Rate hike won’t take ‘too much steam’ out of Canada’s housing market, experts say

Click to play video: 'Bank of Canada raises key interest rate to 0.5%'
Bank of Canada raises key interest rate to 0.5%
WATCH: The Bank of Canada announced a widely-expected 25 basis point rate hike, bringing its bench mark lending rate to half a per cent. This is the first time the bank has hiked, since it was forced to slash interest rates to emergency levels at the start of the pandemic. Anne Gaviola has more – Mar 2, 2022

The Bank of Canada’s move to hike interest rates will make the prospect of homeownership more expensive for some house hunters, but experts say it won’t be enough to fully cool a Canadian housing market beset with strong demand and a historic “supply crunch.”

Major financial institutions are already taking note of the central bank’s decision to hike interest rates to 0.5 per cent on Wednesday, an increase of 25 basis points from the rock-bottom lows seen through much of the pandemic.

RBC and TD Bank moved to hike their prime lending rates to 2.7 per cent from 2.45 per cent effective March 3 in response to the Bank of Canada’s announcement. Other Canadian banks expected to follow suit.

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Variable-rate mortgage holders will immediately feel the effect of the higher rates on their monthly payments.

The average $500,000 mortgage holder will pay an extra $58 per month as a result of the hike, according to Sung Lee, an expert with rate comparator Ratesdotca.

While he says most homebuyers who opted for the variable rate route were probably expecting and prepared for interest rate hikes — the federal banking regulator’s mortgage stress test was installed in 2018 as a safeguard for this — the past few months have seen prices rising across the board on food, gas and other life essentials.

As it stands, the qualifying rate for an uninsured mortgage, where borrowers have a down payment of 20 per cent or more, is their contract mortgage rate plus 200 basis points or 5.25 per cent, whichever is higher.

If the prospect of additional rate hikes is making paying down the mortgage increasingly worrying, homeowners can look at pivoting to a fixed rate for more security.

“I think the initial increase of 25 basis points will be a good kind of warning shot to everyone,” Lee says.

Demand still fervent, supply still tight

But for prospective buyers who’ve been on the outside looking in of Canada’s hot housing market, the first step towards higher rates likely isn’t enough to stave off demand.

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Re/Max Canada president Christopher Alexander says gradual rate increases, as the central bank has telegraphed, won’t “take too much steam out of the market.”

“It’ll take some froth out, which I think we would all enjoy,” he tells Global News.

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“But I think the market will adjust … demand is still incredibly strong and Canadians really believe in the value of home ownership. So I think that will still continue to see people wanting to buy, just might take them a little bit longer than they had hoped.”

As the central bank signalled in January that rates would be on a “rising path,” Ratesdotca saw a “surge” in mortgage pre-approval requests, Lee says.

Both he and Alexander say house hunters still have plenty of buying power with rates at 0.5 per cent and will look to put that to use while they can.

Click to play video: 'Market conditions'
Market conditions

Toronto broker Michelle Gilbert says her clients aren’t letting the rate hike deter them from buying because they’ve lived through years of home price increases and interest rates are still lower than they were pre-pandemic.

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Gilbert says clients want to get into the market while they can, and they won’t find better conditions until there’s a significant rise in supply, or until investors are required to cover higher down payments, which could deter them from buying.

Gilbert’s views are bolstered by a Zoocasa analysis showing the country’s last round of interest rate increases between the start of 2017 and end of 2019 correlated with slower sales numbers, but triggered no major impact on prices.

The listings site found after those rate hikes there were “very small movements” in the average price, which could be attributed back to seasonality and the new mortgage stress test rather than the rate increase.

Expect prices to remain elevated as the sellers’ market persists, Alexander says. Current inventory levels have the market at about a two-month supply at any given time, while buyers’ markets kick in when the sector gets around six months’ worth of units.

“We’ve never seen anything like this and people that have been around for decades have commented at the same” he says.

“This has been such a supply crunch of epic proportions that there’s really no parallel to it,” he says.

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Rushing into market a 'dangerous game'

While Alexander maintains the initial rate hike won’t have much of a material impact on housing markets, he says it could bring some “calm” to homebuyers as competition potentially wanes in the months to come.

Lee says that until the central bank hits Canadians with a series of hikes, potentially pushing interest rates beyond the 100-basis-point mark, home prices will continue to grow at their current clip.

He warns, however, that Canadians trying to secure a low rate for a hot real estate opportunity are playing a “dangerous game.”

“If you’re going into real estate just for the fact of cheap money and to try to take advantage of that, there’s a lot of individuals that have that mindset. Then you get caught up into bidding wars where you have 10, 12 offers,” he says.

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“Whereas if you kind of hold out and let the rate increases play out, then there may be less competition and you’re not paying as elevated of a price.”

— with files from Global’s Anne Gaviola and The Canadian Press

Click to play video: 'How interest rates impact the housing market'
How interest rates impact the housing market

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