A question many Canadians are asking is whether higher fixed mortgage rates will take hold. At its September monetary policy meeting, the Bank of Canada (BoC) raised interest rates by 75 basis points, raising the policy rate to 3.25% while maintaining a tight stance on monetary policy. The central bank has signaled it is ready to push further rate hikes until the consumer price index (CPI) has enough evidence of signs of a fall.
Canada's annual inflation rate fell from a 30-year high of 8.1% in August, but officials acknowledged it was largely driven by gasoline prices. The economy is enduring “further rising price pressures, especially on services.” As a result, “the policy rate must continue to rise” and further tightening is imminent to ensure price stability.
"Given the inflation outlook, the Policy Board still believes that interest rates need to be raised further," the BoC said in a statement. “Quantitative tightening complements rate hikes. Given the impact of tighter monetary policy on the economy, we will assess how much rate hikes are needed to bring inflation back to the target level. We maintain our firm commitment to price stability and will continue to take the necessary steps to reach our 2% inflation target.Rising and servicing.Of course, this also means higher returns on bank deposits.
But many buyers and homeowners are asking an important question:
What about mortgage rates?
Will fixed rate mortgage rates continue to rise?
In response to the central bank’s policy decision, most Canadian financial institutions, including the Bank of Montreal, Scotiabank, and Toronto-Dominion Bank, raised their prime lending rates by three-quarters to 5.45 per cent. This is up from the previous prime lending rate of 4.70 per cent.
This is important because it is the starting point for the lender's loan calculation. In other words, borrowing costs for many Canadian consumers will rise significantly.
Many economists, market analysts and homeowners are concerned that this will put pressure on the Canadian housing market. That's true, but the impact of rising mortgage rates on the nation's housing economy is not as clear-cut as experts claim.
Variable rate mortgages are immediately affected by rising mortgage rates. Homeowners who need to renew their fixed-rate mortgages in the next few years will also feel the economic pressures of rising mortgage rates. A homebuyer has to contend with higher mortgage rates compared to what others were getting her a year ago.
A higher interest rate environment in the Canadian housing sector is expected to have knock-on effects across the economy. As homeowners grapple with higher debt payments, many will inevitably tighten their budgets and cut spending in other areas, whether it's eating out or buying clothes.
But this is Canada. New Normal for the New Housing Market? yes.
Governor Tiff Macklem has said he intends to tighten monetary policy further until the central bank succeeds in keeping inflation under control. Financial institutions have found themselves unable to curb the supply component of rampant inflation, but they have the tools to curb red-hot demand. Thus, when interest rates rise, demand declines, whether for labor or real estate.
Many central banks have agreed to raise their base rates and leave them there for the long term. When many Canadians bought homes during the historic bubble, the debt factor could be a concern for new homeowners.
In addition, imminent interest rate hikes tighten the minimum stress test for mortgages. But while federal regulators are unlikely to reform stress testing in this environment, other industry experts believe it may be time to think again. are considered to be potentially detrimental.
Will rising interest rates be the death knell for real estate?
RE/MAX expects average home prices to fall 2.2% by the end of 2022. However, some market pundits seem to have thrown in the towel by forecasting a 20% decline in the Canadian housing market. Also, higher mortgage rates will not do the industry any favors going forward.
"We see the recession deepening and widening as buyers wait and assess the impact of higher lending rates," Robert Hoag, deputy chief economist at the Royal Bank of Canada, said in a research note.
That being said, there is some hope that perhaps the five-year fixed rate mortgage could have already peaked, as long as the Bank of Canada does not approve any supersized rate hikes for the rest of the year or heading into 2023.
Ultimately, the effects of rising interest rates are already being seen in the Canadian real estate market. In July, national home sales tumbled by 5.3 per cent month-over-month, while the MLS® Home Price Index (HPI) tumbled by 1.7 per cent month-over-month, according to the Canadian Real Estate Association (CREA). The next few months of data should give the industry a clear picture of what to expect in 2023.
