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The old deal if you owned a home was low-interest rates and rising equity.

The new deal is rising rates and falling equity. This shift is brought to you in part by real estate investors and speculators. They contributed to an inflation problem that is driving up interest rates and bringing prices down.

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

The reason for this onslaught of rate increases is the steady rise of inflation to a 31-year high of 6.8 per cent as of April. Housing holds a special place on the list of inflationary concerns at the Bank of Canada.

In a speech last month, senior deputy governor Carolyn Rogers zeroed right in on housing. “We need higher rates to moderate demand, including demand in the housing market,” she was reported as saying in a Reuters story. “Housing price growth is unsustainably strong in Canada.”

How did housing get so unsustainably strong? Partly because our national home ownership obsession was amplified by the pandemic. Interest rates were slashed to support the economy and lockdowns left people hungering to own homes with more space.

Growth in the number of real estate investors and speculators took housing to the next level. Individual investors were responsible for just over 20 per cent of all purchases nationally in the first half of 2021. Given that prices didn’t peak until February of this year, it’s likely that investor buying was even more of a factor in the latter part of 2021.

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Monthly payment for 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 houses and expenses related to home ownership. Rannella Billy-Ochieng, an economist at RBC Economics, said these costs accounted for roughly 20 per cent of the rise of inflation in recent months.

Housing also has a role in the psychology that sustains inflation. Until recently, buyers were willing to bid hundreds of thousands of dollars over the ask price for houses out of fear they might not be able to afford a purchase later on. Speculators and investors helped create that sense of urgency.

Behaviour in the housing market is a concern to the Bank of Canada because it suggests inflation is becoming entrenched in the economy. The bank’s seriousness about inflation can be seen in the fact that rates are going up by increments of 0.5 of a point instead of the more typical 0.25 increase we’ve seen in the past. Earlier in the spring, there was even speculation that rates could jump by an exceptional 0.75 of a point in one go.

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

Investing, whether it’s in houses, stocks or cryptocurrency, means accepting the possibility of losing money in order to get a better return than keeping money safely in cash or savings. Savvy real estate investors would have foreseen the possibility of rising rates hurting home prices, and the unsavvy ones will learn.

Everyday homeowners should have been ready for higher rates, too. But without the influence of investors buying up homes, these rate increases might have been less of a burden.

Imagine you and your young kids bought a first home five years ago, when a well-discounted five-year fixed rate mortgage could be had for 2.25 per cent. You bought the place to live in, not to flip or rent. You made improvements in your property and the community benefited from your presence.

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


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