A sharp increase in interest rates might have highly undesirable effects on other sectors of Canadian activity
Federal and fiscal authorities should take care not to rein in the housing market too quickly as this segment is highly sensitive to fluctuations, according to a senior economist.
“Some activity sectors could respond more sharply to overly abrupt interest rate increases,” said Hendrix Vachon of Desjardins. “During the pandemic, activity in [the housing market] shot up, compensating for sectors that were having more difficulty. The low interest rates probably had a hand in the boom.”
A sharp increase in interest rates, similar to the “supersized” hike that could happen south of the border, might end up dragging other sectors of Canadian activity with it, Vachon said.
Considering that home prices have seen accelerated growth despite the pandemic, rate hikes could help cool down buyer demand, in turn translating into downward pressure on prices.
“It would not be catastrophic for prices to moderate or edge down,” Vachon said. “However, a major correction would have a bigger downward impact on the economy.”
Read more: BoC on how its 2022 rate hikes will proceed
Policymakers should also take into account the riskier knock-on effects of rate hikes, Vachon warned.
“In addition to a correction in property prices, securities could also drop steeply and magnify the impact of the negative wealth effect on consumer spending,” Vachon said. “The ultra‑accommodating monetary policies of recent years have been one factor supporting the valuations of different asset classes. Reversing these monetary policies too quickly could heavily penalize the value of financial assets, such as stocks and bonds.”
