Urgent: Bank of Canada Hikes Rates Again! But less than it could have been… (Oct 26, 2022)

Bank of Canada Rate Change October 26 2022

This time, the market was expecting it.

That doesn’t make it hurt any less for most Canadians.

There is fear in the market and still uncertainty.

But, there could be a bright side especially for real estate investors!

First, what is the news? What changes has the Bank of Canada made?

Here are some of the highlights from the Bank of Canada meeting today:

  • Rate increase was 0.50%
  • “The Bank projects that global growth will slow from 3% in 2022 to about 1½% in 2023, and then pick back up to roughly 2½% in 2024”
  • “The Bank’s preferred measures of core inflation are not yet showing meaningful evidence that underlying price pressures are easing. Near-term inflation expectations remain high, increasing the risk that elevated inflation becomes entrenched.”
  • “CPI inflation is projected to move down to about 3% by the end of 2023, and then return to the 2% target by the end of 2024.”

Link to the meeting notes

Now how do the changes in rate and market expectations potentially open doors for you as an investor?

We’re seeing a few things on the ground.

Market prices have been coming down

From an equity stand point, this is good news for those who are looking to grow their property holdings.

With prices coming back down we are seeing a more realistic market.

Pre-sale and Pre-build Challenges

One investing strategy that a lot of realtors have been pushing is called an assignment of sale for pre sale properties.

It involves putting a pre-sale purchase under contract and assigning the contract down the road when the property values have gone up.

These are the usual steps:

  1. Find a solid pre-sale
  2. Put the property under contract with an assignment of sale clause
  3. Invest the deposit needed for the pre-sale
  4. Wait
  5. Sell the contract for a purchase price higher than the original price (note: the difference is called a lift in assignment)

 

Now, these come with a huge risk: what happens if you cannot assign it?

This is where we are right now

There are a large number of investors who’ve entered into these contracts that have been told they can assign. Due diligence hasn’t been met and they have no exit plan.

If they just don’t close, they could be liable for a lawsuit.

So what happens? Well, that’s where some investors come in and negotiate a huge discount to buy new build properties for a fraction of the price they were listed for.

Closer to a Buyer’s Market

It’s been years since places like Vancouver and Toronto have seen a Buyer’s Market (i.e. where buyers have control).

We’re getting closer and closer to one now.

Over the last 2 years, buyers have had a hard time because sellers were in control. Many offers had to be “subject free” which puts the buyer under stress. Most listings had double digit offers and bidding wars were common.

As the market reverses, we’ve been seeing subject to financing, and other subject clauses coming back to the market which has made a HUGE difference.

Before you go out making financial decisions…

You should seek a professional advisor and chat with them about the pros and cons.

This is not intended to be financial advise but is a current market update of what we’re seeing right now.

Run the Numbers. Run them again. And probably one last time.

There is still a lot of risk and uncertainty in the market.

You need to make sure you are comfortable taking on risk. Double check your numbers ESPECIALLY your cash flow.

When investing in real estate, you are more than likely taking on debt (as a mortgage). This means you need to be more cautious and diligent than someone investing in stocks. You could lose MORE than the money you put in.

With leveraged investing, like real estate, liquidity is one of the key considerations you need to look at. Do you have the liquidity to cover if something bad happens? 

The other major consideration is what is your exit plan? What if things go south? How will you get out of the investment for as minimal loss as possible?

Conclusion

Overall, yes the rates are going up. The Bank of Canada wants you to stop buying. We may be heading for a recession.

Historically, millionaire’s were made during recessions. They were diligent, and took calculated risks.

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