Canada's housing demand dips as interest rate rises
Have we finally arrived at that long predicted correction point in the Canadian housing market?
In a post pandemic reality with the invasion of Ukraine by Russia causing all form of disruptions to the global economy, snowballing elevated inflation rates (a 31 year high) and experts predicting a recession risk in the coming months, the Bank of Canada on Thursday, June 9, announced that Canadians - mainly those who took out mortgages in 2020/21- with a high loan-to-income ratio variable rate mortgages would likely see payments rise by 44% in five years upon renewal.
While Canadians with a fixed-rate mortgage - with an unchanging interest rate- could see a rise of up-to 24% within the same period.
Simply put, at the height of the pandemic in 2020-21, mortgage rates were uncommonly cheap to access at a record low (1.85%-2.60% depending on lender), so the assumption is that in 2025-26, variable and fixed-rate mortgages would renew at median rates of 4.4% and 4.5% respectively.
Either guided by these higher borrowing costs or the general frustration with the increase in nearly everything - from groceries to gas - the Canadian housing market is already feeling the effect as demand for houses that experienced record high prices and sales during the pandemic are beginning to cool off.
A very common feature on household lawns in provinces like Ontario and British Columbia is the ‘‘For Sale’’ board lining up in many neighborhoods, but one major difference in recent months is the length at which these ads are staying. Houses that barely lasted two weeks in the market now have signs staying up-to two months before sales are confirmed with lesser competitive bidding taking place.
Economists, however, continue to emphasize that even in correction, a total collapse will likely not happen as the average home prices would still remain nearly 30 per cent above their December 2019 levels and above their pre-COVID level and trend line.
On the report itself, the Governor of the Bank of Canada Tiff Macklem stated, ‘‘Our goal in identifying this is to help households, the private sector, financial authorities and governments take actions to reduce them.’’
This report has since generated varying reactions since its release with many calling out the Government for its unsustainable and artificial representation of the economy by pumping billion of dollars to keep the economy afloat with first time home buyers particularly preparing for the worst.