The impact of higher interest rates may hit the Canadian farmland market harder in 2023, says the chief economist for Farm Credit Canada.
In a webinar last week following the release of FCC’s annual farmland values report, JP Gervais noted the Bank of Canada only raised its key overnight lending rate by relatively modest 125 basis points from its starting point near zero through the first six months of 2022. However, over the last six months of the year, the rate jumped a much steeper 375 points.
The relatively slow rise in interest rates through the first part of the year – and the fact it typically takes time for higher rates to be fully reflected in the economy - may have been one of the reasons the FCC farmland values report showed the average value of cultivated Canadian farmland increased by 12.8% in 2022, up from advances of 8.3% and 5.4% the previous two years, and the largest gain since 2014, when values jumped an average of 14.3%.
Gervais admitted the size of this past year’s increase in farmland values was a surprise to him. He said he expected values would push higher in 2022 but with rates already starting to rise, he was anticipating a more modest pace of increase, likely below the 8.3% advance seen the previous year.
Gervais said FCC data shows that farmland values increased 13.1% in the 12-month period between July 2021 and June 2022. In comparison, the 12.8% increase in values between Jan. 1 and Dec. 31, 2022 was slightly more modest, perhaps an early indicator of the effect of higher interest rates.
“The point is, in the last six months, we have a little bit of a decline – not in farmland values – but in the pace of the increase,” he said.
“We’re starting to see (the impact of higher interest rates). “It’s not that significant right now, but I do think we’re likely to see more of that in 2023.”