Yet another rate hike from the Bank of Canada this week has added to the pressure on anyone seeking credit, but it’s still not enough to slow demand for land.
Canada’s central bank, which sets monetary policy for the country, raised its key policy rate to 5% on July 12, warning that further increases may be needed to stamp out inflation.
“While the bank expects consumer spending to slow in response to the cumulative increase in interest rates, recent retail trade and other data suggest more persistent excess demand in the economy,” the bank noted, calling out real estate activity in particular.
Real estate listings are lagging demand, it said, adding to price pressures that are supporting inflation across the economy.
Demand for real estate is a key issue in the farm sector, which Farm Credit Canada said earlier this year has seen fewer properties available for farming and a corresponding decrease in the number trades. The decline comes at the same time as high commodity prices are supporting growth in the crop sector while livestock operations are seeking additional land to support herds.
Demand remains strong despite interest rate hikes, FCC vice-president and chief economist JP Gervais told Country Life in BC this week.
“The incentive for farms to grow their operations is still there,” he said. “The market for land is not going to tumble. I think it’s on solid ground. But the growth that we’ve seen in land values recently is going to slow.”
The pace of farmland appreciation decelerated last year and will continue to moderate this year thanks to higher borrowing costs, Gervais said, but he doesn’t see values declining.
In BC, farmland values appreciated by an average of 8% last year, with slightly lower growth possible this year.
Gervais said that farmers saw the cost of debt increase by just half a percent nationwide last year. This year, he expects farmers to pay an additional percentage point, but that will be felt more keenly in sectors with tight margins such as dairy.
“[Rates] are locked in, especially when it comes to real estate,” he says. “But higher interest rates are going to diminish the appetite to grow because it’s just not going to pencil out.”