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Mortgage Expert TMG The Mortgage Group

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Interest rates have gone up. But why?

I’m sure you are well aware that interest rates have gone up.  But why? Various economists have their own opinions as to why this needed to happen, I will explore some of the factors.

As a comparison, at this time last year a five year fixed rate mortgage was 1.99%.  It is now an average interest rate right now at 4.09%.

Housing affordability

Housing has suffered a serious supply and demand issue over the last two years as a result of the pandemic.  Because of limited supply of homes for sale on the real estate market, prices sharply increased as demand outweighed supply.  Bidding wars have been the norm and selling prices are often much higher than the asking price.  Rental availability was on the decline, so for the same reason, those prices increased.  Increasing interest rates have historically slowed down over inflated real estate markets therefore solving some of the affordability issues consequential of inflated prices.  We are already seeing some evidence that this measure is working.

Supply and demand imbalances

Supply and demand is a major factor creating high inflation. For example, currently there is a shortage of baby formula in the US because manufacturers are short on some of the ingredients and there was a factory closure because of product issues.  This could cause an increase in price for the limited product.  This can also be seen in the construction industry.  There is a shortage of some construction materials because of shipping backlogs and other factors causing those prices to rise and the cost to build a new home to increase.  A basic “conundrum” is happening because home   prices in general are falling.  This could be problematic for builders.

Inflation

The Bank of Canada sets a goal for its inflation target, currently 2%.  Because of many factors including pandemic related supply issues, war in Ukraine, better than expected economic recovery, etc. the inflation rate has been high. Today 6.8%, affecting affordability of every day goods including gasoline.  Without government intervention, prices could continue to increase. The bank increased interest rates to curb spending so that inflation can get back to a more sustainable and balanced level.  Less demand, lower prices.

Pandemic

Interest rates were held low during the worst parts of the pandemic in order to compensate for the down time in the economy preventing a major recession and widespread business closures.  This in addition to government stimulus programs which kept the country afloat.  Now that the pandemic has subsided somewhat (unfortunately, not gone) interest rates have to rise in order to meet the demands of a more normal market.

War in Ukraine

The war in Ukraine is causing supply issues of goods they normally provide for export.  Wheat is one of their main exports which is now being held back by the war, causing more demand from other sources of the product. Boycotts of Russian goods have also caused supply and demand issues, including gas and oil, contributing to higher inflation.

Savings Accounts

Higher interest rates affect consumer spending, mortgage borrowing and other credit facilities.  Interest you receive on your savings accounts may increase therefore your rate of return go up too.  At least there is some good news!

Tiff Macklem, governor of the Bank of Canada says that increasing interest rates are “a tool to moderate demand and to prevent domestic buildup of price pressures”.  He feels higher interest rates will “dampen spending and reduce overall demands in the economy”.  He said that these measures will be monitored closely and if it works, they may ease back or conversely take a more aggressive approach, if needed.

Further Info

Please see his full announcement on You Tube at https://www.youtube.com/watch?v=MP07AI0NX5s

The above article is written by Anne Martin and is to be accepted as my interpretation of the information that is currently available.

There is so much more that could be written on this topic but time and space limit me.

 

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