The Canadian real estate industry is buzzing over the recent Bank of Canada monetary policy report released by Bank Governor Stephen Poloz. The central bank has modified its outlook for economic growth, forecasting 1.6 per cent this year and predicting increases of 2.3 per cent in 2014 and 2.6 per cent in 2015, a notable downgrade from their July forecast.
The bank's warning of an inevitable rate hike has also been dropped, representing a major reversal of their bias toward rate hikes. "We have balanced the risks," Poloz said, announcing that rates will remain low for until possible second half of 2015.
While that decision came as no surprise, the wording was construed in ways that subsequently caused the Canadian dollar to fall in value by two cents. Foreign investment is thus even more stimulated. The dollar will soon recover, given overall market conditions. We're already seeing the resilience of our currency rebounding and gaining strength from rising commodity prices and favourable real estate statistics.
Yet, what the capping of interest rates means for Canadian cap rates is the thought on every commercial real estate investor's mind. Historically, low interest rates have resulted in some of the lowest cap rates in Canadian real estate history, and cap rates only increased 1.2 per cent during the recent recession.
However, all signs point to stabilization, including the recent Colliers International Canada Q2, 2013 Cap Rent Report. This report offers an optimistic outlook for investors, indicating a stabilization on cap rates throughout Canada due to stable rental rates and consistent low vacancy rates.
Canadian commercial investors will feel the pinch more from the competition of foreign investment dollars than from falling cap rates in the current real estate financing climate.
Tarun Gupta is a commerical sales representative with Royal LePage Commercial. For more information, please call (416) 479-4486, or visit TorontoInvestRealEstate.com.
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