If you owned a home, the old deal was low interest rates and rising equity.

The new deal is higher rates and lower equity. This change is brought to you in part by real estate investors and speculators. They have contributed to an inflation problem that drives up interest rates and drives down prices.

The Bank of Canada raised its overnight rate by 0.5 percentage points on Wednesday, bringing the total increase this year to 1.25 points. Expect another 0.5 point rise on July 13, and more thereafter.

The reason for this onslaught of rate increases is the steady rise in inflation to a 31-year high of 6.8% in April. Housing ranks high on the Bank of Canada’s list of inflationary concerns.

In a speech last month, Senior Deputy Governor Carolyn Rogers focused on housing. “We need higher rates to moderate demand, including demand in the housing market,” she reportedly said in a Reuters article. “The growth in housing prices is unsustainable in Canada.

How did housing become so unsustainable? Partly because our national obsession with home ownership has been amplified by the pandemic. Interest rates have been cut to support the economy and lockdowns have left people eager to own homes with more space.

The growth in the number of real estate investors and speculators has taken housing to the next level. Individual investors were responsible for just over 20% of all purchases nationwide during the first half of 2021. Given that prices only peaked in February this year, it is likely that investor buying was even bigger in the latter part of 2021. 2021.

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The monthly payment for a new mortgage on a typical home is up nearly $800 from October

The Consumer Price Index used by Statistics Canada reflects housing costs in a few different ways, including the cost of new homes and homeownership expenses. Rannella Billy-Ochieng, an economist at RBC Economics, said those costs accounted for about 20% of the rise in inflation in recent months.

Housing also plays a role in the psychology that supports inflation. Until recently, buyers were willing to bid hundreds of thousands of dollars over the asking price for homes for fear of not being able to afford a purchase later. Speculators and investors have helped create this sense of urgency.

The behavior of the housing market worries the Bank of Canada because it suggests that inflation is taking root in the economy. The bank’s seriousness about inflation can be seen in the fact that rates are rising in 0.5 point increments instead of the more typical 0.25 point increase we’ve seen in the past. Earlier in the spring, there was even speculation that rates could jump an exceptional 0.75 points in one go.

Increases in the central bank’s overnight rate directly affect the cost of variable rate mortgages, and they also indirectly affect fixed rate mortgages. Globe personal finance reporter Erica Alini recently wrote about data showing that the monthly payment for a new mortgage on a typical home increased by almost $800 per month from October to April.

Investing, whether in houses, stocks, or cryptocurrencies, means accepting the possibility of losing money in order to get a better return than keeping money safe in cash or savings. Savvy real estate investors would have anticipated the possibility of rising rates hurting home prices, and the less savvy will learn.

Ordinary owners should also have been prepared for higher rates. But without the influence of investors who buy homes, these rate increases could have been less severe.

Imagine that you and your young children bought their first home five years ago, when a discounted five-year fixed rate mortgage could be obtained at 2.25%. You bought the place to live in, not to return or rent. You have made improvements to your property and the community has benefited from your presence.

Flash forward to 2022 – you now have to renew at mortgage rates of around 4.2% for the same five-year fixed rate. A substantial increase in mortgage payments is coming, brought in part by real estate investors and speculators.

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