A rapid rise in interest rates will cool down the housing market, as inflation is at a three-decade high and the Bank of Canada signals it will hike rates significantly in the year ahead. The Bank of Canada began normalizing its monetary policy in March, raising its policy rate 50 basis points to 1.0%. It plans to raise it another 100 basis points by year's end.
Fixed mortgage rates have gone up, but the Bank of Canada's hiking campaign will soon make variable rates more expensive. The rate increase is pushing up the qualifying rate for a mortgage, removing stretched-out buyers from the market, and reducing the size of the mortgage and the price buyers can pay.
Higher rates will pose huge challenges for buyers, and the housing affordability measure may reach its worst-ever level in the third quarter. We expect poor and worsening affordability to increasingly weigh on homebuyer demand across the country, even with new federal initiatives.
Royal Bank of Canada revised its housing forecasts lower due to expectations for a more aggressive rate path from the Bank of Canada. This will help the market stabilize in 2023.
RBC projects prices to soften as rising rates, deteriorating affordability and cooling activity dampen market sentiment. However, stronger-than-expected gains will result in a higher annual average price for 2022 than previously anticipated.
Rising rates will hurt buyers in the most expensive markets the most. RBC expects larger annual price declines in British Columbia and Ontario.
While a market crash isn't completely ruled out, solid demographic fundamentals will keep demand from falling into a deep freeze. The housing market is tight, with inventories at historically low levels. Strong construction and cooling demand will balance the market.
Rising interest rates will bring more sustainable activity, fewer price wars, and modest price relief for buyers.
Source: Rising interest rates a game-changer for Canada's housing market
Rising interest rates a game-changer for Canada's housing market (2022). Available at: https://thoughtleadership.rbc.com/rising-interest-rates-a-game-changer-for-canadas-housing-market/ (Accessed: 19 May 2022).
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929