Whatever goes up, will come down… or go up further.

Canadian inflation drops to 7.8%: Will mortgage and interest rates follow?

Canadian inflation is gradually cooling and has now dropped to 7.8%. Property investors and landlords still groaning under the skyrocketing interest rates are hoping that the latest inflation figures will also lead to a reduction in interest rates soon.

Most home owners with variable interest rates have seen their monthly mortgage payment climb to record levels.

Some Canadians who took out mortgages in 2020-21 could see their monthly payments jump by as much as 45% in 2025-26, when their mortgages come up for review if the current interest rate regime continues.

According to Statistics Canada, the Consumer Price Index (CPI) dropped from 8.1% to 7.6% on a year-over-year basis in July. The deceleration was a result of slower year-over-year growth in gasoline prices. Excluding gasoline, prices rose 6.6% year over year in July, following a 6.5% increase in June, as upward pressure on prices remained broad-based.

While gasoline prices declined on a monthly basis in July, prices for other non-durable goods like natural gas and groceries rose. Price increases for in-person services such as flights, restaurant meals and hotel stays contributed to the month-over-month increase.

On average, price increases continued to exceed the year-over-year increase in hourly wages (+5.2%) in July. While consumer inflation continued to exceed wage growth, the gap in purchasing power was smaller than in June.

Canadian housing debt load and September 7th new interest rate

Home prices increased by about 50 per cent, on average, during the pandemic, as low rates allowed buyers to qualify for larger loans while still keeping the ongoing payments relatively affordable.

According to the Bank of Canada, much of those inflated house prices have been built on a foundation of debt. Almost one in five Canadian households are now considered “highly indebted,” which means their debt to income ratio is 350 per cent or more.

Prior to the pandemic, only one in every six were that much in debt. Barely 20 years ago, in 1999, only one out of every 14 households had that much debt. Those numbers mean that each rate hike will inflict more pain on the economy than it would have in the past.

While yearly inflation has possibly peaked, the persistently broad pressures could still prompt the central bank to deliver a 75-basis-point increase to its policy interest rate on Sept. 7. It is the third-highest in the past four decades, and economists strongly feel that the Bank of Canada will continue its aggressive interest rate  posture.

Home owners have not seen the end of the storm yet.

Reference:

Stats Canada

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