It’s been an interesting year for the Canadian economy. No one, including the Bank of Canada, anticipated that the Canadian economy would explode as it has throughout 2017. Earlier this year, the bank’s Governor Stephen Poloz spoke very cautiously in regards to both the economy and interest rates, as it appeared as though we were still recovering from the economic shock of the 2015 oil crisis. Nevertheless, the economy has rebounded substantially, and with this rising economy comes rising interest rates.

A nation in recovery

In 2008, Canada faced a myriad of factors had brought the economy to its knees. To avert a second Great Depression, the Bank of Canada brought rates to a historically low 1 percent – and no one imagined that rates would ever drop any lower. These interest rates were intended to stimulate the economy and encourage economic activity.

7 years later the Canadian economy remained at a stand-still. The economy was growing but very slowly. We were still feeling the aftershocks of the global financial crisis and suddenly oil prices nose-dived over 50% percent in a matter of months.

The Canadian economy was already at the brink of recession, there was little growth in sight, and one of the largest revenue generators of the country, disappeared overnight. In response, the Bank of Canada made the choice to drop interest rates another 0.50 percent in hopes to avert a recession. In the end, that decision proved to be the right one, as the country avoided falling back into the red.

Since that time, the economy has been growing, but at very low levels. Most economists predicted that we had entered a new era of “slow growth” that could remain for years to come.

We entered 2017 expecting another lackluster year for the economy, one where low interest rates would continue to be needed in order to stimulate demand. As we headed towards spring the economy appeared to be picking up better than expected. Most analysts didn’t think the positive numbers could sustain themselves. Month after month the news kept getting better and to everyone’s suprise the Canadian economy has exploded. Not only has it recovered from the Great Recession of 2008 and the Oil Shock of 2015, but it is now growing faster than any other nation in the Western world. Unemployment is low, wages are growing, home values are increasing, and the economy is about to reach full capacity. As a consequence, the Bank of Canada has renewed confidence in the economy and no longer feels that this historically low interest rate environment is in the best interest of the economy.

Bank of Canada announces the first interest rate hike since 2015

On July 12, 2017, the Bank of Canada raised interest rates by 0.25 percent, bringing the total rate to 0.75 percent. This was still lower than 2015’s rate of 1 percent, which had been previously considered to be historically low. Since that time, the economy has continued to show incredible growth – which analysts predicted could bring another interest rate increase as early as October.

To everyone’s surprise the Bank of Canada shocked virtually everyone by raising interest rates at their September meeting, 1 month earlier than expected. The overnight rates was raised a further 0.25% bringing them up to the 1 percent mark that the country last saw back in 2015.

Though interest rate increases may appear to be negative, they are positive news for the economy. Interest rate increases mean that the economy is growing – and that the government no longer needs to worry about artificially increasing the country’s economic activity. These historically low rates were never intended to be permanent; interest rates of 1 percent or lower signal a very weak economy and leave the Bank of Canada little room for stimulus should another financial crisis appear. Bringing rates up now, while the economy is flourishing, allows the Bank of Canada to prepare for any future economic disruptions.

The consequences of interest rate increases on the real estate market

The current interest rate increases mean little for the real estate market. Interest rates related to the purchase of homes will be impacted very minimally, with marginal interest rate increases seen by buyers. Rates still remain among the lowest seen in the average buyer’s lifetime – and will remain so even with last week’s rate increase. Borrowing continues to be easy and affordable, at least for the near future.

Of course, if the economy continues on its positive path, it’s likely that interest rates will normalize over the next few years — eventually settling somewhere in the range of a healthy 3 to 4 percent. Now is likely the best time for a buyer to purchase a home for many years to come. Again, this increase of interest rates is good for the economy; higher rates will bring about more stable growth in real estate values and will keep consumer debt from getting out of control. This will further stabilize the Canadian economy as a whole and protect against consumers over-leveraging thesmelves.

It’s important to note that pre-recession interest rate levels do not mean that real estate values will suddenly drop. The interest rate increases projected over the next few years are still historically low. At the same time, these increases could be put on the backburner if the economy slows or goes into decline. Buyers should take advantage of these historically low interest rates, as there is no sign that affordability will increase anytime soon. Although slower growth in real estate values is expected it will likely be ofset by rising rates. Meanwhile, sellers have nothing to fear, as the fundamentals of the real estate market – especially in Hamilton – remain very strong.

We expect a strong, stable market in the coming years – not only because of Canada’s economic growth, but also due to the long-awaited rebuilding of Hamilton following three decades of economic stagnation. Hamilton’s real estate has grown in value in leaps and bounds and will only continue to do so – making any interest rate increases largely negligible. Buyers who can get into the market now will find no better time – and sellers who are interested in selling their home should be aware that rising interest rates will slow growth in values but not cause it’s decline.