The central bank's benchmark rate has now risen by 50 basis points since June
The Bank of Canada’s latest interest rate hike could contribute to cooler activity in the national housing market for the remainder of the summer, with little certainty for borrowers over where rates are eventually going to end up.
That’s according to James Laird (pictured), co-CEO of Ratehub.ca and president of the CanWise mortgage lender, who told Canadian Mortgage Professional that the new increase – coupled with climbing home prices in 2023 – may put a dampener on home sales activity.
“I expect it to be a pretty quiet summer as far as housing activity goes for two reasons,” he said. “One, rates have just gone up again, and we don’t know high they’re going to go. Two, home values rebounded significantly this year.
“So home prices are high again. In many regions across the country, they’re at or approaching their 2022 peak. Homes are fully valued, rates are up – those are not good ingredients for many transactions to occur.”
The central bank hiked its benchmark interest rate by a further 25 basis points yesterday, a decision that marked its 10th rate increase since March of last year and brought that trendsetting interest rate 4.75% higher than its rock-bottom pandemic-era low.
We have increased our policy interest rate to 5.00%.
— Bank of Canada (@bankofcanada) July 12, 2023
Learn more: https://t.co/THCX74ecBL#economy #cdnecon pic.twitter.com/fJqioBYuqQ
Housing market demand remains high – but challenges remain
In remarks accompanying its rate announcement, the Bank noted that still-high demand in the housing market was outpacing new construction and listings, putting upward pressure on home prices.
Laird said inventory shortages, a chronic issue in Canada’s housing market, showed little signs of improving, with volatile market conditions also dissuading many would-be sellers from listing their homes.
“The lack of supply certainly bolsters home values. I think there are two reasons for the lack of supply: one is people don’t want to buy in the current environment. So if they’re not buying, they’re not selling their existing home, so nothing happens,” he said.
“And many people have fixed-rate mortgages from more than a year ago that are quite low, and they don’t want to mess with that until that rate goes up, so I think lack of home supply definitely provides support for home values. Higher rates put downward pressure – and we’ll see how those two work against each other going forward.”
Bank of Canada’s ambiguous tone on further hikes unsurprising
While the Bank often suggests in each policy rate announcement what its future approach on interest rates may be, its July statement was conspicuous for its lack of any indication of what might be coming down the line in the next decision.
It merely said that its governing council would “continue to assess the dynamics of core inflation and the outlook for CPI inflation” with a particular focus on the evolution of excess demands, inflation expectations, wage growth and corporate pricing behaviour – but made no comment on its preparedness to hike rates again.
That was probably a deliberate move, according to Laird. “I’m not surprised that there was a hike, and also not surprised that they didn’t tell us one way or the other what their plans are going forward,” he said. “I think if they could go back in time, they probably wouldn’t have told us in January that they thought they were done hiking rates.
“I think that spurred consumer spending. I think it caused the housing market to run hotter than they would have liked through the spring, so I thought it was notable that they didn’t say [whether] they plan on raising rates further. They didn’t say if they plan on holding.”
That may come as little comfort to borrowers or prospective buyers in the housing market, who have no clear idea of where rates are going to end up or when they might hit their endpoint, but it’s in line with the Bank’s focus on restoring inflation to its target rate as a top priority, Laird said.
“They just said, ‘We’re committed to getting inflation back to 2%, and we’ll analyze the data and decide in the future,’” he said. “So that’s not great for borrowers, not great for consumers, because we’re left with uncertainty whether they’re done. Are they going to hike further? We don’t know. But that to me is logical that they have gotten away from predicting what they will do at future announcements.”
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