After many months of negotiating (including threats from U.S. President Donald Trump) Canada, the United States and Mexico have come to a new trade agreement that would replace NAFTA, which was put into place in 1994. It is the most important trade agreement for Canada, as the U.S. and Mexico are Canada’s largest trade partners. The new agreement is branded as the U.S.-Mexico-Canada Agreement, or the USMCA.
According to economists and other experts who have really delved into the details of the agreement, this is really just an evolution of NAFTA. The majority of the agreement remains the same; there are just some tweaks and updates. Time has passed since the last agreement was put into place, and modifications are necessary. In general, everything looks to be good.
Many have been wondering what effects we’ll see as a result of this agreement coming together on the economy and on the real estate market. There was a pretty intense cloud that was hanging over the country — and that cloud has now been lifted. There were many fears in the business community, and many businesses were holding back on making new investments, increasing wages and hiring. This negative environment trickled down to consumers and, of course, trickled down into housing.
We’re currently undergoing one of the longest economic expansions in recent history. The economy has been growing very well over the last few years — most importantly, wages are increasing. Unemployment is at the lowest rate we’ve seen since the 1960s and 1970s. The Bank of Canada has been lifting rates out of their recession-era levels. We’ve had four interest rate increases in the last 12 months. The one thing really being cited as a potential issue moving forward was this trade agreement.
Now that that has been solidified, there is nothing in the foreseeable future that should stop the economic markets from expanding. This will increase yields for the stock market, economy and housing. Most of all, it’s really going to give the Bank of Canada that final bit of confidence in continuing on its path toward hiking interest rates.
The Bank of Canada has stated that interest rates are too low and have been too low for too long, but they had no choice but to keep rates at those low levels in the aftermath of the 2008 recession and 2015 oil crisis. They’ve done very good so far in taking a “wait and see” approach and lifting rates slowly but surely. The one thing that the Bank has continuously cited as a major concern has been the NAFTA negotiations. Thus, it’s likely interest rates are on a path back to “normal levels.”
Despite the fact that rates have gone up four times in the last 12 months, they are going to keep going; we are probably somewhere around the halfway point. Most economists and bankers think that, based on current economic activity, interest rates should be somewhere around the 2.5 percent to 3 percent range. Given that we’re only at 1.5 percent, we’re obviously still not quite where we need to be. Analysts are predicting four more increases in the next 12 months, bringing us closer to where they should be, given the current economic environment.
For buyers, rates and home prices are going up. And that means affordability is decreasing. You aren’t getting further ahead by waiting. Our recommendation, as always, is to get into the market as quickly as possible, no matter what that might look like. It’s going to really require being creative, as far as putting together a down payment, and it’s going to require looking at types of housing in areas and different things you may not have considered. You’re going to need to build equity, and that means not necessarily buying your dream home as your first home.
From a seller’s standpoint, of course, it’s good that real estate values are increasing — but at the same time, affordability is eroding as interest rates increase. Things will balance themselves as rates rise. You’re in a good place if you need to sell your home or if you’re thinking of selling your home. I don’t recommend holding out for some massive gain in value. We anticipate growing home values in the next 12-24 months but at smaller percentages in comparison to the last couple of years.
Ultimately, it’s all good news in terms of the USMCA deal, but it could have some consequences on the real estate market for buyers and sellers. Getting into the market now is ideal for buyers — and sellers may want to consider whether they’re interested in selling their properties before interest rates increase.