Unless you have been living off the grid for the past year, you are likely aware that inflation in Canada is high. To be specific, it hit a 39-year high in June 2022 and the annual rate of inflation is currently at 7.0 per cent. The Bank of Canada typically aims to keep inflation within the inflation-control target range, with 2.0 per cent being optimal. Everyone is feeling the burn of rising goods and services prices, however property and condominium owners are being hit extra hard by rapidly increasing Canadian interest rates.
Canadian Interest Rates
On September 7th, the Bank of Canada increased the policy interest rate by 0.75 per cent to 3.25 per cent in an attempt to cool inflation, with more rate hikes projected for the near future. The next rate decision will be made on Oct 26th and Canadians have been told to expect another half a percentage point. Bank of Canada Governor, Tiff Macklem, explains that the current increases are part of one of the “steepest and fastest tightening cycles we’ve ever conducted.”
By increasing Canadian interest rates, the Bank of Canada is attempting to curb inflation. Raising the interest rate discourages borrowing and spending and encourages saving. As a result of this, companies then increase their prices more slowly, or may even decrease them to encourage demand. Macklem assures that raising interest rates will “help relieve pressures here in Canada.” However, for any monetary policy changes, there is a delayed impact of 12-18 months so Canadians will have to wait until next year for inflation to come back down.
Housing Prices + Mortgage Rates
Currently, 5-year fixed mortgage rates are as high as 6.49 per cent. TD Chief Economist Beata Caranci explains that Canadians have been shielded for decades from inflation volatility so today’s inflation might seem especially challenging. It appears that the Bank of Canada learned from the interest rate hikes they implemented in the 1980s and has taken a more proactive stance this time around to bring inflation down to normal targets. Additionally, Caranci claims that there are important differences between today’s situation and that of the 1980s, including a different makeup of the economy and the application of safeguards like mortgage stress tests which ensure mortgage holders can weather changes to interest rates
The Bank of Canada has been successful at keeping inflation between their target of 1-3% for the last 30 years. Check out this video from Bank of Canada highlighting the importance of inflation targets.
Source: Bank of Canada
Increased borrowing rates have pushed many potential buyers out of the market, and a recent survey conducted by Royal LePage and Leger found that 19 per cent of respondents are putting off buying a home since the start of 2022. On the other hand, higher rates are having a cooling effect on the market. An RBC analysis suggests that housing prices will continue to come down and bottom out at 14 per cent by spring 2023. Currently, the average home price in Canada has dropped 3.9 per cent but in some areas of Ontario, prices are down as much as 23 per cent.
Market Value vs. Replacement Cost Appraisals
In light of declining home prices, we are frequently asked how this affects Normac’s replacement cost appraisal valuation. For example, if the price of my home is going down, why isn’t my insurance appraisal valuation also decreasing? The simple answer is that the two are evaluating entirely different things.
A market value appraisal is tied to the land value and considers things like comparable properties prices, future income potential, or historical sale prices. For insurance appraisal purposes, we are solely looking at what the cost would be to rebuild a similar structure following a total loss in today’s market. Our valuations are tied to the cost of construction and so whether your market value appraisal has gone up or down, this will have no impact on the total insurable value our appraisers are reporting.
Normac’s team of expert insurance appraisers are trained in local construction costs. We provide three-year programs with annual updates, ensuring your assets are always adequately protected. Contact us today to inquire about an insurance appraisal for your property.