Rising rates pose a "clear and present danger to the teetering housing market," economist says
The Bank of Canada is in the midst of an aggressive cycle of rate increases – and some observers are sounding the alarm on the possible risk those hikes pose to the housing market.
After keeping its benchmark policy rate at a rock-bottom 0.25% throughout the first two years of the COVID-19 pandemic, the central bank has introduced three consecutive rate hikes (the first a quarter point, the next two 0.5% increases) to combat the growing threat of persistent and rising inflation.
Its latest increase – revealed at the Bank’s June policy rate announcement – means that the trendsetting rate now sits at 1.5%, having witnessed a rapid rise in just weeks, and the potential adverse impact to the housing market of those quickfire moves shouldn’t be overlooked according to a leading economist.
That rising-rates cycle represents a “clear and present danger to the teetering housing market,” BMO chief economist and managing director – economics Doug Porter (pictured top) wrote last week, with rate hikes arriving as year-over-year sales plummet in leading Canadian markets including Toronto and Vancouver.
“The pullback in sales has now gone far beyond simply reversing the outsized strength a year ago, and is now in well-below-average terrain, with inventories building quickly,” he added.
Speaking with Canadian Mortgage Professional, Porter said the effect of those rate hikes on certain markets could be profound, although he emphasized that the prospect of an overall market collapse remained remote.
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“I think a significant downturn is a possibility,” he said. “I’m not in the crash camp – I never have been. I think there are some pretty important supports [to the market] and mileage will vary by city. Each city had its own story in the last couple of years and has its own economic fundamentals.
“A smaller city in southern Ontario has a very different outlook than, say, Calgary at this point. But I would say that the housing markets that flew closest to the sun over the last couple of years [and] had the highest highs are probably most at risk of now retreating.”
The Bank’s latest announcement saw it signal that “more forceful” action on its benchmark rate could be coming down the tracks, leading to some speculation that an even larger rate hike – possibly a three-quarter percentage point – could be on the way in July. But could the looming threat of a housing downturn see the central bank map out a less ambitious, or sudden, path on rate increases?
That’s unlikely, according to Porter, chiefly because curbing inflation and reducing the risk of it becoming entrenched or normalized is a far more important consideration for the Bank than keeping the housing market healthy.
“The reality is the Bank of Canada can’t let housing dictate its broader policy,” he said. “Sure, housing is an important element of what the Bank tries to achieve, but it’s not their main target or their main goal.
“They’ve got to keep their eye on inflation – and inflation is [currently] like we haven’t seen in decades. It’s incredibly uncomfortable, and the Bank has to address it, come what may for the housing market.”
The Bank is unlikely to completely take its eye off what’s happening in terms of home sales and prices, nor is it going to “dance to the tune” of the market, Porter said.
Read more: A Canada housing crash? Don't count on it, says RBC economist
“When you think about it, during the pandemic they had to let the housing market run wild because they had to keep policy extraordinarily weak to support other areas of the economy,” he explained. “Now it’s like the shoe is entirely on the other foot.
“Now they almost have to tune out any problems the housing market has because the inflation challenge is so serious.”
If there’s any positive news on the housing front it’s that the Bank’s recent oversized rate hikes have largely been baked into many longer-term mortgage rates, Porter said, with five-year rates having risen steadily over the past several months to account for a more involved central bank.
However, that’s little solace for those on variable rates, which are now moving in lockstep with a very aggressive Bank of Canada, he added.
“Is the housing market at risk of further weakness? I certainly think it is,” he said. “Essentially, we’re going from having a housing market that was priced at essentially 1% [for] mortgages – now that’s about to be priced at 4-5% mortgage rates. And for some, that’s going to be painful.”
