Could rate hikes put the brakes on Canada’s runaway housing market?

Attempts to curb inflation with higher interest could have serious implications for homeowners, suggest economists

Could rate hikes put the brakes on Canada’s runaway housing market?

As the Bank of Canada joins other global central banks faced with the dilemma between letting the economy recover further or hiking interest rates, economists are considering the implications for the nation’s indebted homeowners and scorching-hot housing markets.

Since its aggressive moves to prop up the COVID-stricken economy in March 2020, the BoC has kept its monetary policy levers in the dovish position by leaving its key interest rate at 0.25%.

With borrowing costs so close to zero, Canadians took their chance to renovate homes or move up to larger ones. With housing prices elevated to hair-raising levels, some homeowners also took the chance to borrow against the equity on their properties. The upshot, as noted by Global News, has been the accumulation of $1.96 trillion in mortgage and HELOC debt.

“That’s the number one issue facing the Canadian economy: the increased sensitivity to higher interest rates,” Benjamin Tal, deputy chief economist at CIBC, told the news outlet.

Given the amount of mortgage debt Canadians are holding, he warned that even a slight uptick in interest rates would deal a substantial blow to households. With a 1.5-percentage-point hike, some homeowners could see their monthly mortgage payments double.

As the latest economic figures show larger-than-expected increases in inflation, the pressure is on for central banks to raise interest rates. Policymakers have some leeway to stand pat for now since those inflation figures are coming off historic year-ago lows set in the spring of 2020.

But if subsequent data from StatCan indicates that inflation isn’t as fleeting as many hope, the BoC may take it as a cue to turn hawkish. The normal intervention would be to increase interest rates, which would cool down the overheating economy – and put a lid on overheating housing markets as well.

“To the extent that inflation starts rising and the Bank of Canada is behind the curve and not dealing with it quickly enough, the speed at which interest rates would have to rise might go up,” Tal said. “And that’s something that can have a significant negative impact on housing.”

Higher borrowing costs would dissuade would-be homebuyers from pushing through with their plans. This would, at least in the short term, likely have a calming effect on housing demand, according to Diana Petramala, senior economist at Ryerson University’s Centre for Urban Research and Land Development.

But like Tal, she stressed that higher interest costs could deal a blow to Canadian homeowners, who may in all likelihood be cash-poor even as the run-up in property prices makes them house-rich.

“If interest costs were to go up one to two percentage points, because of the level of debt, households could be put in a position where they’re devoting a significant share of their income to making their mortgage payments,” Petramala told Global News.


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