Well, it happened. The Bank of Canada (BoC) finally raised interest rates. The question now is what impact higher rates will have on the sizzling Canadian real estate sector.

Many market analysts anticipate the central bank will raise rates several more times in 2022 to help combat swelling inflation, which could lead to a myriad of consequences, including the potential to slow the Canadian real estate market.

There are varying opinions as to whether the BoC pulling the trigger on rate normalization could result in a correction in the red-hot housing sector. Indeed, one of the contributing factors to the exceptional growth in the Canadian housing market has been near-zero interest rates, giving borrowers more purchasing power and enabling them to compete in fierce bidding wars for residential properties.

Can Rising Interests Rates Help Ease the Canadian Real Estate Affordability Crisis?

Housing affordability continues to be a pressing issue in Canada, both at the national and regional levels. More prospective homebuyers are being pushed to the sidelines, waiting for a chance to purchase a detached property, a townhome or a condominium unit. Could higher interest rates be the solution to this ongoing concern?

BMO recently released a report discussing how Canadian real estate prices will struggle to keep up with recent trends in a rising-rate environment, particularly with many homeowners taking advantage of variable-rate mortgages.

The BMO anticipates that mortgage rates could increase significantly: 50 basis points for fixed-rate and 100 basis points for variable. Ultimately, this could result in shrinking credit demand across the Canadian housing market.

“For housing, the shift into lower-rate variable mortgages in 2021 kept the fire going, but the market will no longer be able to hide from higher rates this year,” BMO economist Robert Kavcic said in a note to capital market clients. “Incomes will grow too but, all else equal, it will be hard for prices to keep powering through that given where valuations already are.”

Canadian mortgage payments have accelerated in recent quarters, with the average new mortgage payment hitting $1,621 in the third quarter, up 11.7 per cent year-over-year. In the last five years, average payments have increased by 20 per cent.

And many people are concerned that rate hikes will affect their mortgage payments.

A new poll by the Angus Reid Institute found that more than half (53 per cent) of Canadians say a two-per-cent increase in their mortgage rates would have an impact on their finances. The same survey also revealed that 83 per cent of Ontarians think the provincial government has done a “poor” job reining in housing affordability.

“High housing prices have divided Canadians into three groups: the haves (40 per cent) who want the boom to continue lifting their assets, the have-nots (39 per cent) who hope for the market to tank so they can get in, and the status quo (21 per cent) who don’t mind prices staying right where they are,” BMO reported.

At the same time, housing experts believe that the latest surge in home prices in the last couple of years has placed prices too high for the typical household, especially in major urban centres and popular hot-spots. So, with higher borrowing costs and tighter mortgage lending standards, many prospective homebuyers could still face an uphill battle to accomplish their home-ownership goal.

But who says that prices will even start falling in this economy in the upcoming year?

Canadian Real Estate Prices Expected to Rise

Despite all the prognostications and expectations that Canadian real estate market prices could ease this year because of interest rates, many forecasts suggest that home valuations will continue their upward trajectory through the end of the year.

According to the RE/MAX 2022 Canadian Housing Market Outlook report, home prices are expected to rise 9.2 per cent in 2022 as low supply and high demand continue to support sky-high prices. Moreover, the report highlighted that many of the trends of the last couple of years would persist in 2022, such as inter-provincial relocation, as more Canadians search for less dense cities and neighbourhoods.

“Without more homes and in the face of rising demand, there’s potential for conditions in these regions to shift further,” said Christopher Alexander, the President of RE/MAX Canada, in a statement.

Sources