Canada housing market showing signs of ‘cooling’ as more interest rate hikes loom

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Real estate watchers say rising interest rates are already starting to have a “cooling effect” on Canada’s hot housing market, but some economists are warning that the Bank of Canada will have to strike a tough balance with monetary policy tightening or risk a market crash.

Central banks across the world have signalled plans to hike interest rates through 2022 in an effort to tame global inflation, with the Bank of Canada kicking off what’s expected to be a series of increases to the key overnight rate earlier this month.

The Bank of Montreal said in its latest interest rate forecast Monday that it now expects the Bank of Canada to hike rates by 50 basis points to one per cent at its next meeting, with another 50 basis point hike to follow.

BMO economists cited Bank of Canada deputy governor Sharon Kozicki’s speech on March 24, in which she said the central bank “is prepared to act forcefully” to tame inflation.

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CIBC said in its updated forecast on Monday that interest rates could hit 1.5 per cent by the end of the year and reach the 2.25 per cent mark by September 2023.

Some have already observed a slowdown spurred from the central bank’s move to an overnight target of 0.5 per cent, the first hike to interest rates since 2018.

Realtor Nasma Ali has noted a marked slowdown in housing demand in the red-hot Greater Toronto Area over the past few weeks, which she sees as a likely precursor to a reckoning in the suburbs and surrounding towns that have seen blistering price growth over the past two years.

“I had listings that, in January, would have had 100-plus showings,” Ali, chief executive of broker One Group, said. “All of a sudden, we’re only getting five to six in four days. This is a transition period and it’s not for all markets or price points. But we’re seeing it.”

Interest rates not the only factor affecting home prices

James Laird, co-founder of, told Global News that there’s no question rising interest rates will have a “cooling effect” on home prices, as the record-low rates seen during the COVID-19 pandemic were among the reasons prices grew so quickly in the first place.

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“It does feel like homes might moderate a little bit as far as month-to-month appreciation. We might see stability as opposed to (prices being) up 10 per cent year-over-year,” he said.

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But he questions whether interest rates will be enough to completely cool Canada’s hottest real estate markets.

He’s not alone.

Representatives from the Canadian Real Estate Association (CREA) were among those who spoke to the federal finance committee Monday morning on the topic of inflation.

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CREA CEO Michael Bourque told the committee Monday that the upward pressure on home prices in Canada will increase as the country’s population — growing at the fastest rate among G7 nations, largely thanks to immigration — continues to outpace available inventory.

“The supply of new homes is not even close to keeping up with demographic changes and population growth,” Bourque said. “With housing becoming a scarce asset, prices will continue to increase.”

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Until barriers to rapid housing construction are removed — Bourque cited “NIMBYism, red tape, high fees, delays for permitting at the municipal level” — Canada won’t see housing prices drop off any time soon, he argued.

Housing market in ‘full-blown mania’

But others still argue that interest rates do in fact have the ability to stem surging prices in Canada’s housing market.

Author and portfolio manager Hilliard MacBeth warned the finance committee Monday that not only is such a correction — a rapid change in an asset’s market price, usually of 10 per cent of more — on the horizon, but it’s needed to effectively tamp down on inflation.

MacBeth first wrote a book about a looming burst of Canada’s “housing bubble” in 2015. Though the collapse has not come to pass, MacBeth stated in his opening remarks to the finance committee that he’s confident his prediction wasn’t wrong, just “early.”

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He said he’s become increasingly convinced of the housing bubble’s existence the more he hears people talk about a seemingly unending climb to home prices in the country.

MacBeth argued the conviction that housing as an asset class is immune to market correction has become a “full-blown mania, probably unsurpassed anywhere in the world” since the COVID-19 pandemic began.

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Interest rates will need to continue to increase to correct rampant price appreciation, he said, even at the risk of dealing a harsh blow to the economy. He said central banks globally will need to show the “backbone” to impart short-term pain on consumers by continuing to hike rates.

“Inflation must be lowered, even if it means bursting the housing bubble and triggering a recession,” MacBeth said.

Senior economist Stephen Brown with Capital Economics wrote last week that surging interest rates could “topple” the housing market.

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But he also argued in an interview with Global News last week that the Bank of Canada might be willing to risk a slight dip in the housing market to tackle inflation.

He said a modest drop in housing prices of five to 10 per cent would probably be tolerable as it would “take some heat out of the economy.” The housing market could handle that, he said, because home prices rapidly appreciated over the course of the pandemic, up roughly 50 per cent over the past two years.

“The concern would be even if we had a five-per cent fall in house prices… that could then trigger this spiral. And that’s really not a situation we want to be in,” Brown noted.

“That’s a very hard thing to manage because as everyone knows, psychology plays such a huge role in the housing market.”

Brown said last week he doesn’t believe the Bank of Canada will be quite as hawkish as the Federal Reserve in the United States, which said earlier this month that it anticipates raising interest rates at every meeting for the rest of the year.

He said he thinks Canada’s central bank will raise its target overnight rate to as high as 1.25 per cent before pausing to see the effect of its hike on inflation.

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“I think my strong view at the moment is that the bank is very unlikely to be able to get its policy rate above two per cent without causing some pretty major problems in the housing market,” he said.

— with files from Reuters

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