Rate hikes alone won’t be able to cool the housing market: Salerno Realty founder
Homeowners who have opted for a variable rate mortgage over a fixed-rate one are likely cheering the Bank of Canada’s decision on Wednesday to hold steady on its key lending rate.
But those same homeowners should start preparing for their mortgage payments to rise starting as early as March.
Bloomberg data shows the market is now pricing in a 100 per cent chance of a rate increase from the central bank at its March meeting, and as many as six hikes for this year overall, which would bring the Bank of Canada’s benchmark policy rate to 1.75 per cent.
“Our message today is interest rates are on a rising path and will feed through to mortgage rates and likely moderate demand [for housing] over time,” said Carolyn Rogers, senior deputy governor at the Bank of Canada, during a press conference Wednesday.
Record low rates have been a major factor in driving housing market activity and home prices to new heights in regions across the country during the pandemic. It has also fueled a surge in demand for variable rate mortgages, according to experts.
However, after being a major driver of economic growth, the bank is forecasting the real estate sector will drag on Canada's gross domestic product this year by 0.7 percentage points as higher rates impact demand.
“We’re not in the business of financial advice - whether to take a variable or fixed mortgage rate,” Rogers said. “As it relates to housing, our forecast is clear [with] what we see the path of housing to look like.”
Interest rates are “just about the biggest demand-side lever for home prices,” according to Rob McLister, mortgage analyst and columnist at The Globe and Mail.
He thinks homeowners are generally well-prepared to handle an up to 200 basis point rise in rates because of the federal mortgage stress test, where homeowners need to prove they can handle their mortgage payments at a rate higher than market levels. But he added some homeowners could be trouble if economic conditions force the Bank of Canada to raise rates higher than that.
“If you’re in a variable rate, there’s going to be bumpy times ahead. But you have to think of your average rate over the next five years. And I think at this point, history is a guide, and you should probably price in the fact that rates will start probably start ticking lower before your five-year term is up,” McLister said in an interview Wednesday.
“Other things equal, material rate increases are kryptonite to home prices. But it takes a while for rate increases to work their way through the system.”
Aside from interest rate hikes, the Bank of Canada thinks the main factor that will solve the housing affordability crisis is more supply.
“The bank’s view is the most important thing that will restore balance to the housing market in Canada is an increase in supply,” Rogers said. “Supply has not kept pace with demand. We think that’s an important thing that needs to happen so we’re encouraged by recent conversations in that direction.”