Inflation and real estate aren’t two things we often see mentioned in the same sentence.  Our notice of the effects of inflation is usually limited to everyday purchases – food, clothing, gas or other household items.  After all, it makes sense you’d take note when your weekend grocery run ends up costing you significantly more over time, since it’s something we all do so frequently.  But the impact of inflation upon housing prices is very real too, and it’s played a larger role in this past year’s climbing average sale prices than you’d necessarily think at first blush.

The key to our region’s ability to have so far weathered the pandemic in relatively good economic shape is the same factor currently driving the explosion in average housing costs: a skilled, well educated workforce with the digital aptitude to remain productive while working remotely from home.  Average salaries haven’t suffered in Kitchener-Waterloo, and with shops, restaurants and other amenities closed and no way to vacation, local families have been able to stockpile their savings over the past year.  This, combined with a flood of government investment in economic stimulus packages and accelerated quantitative easing (simply printing more money to cover skyrocketing government spending), is leading inevitably to a higher rate of inflation.

It’s something we’ve already seen contribute in a big way to the rising cost of housing – for both homeownership and in the rental market.  With more disposable income floating around and fewer places to spend it, people have been able and willing to pour more money into their next home.  And, with people craving more space in the midst of being stuck at home, demand for housing in Kitchener-Waterloo has never been higher.  Historically low interest rates have also helped to fuel this demand, to the point where government and financial regulators have taken notice and are beginning to formulate a response aimed at cooling things down.

Foremost among the options being explored, and the most likely to be implemented, is a strengthening of the mortgage ‘stress test’ currently used by lenders in Canada to evaluate prospective borrowers.  The existing stress test came into being back in early 2018, in response to the overheated real estate market of the previous year.  Right now, borrowers are required to demonstrate that they have the financial capacity to withstand a two-point hike in interest rates.  The new proposal laid out by the Office of the Superintendent of Financial Institutions (OSFI) recommends raising the stress test level to the higher of 5.25% or two points above the existing market rate.

While the implementation of the stress test in 2018 did have the desired effect of slowing things down, it also sparked a frenzy of activity in the markets to qualify under the old rules before the stress test kicked in – and we’re very likely to see the same thing happen again this spring if the OSFI’s plan moves forward.  Looking back to the Kitchener-Waterloo March market stats released by KWAR earlier this month, it appears that the minor slowdown our market is currently experiencing could well have a limited shelf life – get ready for a very hectic next few months.

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