You often hear economists talk about the housing market in terms of sales metrics, mortgage rates, and home prices. But what many experts subtly discount is the role inflation has on market performance.
While inflation may seem like a strange concept, but it’s really just the measure of price increases for goods and services over a set period of time. This means that as inflation increases, your subsequent purchasing power declines.
For many, inflation often squeaks through without you ever really considering it's there. Maybe you pay a little more at the pump or spend a few more dollars on groceries each week.
But on a macroeconomic level it can have a tremendous effect on the economy, especially real estate. Let’s take a deeper dive and look at how this one key metric might be impacting your ability to buy a new home, obtain a mortgage, or lease that new downtown apartment.
The Impacts of Inflation on Canadian Real Estate
Canada’s inflation rate recently reached a high point in early February, hitting 4.8%. That’s not anything to scoff at especially when you consider the trajectory of housing prices.1
For decades home prices have been on an upward climb, making affordability an ongoing concern. The COVID-19 pandemic certainly exacerbated this trend, although lower financing rates have certainly helped.
According to the Canadian Real Estate Association (CREA), home prices have grown over 300% over the course of the last two decades.1
But the real problem is that rising inflation will only create another headwind that will impede buyers looking to purchase new homes by restricting their purchasing power.
Some buyers are already finding current home prices to be a challenge, with the average home price set at around $713,500.1
Adding inflation into the mix, it can create additional barriers for potential buyers looking to obtain a new mortgage meaning they may delay buying and continue to rent for a longer period.
However, real estate investors should rejoice as investing in real estate has traditionally been an effective way to hedge against inflationary pressure. Furthermore, as more people turn to renting, there is the opportunity to earn a higher return on your investment compared to other asset types.
Another way inflation impacts real estate markets is by putting added pressure on inventory. New construction is one area that often struggles as inflation rises due to higher building costs.
Factoring in existing supply chain disruptions felt by the recent global health crisis, inflation could damper new housing starts for a prolonged period, translating to less homes available on the market for potential buyers.
Lastly, inflation often has an indirect impact on mortgage interest rates. As inflation increases, the government often raises rates to make borrowing more expensive and helps to cool the economy.
In early March, the Bank of Canada increased the benchmark interest rate to 0.5% which should help mitigate inflationary pressure.2 On the flip side, higher interest rates make obtaining a new mortgage more expensive, hindering new home buyers. It's a fine, double-edged sword.
The Bank of Canada has recently announced its plans on additional rate hikes over the next year. While mortgage interest rates remain low, who knows how long that will last.2 Despite where home prices are at, it may be advantageous to buy a home now before rates get any higher.
1 Boisvert, N. (2022, February 2). Inflation isn’t the main factor driving Canada’s sky-high housing costs, experts say. CBC News. Retrieved March 24, 2022, from https://www.cbc.ca/news/politics/housing-inflation-conservatives-1.6335633
2 Ting, M. (2022, March 6). Interest rates are rising. Is it time to switch to a fixed rate mortgage? CBC News. Retrieved March 24, 2022, from https://www.cbc.ca/news/canada/british-columbia/fixed-rate-variable-mortgage-interest-rates-1.6373827