Interest rates

Higher interest rates will help keep property prices under control

Canada’s central bankers could spill water on a hot housing market on Wednesday if they announce widely anticipated interest rate hikes not seen in years.

As the Bank of Canada grapples with runaway inflation, which hit a 30-year high of 5.7% in February, Bay Street economists generally expect Governor Tiff Macklem and his team of economists to increase the bank’s overnight interest rate of 0.5%, double the current rate of 0.5% to 1%.

That may not seem like much – given historic rates which, until the 2008 financial crisis, were typically above 2% – but the move would mark the bank’s most aggressive effort to cut consumer prices in over two decades, and mortgage rate analysts say that will likely help tame a frenzied real estate market.

“Anyone currently buying a home will be less keen on bidding a high price when the cost of financing the home increases. This will drive some buyers out of the market,” said James Laird, co-founder and president from CanWise Financial Mortgage Broker.

Like most monetary policy decisions, the choice presents an economic catch-22: the higher the rate, the harder it is to borrow money, which means potential buyers will have a harder time obtaining debt. financing while current owners pay more for their mortgages.

Already, Laird noted, mortgage rates from major Canadian banks have risen steadily in recent weeks as lenders price in upcoming rate hikes.

According to’s mortgage payment calculator, a homeowner who put down a 10% down payment on an $800,000 home with a five-year variable rate of 1.15% (amortized over 25 years) is currently paying a monthly mortgage of $2,847.

According to the Bank of Canada’s projected 0.5% increase, the homeowner’s monthly mortgage payment will increase to $3,019, meaning the homeowner will be paying $2,064 more per year on their mortgage.

And the rate hikes won’t stop there, economists say. Over the next year, the bank is widely expected to continuously increase the overnight interest rate until it reaches 2% by the end of the year, the level the highest in more than a decade.

“Anyone with a variable rate mortgage should understand what their payment will be with a 50 basis point increase next week and should plan for additional rate increases totaling one to two percent for the rest of the year,” Laird said.

Among those who will bear the brunt of the rate hikes are potential first-time buyers who must pass the so-called “stress test” of the federal government to qualify for a government guaranteed mortgage.

The test requires mortgage applicants to prove they can afford higher interest rates in order not to default.

Leah Zlatkin, mortgage broker at, said the recent rate hikes represent a “turning point” for these potential buyers.

Mortgage rates are now high enough that many potential buyers will need to qualify at percentages above the stress test, which is currently 5.25% or 2% above the offered mortgage rate, whichever is higher, said Zlatkin.

“Many homebuyers are unaware of this nuance and it would affect their affordability even if home prices slow over the next year,” Zlatkin said.

The Bank of Canada kept borrowing costs at record highs during the pandemic as the economy teetered on the brink of recession, but mounting inflationary pressures caused by supply chain challenges and high costs of energy prompted Macklem and his team to take a tougher stance.

Macklem has publicly expressed concern over current inflation rates, which are well above the bank’s 2% target and provide a grim reminder of soaring inflationary pressures in the 1970s and 1980s.

“The economy just doesn’t perform well when inflation expectations come off,” Macklem said last month.

The housing market is at the heart of major inflationary pressures in Canada, where the price of a typical home has jumped 52% to $868,400 in the past two years, according to the Canadian Real Estate Association .

But rate hikes alone won’t solve an affordability crisis, experts noted. The growing exclusivity of the real estate market has been attributed to a wide range of factors beyond historically low interest rates, including the lack of housing supply, foreign buyer activity, speculative buyers and investors, and even white collar crime.

Still, Laird says the planned rate hikes will help limit demand and reduce competition for housing, at least to some degree.

“A 50 basis point increase will certainly have a chilling effect on house prices across the country,” he said.