While this will help meet net zero targets and bring down tenants’ energy bills, it represents a significant cost burden for landlords. Analysis by Outra, a data science company, found that over 3m of the UK’s rental homes have an EPC rating of D or below, with London and the West Midlands the worst-performing areas, with over 60pc of total rented properties rated D or below.
The average cost of upgrading a rented property to EPC C stands at £7,646, according to the Department for Levelling Up, Housing and Communities. But 63pc of landlords surveyed by Shawbrook Bank said the burden of EPC improvements made them more likely to sell their properties in the next five years.
Yet selling isn’t always possible, especially if it means banking a loss. Lawyer Richard Cooper bought a one-bedroom new-build flat in Shad Thames, central London, for £650,000 in 2005. “At the top of the market it was worth £850,000, but it is now worth little more than I paid for it,” says Cooper, 55. “Over the time I have owned it, the rent has gone up 18pc and the majority of that was over the last year.”
When he adds up all the costs, including rising interest rates and service charges, Cooper estimates he has lost about £28,000 being a buy-to-let landlord over the past three years. “If it weren’t for falling capital values, I would have exited the market 18 months ago,” he added.
And it’s not straightforward for landlords who’ve made a gain, either. In his Autumn Statement in November, Chancellor Jeremy Hunt announced that the annual capital gains tax allowance would be cut from £12,300 to £6,000 in April this year and reduced again to £3,000 in April 2024.
The average landlord who sold in 2022 in England and Wales sold their buy-to-let for £98,050 more than they paid for it, according to Hamptons. After deducting 10pc for costs, this would leave the average 20pc taxpayer with a £13,670 CGT tax bill, rising to £21,260 for a 40pc taxpayer.
When the threshold is reduced to £6,000 in April, Hamptons found that, at today’s prices, a 40pc taxpaying landlord who cashes in will pay an extra £1,770 in tax; from April 2024, their bill will rise by a further £2,610. Matthew Rowne, of The Buy to Let Broker, said: “This might make private landlords more reticent to sell.”
Increasing numbers of investors are opting to hold their properties in a company, with the number of companies set up to hold buy-to-lets doubling over the past five years to 300,000. Although the dividend allowance is being reduced, incorporated landlords are still able to offset mortgage interest before they’re taxed.
And some investors are even looking to buy – though only if they have deep pockets. “There are simply more people wanting to rent homes than there are homes available,” says Amelia Greene, of Savills estate agency. “Investors, particularly those with cash to hand, could take advantage of price falls over the coming months to secure stock with less competition from mortgaged buyers.”
Inflation is striking homeowners insurance, but if you’re tempted to cut costs by reducing coverage — or, if your mortgage is paid off, even dropping it — think again. A single bad storm could make deep and unwelcome changes to your retirement. Instead, consider shopping around for a new policy, and make sure you take advantage of all the discounts available to you.
The average premium for homeowners insurance rose 12.1 percent from May 2021 to May 2022, according to Policygenius; the average annual increase was $134. Although there’s some evidence that inflation in homeowners insurance is easing in 2023 — Bankrate.com calculates the increase from 2022 to 2023 at just 3 percent — inflation in all things tends to be cumulative: A 12 percent raise one year followed by a 3 percent raise is still a 15 percent hike over two years.
Why homeowners insurance rates are rising
Inflation in all its forms has been a driving force behind rising homeowners premiums, says InsuranceQuotes.com senior writer and analyst Michael Giusti. That includes supply chain problems. It’s not that there are shipping containers filled with policies waiting to be unloaded at the Port of Los Angeles. But homeowners insurance covers home repairs, and many of the things you use to repair a house do, in fact, get shipped in from elsewhere.
In February 2022, for example, the price of lumber soared to $1,337 per thousand square feet. Although later in the year, lumber fell to $429 per thousand square feet, overall home repair costs in 2022 were expensive. Similarly, the cost of asphalt shingles and other roofing materials has risen 51 percent the past five years. Insurers eventually have to recoup those costs in the form of higher premiums.
Other ways inflation has hit homeowners policies:
Labor. You need people to repair a house, and labor costs have been rising as well. “If companies are paying their workers more, that’s been causing them to raise their own prices, and that, in turn, is going to make the cost of repairing a home pricier,” says Cate Deventer, insurance analyst for Bankrate.com. Real — inflation-adjusted — hourly earnings rose 4.6 percent the 12 months ended December, according to the U.S. Bureau of Labor Statistics.
Housing. House prices have also made big gains, meaning that the cost of replacing them has increased too. Home prices, as measured by the S&P CoreLogic Case-Shiller U.S. National Home Price Index, have gained 8.9 percent a year for the past five years.
Interest rates. To combat inflation, the Federal Reserve has been hiking short-term interest rates. Although there’s some indication that the Fed’s plan is working, rising interest rates drive up insurance prices as well, Giusti says. “In the end, insurance companies are financial services companies, and they need to borrow money to do business,” he says.
In the heady days of February 2022, the GTA’s record high home values peaked. For the first time in history, detached houses in the City of Toronto were selling for more than $2 million on average — about $400,000, or 23 per cent more than just a year earlier.
Many Canadians were feeling flush, having banked a few bucks of federal pandemic relief and the savings from the lower cost of working from home.
Borrowing money had never been cheaper. For two years, the Bank of Canada had held rates at an historic 0.25 per cent, fuelling the housing euphoria.
An entire generation had never seen a serious decline in home values. The housing market, particularly in the GTA, felt like the world’s best bet, and authorities did little to discourage that view.
One year and eight interest rate hikes later, and the once fevered financial climate has turned frosty for many households.
New homeowners, having achieved their dream, are plagued by shame and fear because they bought around the market peak that, in retrospect, seems like the worst possible time. Higher borrowing costs have also wiped out any advantage of fallen home prices for those looking to purchase.
Savings accumulated by the pandemic have evaporated; high household debt levels have barely budged; and variable rate mortgages have added hundreds of dollars to some households’ monthly payments.
Meantime, the cost of homeownership, from property taxes to utilities, is rising. Water, fuel and electricity were 12.4 per cent higher in Ontario at the end of December than they were a year earlier, according to the Statistics Canada Consumer Price Index (CPI). Household furnishings were up 6 per cent.
It all adds up to many households starting the new year under financial seige.
The stress is showing in rising numbers of consumer insolvencies, said Laurie Campbell of Bromwich + Smith, a licenced insolvency trustee. Insolvencies were up 10 per cent annually at the end of November, the highest they have been since the start of the pandemic in March 2020.
You don’t need to have a variable mortgage payment to feel the impact of the housing crisis, she said. Even if you don’t own a home, the last year has seen double-digit rent hikes. Then there’s inflation. It has dropped from 8.1 per cent in June to 6.3 per cent at the end of Dec. but “to me that is not a win,” said Campbell.
“I don’t think many employers are giving 6 per cent increases this year. I’m hearing about a lot of wage freezes or 1- to 2-per cent increases. So how are people bridging that gap?”
“People aren’t sleeping well at night and that’s truly the bottom line,” she said.
That’s particularly true of first-time home buyers who purchased around the market peak in late 2021 or early 2022.
If you bought a $1 million home in January 2022 with 20 per cent down and a five-year variable rate of 1.4 per cent, you would have expected a monthly payment of $3,222, according to Ratehub.ca. With Wednesday’s eighth Bank of Canada increase since March — another .25 points — that payment has grown to $5,049 a month, a 57 per cent jump that would add $21,924 a year to the mortgage cost.
First-time homebuyers have always been stressed but those who purchased around the market peak and chose a variable rate loan are likely feeling the most strain right now, said James Laird, co-CEO of Ratehub.ca.
“We can’t fault them because at the time, our own central bank was telling us that rates are going to stay low for the foreseeable future and home prices are going to go nowhere but up. That was the common thinking,” he said.
The Bank of Canada officially announced in January 2022 that it was ending its “exceptional” low interest policy and it noted inflationary pressures, but it seemed few Canadians were prepared for rates to rise so high so fast.
“At least if you took a fixed rate you got to take advantage of that additional four years from today,” said Laird.
The majority of all Canadian mortgage holders — 69 per cent — had fixed rate loans last year, according to Mortgage Professionals Canada’s (MPC) annual consumer survey. Twenty-five per cent had variable-rate mortgages that rise and fall along with the central bank rate.
But when it came to new mortgages last year, only 56 per cent were fixed rate, compared to 62 per cent in 2021.
MPC spokesperson Cecely Roy said that Canada Mortgage and Housing Corp.’s Fall Residential Mortgage Industry Report showed a shift in the kinds of loans borrowers chose last year. In January, 57 per cent of new mortgages were variable rate plans. By August, when interest rates were already climbing, that had declined to 44 per cent.
John Pasalis, head of real estate brokerage, Realosophy, is active on Twitter and has a YouTube channel where he answers real estate questions. He says social media has been unkind to people who are already stressed by the downturn in housing. It’s not uncommon for peak period buyers to be painted as stupid, greedy or the cause of the market correction.
That’s particularly true of those who bought investment properties, he said.
“These people are just families. They’re not sophisticated. They thought it would be a good investment because everyone says real estate’s a good investment. So they invested and now it’s weighing on their finances and they don’t know what to do. They can’t easily sell because now (the property) is worth less,” he said.
Oakville’s Melody Wong isn’t worried about added costs when her fixed rate mortgage eventually comes up for renewal. She expects that the $600 a month she saves on commuting costs because she now works from home, will help backstop any increase. As the mother of four boys, 6 to 15, she is, nevertheless, acutely aware of rising costs.
She and her husband recently purchased a hybrid van to save on gas and Wong says their grocery bills have doubled. “This is not even about the kids growing and eating more now,” she said. “Literally, it’s the cost of the products.”
She is relying on more canned foods and letting her kids fend for themselves occasionally with the instant ramen noodles they love.
Wong, whose boys are in Scouting and soccer, is a Scout leader herself. She says fundraising activities aren’t as successful for extra-curriculars in the current climate and parents, who themselves are stretched, are being asked to contribute more for camps and activities.
“With the rising cost of groceries and other materials, we’re having to put that on the parents to say, ‘We’ve been fundraising, we’re not getting as much but we need you to pay.’ There are families that are struggling. So that’s the challenge we’re faced with,” she said.
Ricardo Tranjan, an economist and senior researcher with the Canadian Centre for Policy Alternatives, says non-profits and their clients are among the most vulnerable to collective belt-tightening. But he acknowledged that homeowners, faced with rising costs, may also be accessing those services.
He doesn’t blame the City of Toronto for imposing an historic tax increase this year of all years. The problem, he said, is that Toronto taxes have been too low too long. That has left community organizations and their clients in peril.
“At the provincial and federal level there are more things that can be done,” said Tranjan.
“The financial situation of the province is in good shape compared to the city of Toronto,” he said. Yet social assistance rates remain shockingly low.
Ottawa has stepped up with pandemic and daycare funding. The latter has offered some families relief but that is likely being offset by the rising costs of mortgages, rent and food.
The struggle many households are confronting now is also debt driven, says insolvency expert Campbell. In 1990, Canadians owed 90 cents for every dollar they earned. Now they owe about $1.84. People held onto their debt during the pandemic when there wasn’t much collections activity. Now, creditors want their money.
She points out that “tackling mental health and finances, unfortunately, are very closely connected.”
If there is a light at the end of the tunnel, it’s that in the bigger picture, the majority of people still have fixed-rate, five-year loans, said mortgage expert Laird.
“For most households, especially for first-time homebuying households, their income situation usually improves on average quite significantly over that five years.
And most people should be able to renew their fixed-rate mortgages in five years unless there has been a divorce, job loss or serious health issue that would cause a household to be financially strained regardless of the rate environment, said Laird.
“As long as our job market stays OK, that’s probably the key correlating factor with whether defaults dramatically rise or not.”
JOIN THE CONVERSATION
Many forecasts expect 2023 to be a negative year for housing, but the ultimate direction the market takes will be informed by mortgage costs. In 2022, mortgage rates doubled between the start of the year and late October rising from 3.5% to over 7%. That dramatically increased the effective cost of home ownership for many Americans.
That’s because most buyers finance a house purchase with a mortgage, and so the cost of the mortgage determines the home the buyer can afford. If mortgage costs double, then the house a purchaser can comfortably afford may approximately halve, all else equal.
U.S. 30-Year Mortgage Costs, 2022
Since exceeding 7% in October, 30-year mortgage costs have fallen back slightly to close to 6%. That largely reflects moves in long-term interest rates more broadly, which also moved up sharply in 2022 but have eased back from the highest levels reached in the fall.
Still, even if mortgage costs have fallen back from peak levels, the Federal Reserve Bank of Atlanta estimates that housing affordability is reaching lows that we haven’t seen in decades. That’s in part a reflection of higher mortgage costs, but in addition housing affordability was declining in 2021 even before interest rates rose, as house prices rose faster than incomes during the pandemic and its aftermath, squeezing potential buyers.
The U.S. Federal Reserve (Fed), set short-term interest rates, which can in turn influence the longer-term cost of borrowing. The Fed plans to continue to raise rates in 2023. While the Fed’s current plans are largely priced into the mortgage market which takes a very long-term view, it suggests that mortgage costs may remain elevated for some time. In fact, Fed Chair Jerome Powell said he viewed the U.S. housing market as “very overheated” last November. House prices have not declined much since that statement.
It is also important to remember that housing in the U.S. is a regional market. Affordability measures suggest that home prices on the west coast may be relatively less affordable, whereas in other parts of the country, especially in the Midwest, affordability is less of an issue. That may impact price trends, and currently the U.S. west coast appears to be seeing relatively weaker house pricing in many markets. Seasonality complicates the picture too, with the winter months typically a slower period for the housing market compared to the summer making data a little harder to interpret.
What To Expect
With the sharp rise in mortgage costs recently and reduced affordability, it is likely that house prices will soften. That’s what many are forecasting and what current trends suggest is happening.
However, so far in many regions house prices have only given back some of the recent games from 2022 and have not yet declined in absolute terms on a year-on-year basis. 2023 may change that if current sluggishness in the housing market continues.
However, the chance of a recession matters too, if people lose their jobs that can, in turn impact the housing market. There’s some positive news there, because so far the jobs market has remained more robust than most expected. However, the backdrop for house price trends in 2023 appears relatively negative.
Tax on landlords
As demand outstripped supply, this only increased prices further, with tax regulations adding to the froth.
“The tax system is oriented in a way that encourages investment in property effectively as a form of savings,” says Michael Gordon, acting chief economist at Westpac Institutional Bank.
“So we’ve tended to have house prices basically being dictated by their investment value rather than their value as a dwelling. It’s the investors that set the pace and anyone who’s been looking for their own home has had to pay up to match the investors. That’s been a long running issue.”
An attempt to change that without addressing the underlying issue of a lack of supply and excess demand has only pushed up rent prices.
In March 2021 the Government announced that landlords would no longer be able to offset their mortgage interest costs against their rental income. Landlords have responded by passing on rising costs to tenants.
Failure to build homes
A failure to build homes in the last several years has only led to more price inflation. The Government is making moves to reform the planning system, but builders now face a “behemoth” of red tape and rules slowing down the process, Olsen says.
As part of her pledges to voters in 2017, Ardern had promised to build 100,000 homes over 10 years for first-time buyers.
The target was scrapped in 2019 – at which point only 258 homes had been completed under the scheme – with a minister conceding that the target was “overly ambitious”.
“It was a bit of a laughing stock,” says Olsen. “The Prime Minister was elected partially on quite a strong focus around the housing market, affordability and home ownership for Kiwis,” he adds. “In fact, we’ve seen that affordability has gotten worse.”
The satisfaction of building a lifetime asset for oneself comes with an obligation in the form of a mortgage. You put off saving money for years to buy the home of your dreams. You can realize this desire with the aid of a mortgage. Nevertheless, regardless of their financial situation, every person who takes out a home loan wants to pay it off to get the home in their name and be free of debt.
To enable this, the Reserve Bank of India has waived all prepayment fees for any number of prepayments made by borrowers during the loan tenure, thereby assisting Indians in repaying their debts as quickly as feasible. Some people keep their loan open for the whole term they were given and allow it to mature naturally. To have hassle-free ownership and future ease of transfer in either of the scenarios—pre-closure or natural closure—you need to take care of a few crucial elements.
No-Objection Or No-Dues Certificate Or Proof Of Loan Closing
“Home loan is a responsibility, and every liability has evidence of settlement. This documentation is sometimes referred to as a no-objection or no-dues certificate. On its letterhead, the financial institution or bank that lent you the money issues a paper saying that your loan is closed and that you are no longer liable. Once the lender has given you the certificate, they can no longer collect monthly payments (EMIs) from you. They have no legal claim to your property either,” says Vishal Raheja, managing director (MD), InvestoXpert.com, a real estate consultancy firm.
Original Documents Of The Mortgaged Property
When you requested the loan, it may have been backed by the property you provided, for which you may have given the lender the original documents for their safekeeping. The lender would have given you a list of documents (LOD). Take this LOD with you when you visit the lender to finish the closing procedures and compare the documents to this list.
You need not be concerned if you cannot find your LOD or if you never obtained a LOD from the lender. When returning your documents, the lender will share the LOD with you and match each physical document to it. On one set of LOD, they will ask you to sign an acknowledgment sheet as proof that they have given you all the necessary paperwork.
Unused PDCs For Security
Along with the ECS/ACH for regular repayment, the lender must have also requested updated security checks from you when the loan was disbursed. The lender utilizes these checks if the borrower fails to make any monthly payments as agreed. Your lender would still retain your checks if you never fell behind on your repayments. To prevent any further misuse, don’t forget to collect and destroy these checks.
Updates To Credit Bureau Records
The four different credit bureaus in the nation track your whole loan history, from disbursement to closure. Within 30 days after the loan’s completion, make sure the lender updates the information.
Check all four of your credit reports, including CIBIL, CRIF, Experian, and Equifax, within 30-45 days after the loan’s closing. You can submit a request to the bureaus if the records are not current, and they will get in touch with the lender to amend the records. Follow up until the bureau confirms that the issue has been resolved.
Acquire A Current Non-Encumbrance Certificate
A legal document known as an “encumbrance certificate” has thorough details of all your financial activities involving the real estate pledged as collateral for a mortgage. This is accessible through the neighborhood sub-registrar office.
“This certificate must reflect the complete repayment when you close the loan. Obtaining this document is useful if you ever want to sell the property because it provides evidence that it is free of all financial and legal debts. This document is significant in some regions of the nation but is not essential in others,” adds Raheja.
Track Your Repayments
Get a repayment history from the lender, and make sure all of your large payments are included. Make an effort to save a copy of the bank statements from which the reimbursement is made. In the event of a disagreement with the lender, a governmental agency, or a credit bureau, this could be useful.
Legal Verification From Your Attorney
Obtaining a legal clearance certificate from a reputable attorney is not terrible. Even though it’s not required, it might come in handy if you ever decide to sell your house.
December Consumer Price Index (CPI) inflation data showed month-on-month deflation with prices falling 0.1%, primarily due to lower energy prices. However, despite the monthly decline, inflation is still running at 6.5% year-on-year compared to the U.S. Federal Reserve’s (Fed’s) 2% goal.
In addition, services inflation (which the Fed is watching closely) rose 0.5% for the month, driven by mainly by rising housing costs. Although inflation has eased since the summer, the Fed is expected to take a cautious approach, likely hiking rates at its February 1 meeting. A 0.25-percentage-point increase, is viewed as most likely by bond markets.
December Inflation Data
December’s inflation data was broadly encouraging. Energy prices, fell 4.5%, which caused prices to decline overall for the month. But stripping out food and energy, prices rose 0.3% month-on-month, which is still a little higher than the Fed wants. Inflation has clearly trended lower since the summer, even if it’s still well above the Fed’s 2% objective.
The cost of many goods fell in December. Categories seeing monthly price declines included many commodities, cars and certain categories of household goods and clothing. Food prices, which were rising rapidly, are still increasing, but at a slower 0.3% monthly rate as the cost of various foods such as various meats and produce fell in price month-on-month for December, notwithstanding a spike in egg prices.
The main issue the Fed will have with the CPI report is rising services costs. This increase was mainly due to rising shelter costs, which rose 0.8% for the month of December. However, unlike other elements of the CPI report, shelter costs have a lag of several months to current market prices because of the calculation method used.
According to Zillow data, housing costs have eased since the summer, and Zillow forecasts house prices to fall slightly on a 12-month view. If that forecast holds, inflation could go down further, especially because housing costs are a major component of the CPI, and the only major category still rising strongly in price in the December report.
For now, housing is still showing double-digit year-on-year increases on many estimates. But the slowing of house prices, and the lag with which current housing costs are reflected in the CPI, could move the inflation rate lower as 2023 progresses.
What Will The Fed Do?
The Fed may be running out of things to worry about with inflation. Yes, annual inflation remains well above target, but the trend since the summer has been more encouraging than many expected.
Prices of goods are easing and commodities and energy have declined from peak levels. One remaining concern is that service prices are continuing to rise, but housing is a large part of this, and the growth of house prices could slow further in the coming months.
The Fed may also point to wages rising at around 6% year-on-year according to the Atlanta Fed’s estimates, though even here, wage growth appears to have moderated since summer 2022. The Fed also worries that another inflation shock, such as the Ukraine war or supply chain issues, could push inflation to unmanageable levels. As time passes, that scenario becomes less likely.
The Fed may well raise rates again in February, but recent inflation data has shown an encouraging trend, supporting the view that we’re close to the top of the interest-rate cycle. Many Fed policymakers expect rates to top out at more than 5% this year, but the market suspects that the Fed may not go that far.
ALBANY, Ga. (WALB) – With a recession looming, life decisions on buying or selling a home could be impacted. Experts tell us about the housing market in South Georgia and what you can do to prepare.
Thinking about buying or selling a home? Local real estate experts say there is no guarantee that interest rates will go up or down. But right now, Albany RE/MAX says housing demand remains steady.
Since the start of 2023, there have been 64 new listings in southwest Georgia. That’s according to multiple lists of data. The new year gives potential homeowners a chance to get their homes on the market.
“January is a great start of the year. People like to come out for the holidays. They don’t necessarily come November people don’t really want to list or put their homes on the market because of the holidays. So, we get a lot of calls at the end of the year for people wanting to meet with us come January,” Leigh Windham, broker and owner of Albany RE/MAX, said.
Although interest rates have been steady for Albany RE/MAX, an increase could pose challenges for potential homeowners.
“We are an economy-driven business, so when the economy changes our business will change. So, we had to change our hat and become more of an advisor in terms of this is what your payment was, and this is what your payment will be now. So, let’s maybe stop and look in a different price point for something that you are a little more comfortable with a monthly payment,” Windham said.
Real estate agents emphasize how important it is to have a realtor as you navigate these options. Experts tell me it’s better to buy than to rent because you are adding more equity and value.
One piece of advice when considering selling or buying a home is to keep your home neutral to appeal to the widest audience. There are eight steps real estate agents suggest when trying to sell a home.
- Meet with a real estate agent
- Establish a price
- Prepare your home for the market
- List your home for the market
- Offers and negotiations
- Under Contract
- Finalize the details
- Closing Day
If you need any additional information about when will be the best time to buy or sell your home from Albany RE/MAX, you can find more information here.
Copyright 2023 WALB. All rights reserved.
This year should mark a return to the “Great Moderation” of slow but steady economic growth and low inflation that characterized the G10 largest economies prior to the pandemic.
Canadians will see a return to near-normality this year, as inflation eases, interest rates stop rising, and housing and stock-market values bottom out.
But continued inflation, though considerably lower as the year progresses, and high debt-servicing costs could trim average household purchasing power by almost $3,000 this year, warns RBC Economics. For that reason, forecasters expect a mild and brief recession early this year, with a return to GDP growth in the second half.
With the irrational exuberance of the past two years finally wrung out of the economy, 2023 should set the stage for a welcome return to modest but durable gains in GDP and in housing and other asset values, after 2022’s value destruction in everything from condos to crypto.
Here are some forecasts for leading indicators of economic health.
Housing prices, which have already come down about 20 per cent in the past year, are expected to fall another 10 per cent in 2023, with declines tapering off during the year. From that bottom, house prices will resume a sustainable growth rate in 2024 of about four per cent. Record-high levels of immigration will help drive those gains. But with only about 1.3 million Canadian housing starts expected this decade (immigration alone will add at least 1.5 million Canadians), housing affordability will continue to be a problem for years. The affordable housing shortage will be acute in the GTA, which is edging out Vancouver as the country’s most expensive place in which to live.
Inflation will continue coming down this year, after a sharp decline in 2022 from a peak of 8.1 per cent last summer to 6.7 per cent by year end. Inflation will drop further in 2023 to an annual average three per cent range, with some forecasters expecting inflation to end the year at close to two per cent. For that we can thank higher interest rates; the economic slowdown that began in last year’s second half after torrid, inflationary growth in 2021 and 2022; and a sharp decline in all-important energy prices. Having dropped by double digits in last year’s second half, oil and natural gas prices are expected to decline by another seven per cent and 11 per cent, respectively, in 2023.
Interest rates. The era of cheap money that dates from the Great Recession is over. Borrowing costs will remain higher than in the pre-pandemic era for the next several years. Canadians keeping their credit-financed purchases to a minimum are wise to do so. In its mission to destroy inflation entirely, the Bank of Canada (BoC) will continue raising its key, or target, interest rate this year to as high as 4.5 per cent. That’s an extraordinary 18-fold increase in borrowing costs over the 0.25 per cent of early last year. The bank will eventually stop hiking rates this year, and we might even see the first rate cut in 2023’s fourth quarter. And the bank’s key rate will be further reduced in 2024 to an annual average of 2.7 per cent. But the key rate is forecast to stay at about 2.0 per cent for several years thereafter, or eight times the rate in early 2022.
Mortgage rates. As many as 18 per cent of fixed-rate mortgages in Canada are scheduled for renewal this year and rate increases at renewal will be as much as 1.6 per cent higher than when the original mortgage was issued. In an example given recently by TD Economics, a homeowner with a $500,000 five-year fixed-rate mortgage taken out in 2017 at that year’s prevailing interest rate can expect a $700 increase in the monthly mortgage payment on renewal. TD Economics warns that “Mortgage holders will continue to face higher mortgage payments on renewal, as interest rates remain higher than the rates that prevailed when these mortgages were issued.”
Wild cards. Russia’s war on Ukraine and China’s rampant COVID-19 infection rate could continue this year to impair global supply chains. Energy disruptions related to the Ukraine war have dampened economic growth in Europe, one of Canada’s major trading partners. And with an estimated 9,000 people dying each day of COVID-19 in China, according to recent U.K. researchers’ analysis, China remains an unstable source of supply.
Bottom line: Canadians have endured a record number of systemic shocks over a shorter period than ever in the modern era, and the country is performing as well or better than its economic peers. Relief from the hardship is already evident. So, unlike 2022, this will not be a year of living dangerously. But caution is in order until normality is in full flower next year and in the decade to come.