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What the Latest Interest Rate Hike Means for Canada’s Real Estate Markets

The latest announcement from the Bank of Canada (BoC) on June 7 may have come as a bit of a surprise to some Canadian homeowners, buyers and sellers. The BoC announced a rate hike of 25 basis points, raising the Bank’s trend-setting interest rate in Canada from 4.5% to 4.75%.

So what does this mean for Canadians, specifically those looking to buy or sell in the near future?

The rate increase will further impact spending habits among Canadians and those looking to purchase a home during the remainder of 2023, according to Chris Jokel, Senior Data Engineer with the Canadian Real Estate Association (CREA).

“Financial conditions have tightened, and general price growth has slowed in response to interest rate increases that the Bank of Canada had previously carried out eight times in pretty quick succession to combat higher inflation,” he explains.

“The BoC looks at many factors in our economy, but one of their primary roles is ensuring consumer price inflation remains centred on their 2% target. With inflation now potentially remaining stubbornly above the Bank’s target range, the Bank decided to add another rate hike and have made it clear they’ll raise rates again in the future if needed.”

The factors affecting rate decisions So, what does the Bank of Canada look at when assessing the viability of rate hikes? “They usually monitor a wide variety of factors,” says Jokel. “They look at Canada’s (gross domestic product), they look at the labour market—they’re looking to see a bit more slack in the labour market because it’s very tight right now, and they’re looking for a slowdown in wage growth. And of course, again, their primary target: they’re looking for price growth to return to that 2% target, which is the midpoint of their 1% to 3% range.”

Implications for Canadians With another rate increase now in the rear-view and possibly a few more on the way, Jokel says some financial analysts are predicting “a mild recession in Canada sometime in the second half of this year.”

“After a decade of historically low interest rates, it’s possible that with these higher rates through the second half of 2023 we might see a slowdown in economic growth,” he says. But this doesn’t mean it’s time to panic. Jokel adds, “…predictions like these have been ongoing for a while and keep getting pushed out. So we’ll have to wait and see if they actually come true this time around.”

House hunting on the rise

As far as how this impacts Canada’s housing markets, Jokel says “it really depends on whether you’re a first-time buyer or an existing homeowner.”

“If you’re an existing homeowner, you already have equity in your home. Whether prices go up or down, whether rates go up or down, that tide lifts all boats and falls just the same,” he explains. “However, this may impact current homeowners with fixed mortgages, who are thinking twice about selling and buying a new place because their mortgage rate will increase.”

“What we’ve been seeing this spring is some confidence returning to the housing market on the demand side as buyers are jumping back in after waiting it out on the sidelines from the shock of higher mortgage rates. It seems like buyers had taken note of the long pause on interest rate hikes at the end of the tightening cycle and were returning to the housing market in strong numbers, but they may be more cautious given the Bank of Canada’s rate hike and language in their announcement.”

This increase in buyer interest could consequently affect sale prices as the squeeze of limited inventory continues.

“The greater issue housing markets are facing is a lack of new supply, which is tilting the balance in favour of sellers and driving this stronger price growth that we’ve seen recently,” Jokel says. “We saw housing prices reach their bottom towards the beginning of [2023]. It looks like Canadian housing markets are heating up again with very strong monthly growth in March and April.”

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