BoC rate increases are playing a significant role in aggravating risks
The continual overvaluation of Canadian real estate means that the risk of a “more severe” housing market crisis remains, according to Moshe Lander, economist at Concordia University.
A significant contributor to volatility is the Bank of Canada’s outsized rate hikes, which the institution asserted was necessary to rein in mounting inflation numbers.
“The housing market is very, very sensitive to those interest rates – and interest rates went from record lows just 12 months ago, to 20-year highs right now,” Lander said in a recent interview with CTV News Channel. “The Bank of Canada, probably in the next meeting or the meeting after that, is going to increase interest rates again.”
The most likely outcome of these trends is a more pronounced slowdown this year, with TD Economics recently sounding the alarm that 2023 might shape up to be Canada’s weakest year for housing activity since 2001.
“It’s not surprising that the housing market is going to be really soft,” Lander said, but he then stressed that Canadian housing “is really overvalued, and it really needs a correction, and so this really is not necessarily a bad thing.”
And while Scotiabank has warned that tens of thousands of mortgage holders could be at risk of defaulting in this environment, “I don’t think that the banks necessarily want that to happen,” Lander said. “They’re going to do everything they can to make sure that people can renegotiate their mortgages, maybe extend them a few years, maybe refinance at higher rates and change their payments.”
These are persistent symptoms of the overvaluation of Canadian housing, Lander said.
“There are a lot of people who over-indebted themselves and took on housing that they couldn’t afford, enticed by record-low interest rates,” he said. “So now that we’re returning to higher levels, people are realizing that housing is not on a guaranteed ‘always on the up’ situation.”
