The Bank of Canada’s decision Wednesday to keep interest rates near zero at least until early March will continue to add fuel to the country’s overheated housing market. The central bank said it “expects interest rates will need to increase,” but that cost of borrowing will continue to be cheap over the near term.
Property Values Will Keep Heating Up
The Bank of Canada’s decision to not hike rates today will do little to hold back buyers from entering the market. We know from U.S. experience that even a modest increase in interest rates can have a significant impact on housing demand and prices, but in Canada, we’re nowhere near that threshold yet, so even a small increase won’t discourage home buyers from entering the market. And, with the economy still humming along and house prices rising in most markets, it would likely take several rate hikes to significantly slow demand for homes.
Home prices across the country increased at their fastest clip in nearly two years as prices in many cities surged beyond the levels that existed during a similar housing boom in the 2000s. The price of a home rose anywhere from 20- 70 per cent depending on locality during December, according to the Canadian Real Estate Association’s most closely watched home price index, which adjusts for anomalies such as changes in the number of days homes are on the market.
The Bank of Canada hiked its benchmark interest rate five times in 2017 and 2018. Those policy moves contributed to weaker home price increases in 2018. Some economists say the Bank of Canada will have to keep raising interest rates to curb housing prices and counter inflation in other parts of the country. The most popular type of mortgage in the country – the five-year fixed-rate mortgage – is already higher than in 2021.
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