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The Bank of Canada just threw a hand grenade at home buyers/sellers in Canada

Well, they did it. The little rascals at the bank of Canada increased the overnight lending rate, not by what a lot of people were predicting at a zero 75% increase. But they surprised us all with a massive 1% increase in the overnight rate. This is the biggest rate increase we've seen since 1998. This announcement blew the doors off everyone's expectations and today's video is all about what to expect to come out of this rate announcement, how this is going to impact the housing market, and a few key takeaways to think about as we go into this new world we're living in with increased interest rates.

If all that sounds interesting and this is what you came to this video to watch, let's get into it, because you're going to love the content in today's video. What's good, everybody? It's Darin Germyn from the Germyn Group, where we know you've only got one chance to either buy or sell your next home, so we're here to help you get it right

All right, so they did it.

This is going to be a talking point in the media for the next few days and a talking point at family dinners and friends get togethers moving forward. The rates went up and they went up quite a bit. For those living underneath a rock, the bank of Canada up its overnight rate by 1% today, which blew the doors off anybody's guesses of how high they would go. This move was to slow inflation, which is burning way too hot at about 7.7%. If you don't understand inflation and what that means, that means if you had $100 in the bank prior to this inflation bubble happening, your $100 is now worth $92.30.

Nobody likes losing money, myself included. So inflation is bad, bad, bad. And by raising the overnight rate, this is going to help them get closer to their 2% target inflation rate, which is a lot different than where we are at about 7.7% currently. Now, this announcement is going to affect some people, the majority of people it's actually not going to affect today, but it is going to affect people who may have credit card debt. It's going to affect people that have variable rate mortgages.

Some people with variable rate mortgages are going to now pay about $50 more for every $100,000 they've borrowed. While others on variable rate mortgages might just see a little bit less of their payments depending on how they structure their mortgage, see a little bit less of their payments going towards the principal on their mortgage and now going to satisfy the interest instead. Also of course, when people's mortgages are going to come up for renewal they are going to have to get renewed at the recent rates or the current rates that are in today's marketplace. Now don't forget, I've done lots of videos on this. We have been stress tested since 2018.

So many of the mortgages that are going to be coming due based on the current rate as of today have factored in rate increases being a possibility in the future. So ideally the people that have their mortgages coming up for renewal are going to be able to carry their mortgages. So it shouldn't be that big of an issue, albeit it will be for some people. And there is absolutely no doubt about it this will impact the market. This makes it more expensive and more challenging for a home buyer to afford a home at today's prices.

We have already seen large amounts of inventory remain on the market and actually right now there's not a lot of new inventory coming to the market. That's probably just because it's summertime, that's a normal phenomenon of summer. But certainly the home selling are a lot less than what they were doing previously. So normally or not normally, nothing was normal about the market we were in. Inventory was removed so quickly that it almost looked like there was nothing available.

But that inventory is now sitting around for longer periods, which is building the amount of options that a buyer has to purchase, the more options a buyer has to purchase. This means home sellers now need to compete for the attention of the buyer. Most buyers are looking for really good value for their money and they are going to pick the best home in the best location that offers the most value. And a lot of times that value comes in form of price if nothing more. So the home sellers out there, they have to be well priced and they have to be pretty well.

Home prices are certainly down from the peak of where they were. I think most people would be surprised to know what the average numbers are for the benchmark pricing in most areas. I get lots of comments on my YouTube channel about people 'losing their shirts' for homes that they bought, but that's very short-term thinking. That's assuming that people that bought during the peak are selling very shortly after and some people that bought during the peak made some decisions that maybe weren't the best.

They might have put offers in that were substantially higher than what a particular home should sell for. One home sale does not make a market. So just because somebody massively overpaid for a home in maybe March doesn't mean that whole market experienced that phenomenon. To put this into context a little bit, the benchmark price for all property types in the Fraser Valley just kind of averaged out, is down about 6% since the peak in March of this year.

Now for anybody that's been in the property game for a while, a 6% fluctuation isn't abnormal. It's fairly interesting to think that it could go up 6% in a month and people thought that was normal and it's down 6% in the course of a few months, which is also normal. This is what can happen with housing and of course ideally anybody that purchased anytime in the last year is going to ride out what's ever happening right now because they're not planning on selling their home but that's a whole other video. Something important to note though is the game is changing and the game has changed, the market has changed and it takes a while for the market to adapt. Nobody likes the idea of the ground moving underneath their feet.

They feel like the world is changing and based on all the world events, this included, it's going to probably make the market a little quieter than it normally would be for a little bit, probably a couple of months. It takes time for home buyers to adapt to big changes and we have seen this many times in previous markets. Just like in 2018 when the government first announced the stress test which really brought down many people's affordability by almost 20%. That was a massive shock to the market and it took time to recover. It took about two years for the market to really recover and start seeing the prices that we saw in 2018 because of such a significant change.

Of course there are other examples of this as well like the 2008 financial crash or the big oil embargo issue in the mid 2010s. I don't want to get into all that today though, I want to give you a few takeaways based on this information because I know a lot of people might find it concerning about the announcement and this is really kind of the bigger picture of everything. Number one, the bank of Canada is probably not done. They meet again on September the 7th and there is a good chance they're going to continue this season of rate hikes and there's a very good reason for that.

That leads us into point number two is because the rates are still in what is called a neutral territory. There is three areas, either it's stimulatory, neutral or a depressive rate which is meant to slow the economy and actually contract it. Estimates for what a neutral rate looks like is anywhere between 2/2.5 and then all the way over to about 3/ 3.25. We are only in the neutral range right now for our overnight rate and if the inflation keeps running where it is, they need to continue to raise this rate until everybody out there stops buying so much stuff. So I wouldn't be surprised if on September the 7th we see rates increase again.

There's a very good chance that's going to happen. Point number three is some good news is that a lot of the five year fixed rates that are out there already have all of this turmoil baked into the rates that they're offering. The Bank of Canada has been incredibly forthcoming on what is going on, what has been happening, and what their plans would be. It would have been completely irresponsible by all of the lenders out there to not plan for these rate hikes because they were very aware of what was happening. And you'd probably not be surprised to know it's a fairly tight circle in terms of the communication between all these major lenders.

While I'm not saying five year fixed rates may not change, the gap between variable rate mortgages and fixed rate mortgages is still quite significant. So they have planned for this and a lot of that has been baked in already and those numbers have remained fairly steady over the last few weeks. The fourth takeaway is this is kind of a good announcement and that might not be a popular belief, but here's why I say that nobody likes inflation. Nobody likes what's going on right now for how expensive things are. And I think it's better that the Bank of Canada do what they need to do fast to get us out of this environment, so we're not spending more on absolutely everything and let the ground just settle.

The faster this gets done and inflation is under control, the less we spend on everyday stuff. Housing will suffer a little bit, there's no doubt about that, but housing will recover. The faster these rates go up. Then people can adjust to the new normal and start anticipating what the future might look like because the ground is a lot more stable.

A point that I didn't mentioned earlier is that we are still in an environment with interest rates that are lower than what they were in the boom. That's right, in the boom of 2006 to 2008, which was an incredibly insane market, which ultimately led to the financial crash. But that was because of what the US. Was doing, not necessarily what was happening in Canada. Rates are still historically low.

We're just not used to it because we're so short term that we forget that we've been living in a really low rate environment for the last decade. So today's current rate would have been thought to be insane in the 2006 to 2008 market. So we still have historically low rates compared to the past. And the last thought I'll leave you with is if you are thinking of selling your home, nobody loves the idea that they can't get what they may have got at the peak of the market. But I'll tell you the good thing about what's happening right now.

If you're someone thinking of selling your home right now, the great news is it really doesn't matter what the market is doing. And the reason why is because buying and selling a home are competing interests. If it's a good time to buy, it's usually not a good time to sell. And if it's a good time to sell, it's not usually a good time to buy. This means that although you may sell your home for less than what you could have sold it for at the peak of the market, maybe in February or March, whatever you're going to buy is also going to be discounted from that time frame as well.

The most recent numbers from the Fraser Valley Board say we're down about 6% from the peak, which means that your house is likely down a similar number, but also is the house that you're going to go by. You've got more to go look at, there's more inventory out there. You don't have to rush and you can actually go buy the home you want, do an inspection on it and all the things you need to do to protect your interest as a home buyer. So it's actually a really great time to consider selling and then buying. Obviously, you're going to want to have a chat with your mortgage professional to make sure that the numbers match and you can do what you need to do, but if you frame it like that, it really doesn't make a difference what's happening out there.

Anyways, everybody, I wanted to get this post out to you because it's obviously very timely. It's a big announcement today that's a little bit of my lens on what's happening. I would love to know what you think. Please leave your comment below. Let me know what you think is going to happen to the housing market, what you think the long term projection is going to how this is all going to unfold, and also let me know what type of other videos you guys might like to see on this blog.

I'm always trying to bring you the best content so you know exactly what's going on with real estate in the lower mainland of BC. I'm Darin Germyn, from the Germyn Group. We know you've only got one chance to either buy or sell your next home. We're here to help you get it right. I want to thank you for reading.

We will look forward to seeing you on the next post. Take care for now. Bye.

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Darin Germyn PREC* & Adam Howsam
Macdonald Realty LTD
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