Just giving you an update and letting you know that there was a large interest rate hike yesterday, this will definitely continue to affect the market and we will see how this plays out.
Canada’s central bank raised its benchmark interest rate Wednesday by a full percentage point to 2.5 per cent. That’s the biggest one-time increase in the bank’s rate since 1998.
The bank’s rate impacts the rate that Canadians get from their lenders on things like mortgages and lines of credit. Two of Canada’s big banks have already moved their benchmark rates in response, with Royal Bank and TD raising their prime lending rates from 3.7 percent to 4.7 percent as of Thursday morning.
The other major lenders are expected to follow suit in short order.
All things being equal, a central bank cuts the lending rate when it wants to stimulate the economy by encouraging people to borrow and invest. It raises rates when it wants to cool down an overheated economy.
After slashing its rate to record lows at the start of the pandemic, the bank has now raised its rate four times since March as part of an aggressive campaign to fight inflation, which has risen to its highest level in 40 years.
The impact of higher rates will be felt most directly on the housing market, as variable rate mortgages are closely tied to the central bank’s rate.
Canada’s housing market was red hot for most of the pandemic, as record low rates fuelled demand and pushed prices up to their highest levels ever. But that direction turned in the first part of this year, as the central bank’s signal that higher rates were coming took the wind out of the sails of insatiable demand.
Average prices have fallen since March across the country, the Canadian Real Estate Association says. Wednesday’s rate hike will do nothing to reverse that trend.
Prospective home buyers must have their finances stress tested to ensure that they can withstand higher lending rates, and Wednesday’s rate hike will raise that testing bar to about seven per cent for fixed rate loans, and six per cent for variable loans.
If borrowers don’t pass the stress test, lenders are obligated to lower the amount they will lend to them, until they meet the bar.
On a $400,000 mortgage amortized for the normal time frame of 25 years, a borrower who signs up for a loan at a three per cent rate will pay $1,893 a month. But if their rate jumps by a full percentage point, the way the bank’s rate just did, that monthly payment will go up to $2,104 a month. That’s an extra $211 every month out of their budget.
If the rate goes to five per cent, the monthly payment jumps to $2,326, which would be more than 22 per cent higher than what they were originally paying.
Home resales and prices have been tumbling since the central bank embarked on a series of rate increases as it seeks to arrest inflation. On Wednesday, the Bank of Canada announced an increase of a full percentage point – more than the consensus estimate of 75 basis points – pushing its benchmark interest rate to 2.5 per cent from 1.5 per cent. It is the fourth consecutive interest rate increase since March, and the first time the bank has raised its rate by a full point since 1998.
The central bank said that unsustainably high housing prices have contributed to excess demand in the country’s economy and warned interest rates would have to rise further to cool demand and lower inflation.
Robert Hogue, assistant chief economist with Royal Bank of Canada, said the central bank action “will intensify the market cooling” in the coming months. “The hike will make it tougher for some buyers to qualify for a mortgage and reduce others’ mortgage size they can qualify for. The more bearish tone of the Bank of Canada’s statement is also likely to further dampen market sentiment.”
Robert Kavcic, senior economist with Bank of Montreal, said the large interest rate increase “will cast an even deeper chill on the market through the fall, and reinforce the change in market psychology. He said: “Expectations of price declines are on the rise. This week’s rate hike will reinforce that shift.”
For the buyers who took out a variable-rate mortgage, which is based on a bank’s prime lending rate, they will see an immediate change to their payments. For those with fixed monthly payments, more of their payment will go toward interest and less toward principal, and the term of their entire mortgage will be extended. For those with variable-rate mortgages that adjust when the prime rate changes, they will have a higher monthly payment.
Ms. Rogers said the bank was cognizant of the fact that some homebuyers, especially those who bought during the frenzy, might have “stretched to do so.”
“There’s no doubt they’re being squeezed,” said Ms. Rogers. Though she added that those variable-rate mortgage holders represent a small segment of the population.
Would-be buyers are now qualifying for smaller loans, cutting them out of the priciest markets, such as Southern Ontario, and reducing competition for real estate. At the same time, federal rules have made it harder for borrowers to qualify for a loan from banks – which typically offer the cheapest mortgages.
In its most recent report released Tuesday, the association said some markets and housing types have tipped into balanced or even buyers’ markets as high interest rates are keeping potential buyers to the sidelines.
“While a still growing economy and robust population growth point to strong demand, it is increasingly difficult to satisfy that demand at current interest rates,” said BCREA chief economist Brendon Ogmundson in a statement. “As a result, sales activity across the province, but especially in more expensive markets, continues to slow.”
In June, the average residential price in B.C. was pegged at $951,105, a 4.6 per cent increase from the $909,657 recorded last June but down 14 per cent from this year’s highest average price of about $1.1 million in February.
In Greater Vancouver, the average home price is just over $1.2 million, down 9.5 per cent compared to February, while the Fraser Valley’s average price sits at just over $1 million, down 19.5 per cent compared to four months ago. Some of the most dramatic sales declines have occurred in Chilliwack, which recorded a 54 per cent drop in June sales compared to the previous year.
Home sales are forecast to dip to “historically normal levels” for the rest of 2022 before falling to “slightly below average levels of activity” in 2023.