Inflation, interest, real estate...

Prime interest rate (Prime Rate) increased again by 0.5% in December. The Central Bank of Canada explains this as a continuation of the fight against inflation. 

Instant Prime Rate is 6.45%. Average interest rates are around 6%. 

What is happening, why, and what can we expect in terms of inflation, interest, and real estate?

Everyone knows that we are struggling with historically high inflation. In Europe, the situation is even worse than in Canada. However, it's not great here either. Rising prices of food, accommodation, gas, building materials and such certainly contribute to rising inflation. And let's not forget that the state is wasting money on unnecessary projects, contributing to this very fiasco.  

To fight inflation, the Prime Rate needs to be raised. This means that interest rates go up, people spend less, save more and thus inflation is brought under control.  

The government has already raised interest rates a couple of times. Hopefully this December increase is the last increase and that it will be enough to make an impact. And as we move away from the ill affects of covid and, hopefully, the soon ending of the war in Europe, we should expect that interest rates will start to fall.

It should not be forgotten that there are high expectations that we will enter a "modest" recession in mid-2023, which would likely lead to further interest rate cuts.

So, there is light at the end of the tunnel, as some of our economists would say. Interest rates are high, but it is expected that they will start falling mid-2023 and that they will be in order by the end of 2024. This is not my opinion, rather, what the economic experts say. 

And what should you do if you have a loan that is about to be renewed or you are looking for a new one?

You should take a variable interest rate or a short-term fixed one, say for a year or two, in my opinion. I believe that a long-term fixed interest rate where you will be locked in for many years at a high interest rate should not be taken at this time. Terminating that contract, if interest rates start to fall, would cost you a fortune. It certainly suits the banks, and that's why they push this option with all their might. If we can believe the economists, that approach makes the most sense.

And that brings us to the topic of real estate. I'm not the biggest expert on that, but the fact is that real estate has fallen on average by about 20% in the last 10 months. Of course, not in all neighborhoods. I am not sure if they will fall further, but I believe that we are relatively close to a ‘bottom’. This only means one thing. If you have been planning to buy something, I believe now is the time to do it. 

Interest rates are high, but they won't be for long. Falling property prices are a much, much bigger savings than rising interest rates, which, again, shouldn't last too long.

Let's face it, don't expect interest rates to go back to 2%. Those were extraordinary interest rates that, it seems to me, have come to an end. If I could guess where real interest rates should be, once we get out of this inflationary situation, I'd say around 4%. 

Interest is important but not the most important as we have very little control over them. However, we have much more control over whether we do something about it or not.