High Interest Rates in Canadian Housing Market
High-interest rates bring winter mood to the Canadian housing market. Canada's housing market cools, buyers sidetracked by rising borrowing costs, and sellers holding on to listings in hopes of a spring rally, but rising interest rates could push prices further down before a recovery materializes. Experts say it means you have to.
The Bank of Canada has suggested its historic tightening campaign is coming to an end, but economists expect the central bank's policy rate to remain at its 15-year high of 4.25% or 4.5% through 2023, and this put pressure on prices. At the same time, Canada needs to build 3.5 million more homes by 2030, according to Canada's National Housing Authority. This is to meet the current housing shortage and increased demand from millennials and newcomers as the government raises its immigration targets. ``There is still significant fundamental demand, but with interest rates falling, the market cannot get out at current prices,'' said Robert Kavcic, senior economist at BMO Capital Markets. “Prices need to be adjusted, and that will take time.”
BMO forecasts a 20% peak-to-trough decline in house prices. It is already 10% below its February peak after falling 1.2% in September-October, according to Canadian Real Estate Association (CREA) data. Home sales rose slightly in October, suggesting that buyers and sellers are "likely to remain on the sidelines into 2023," CREA Chairman Jill Udil said in a statement. It would be a far cry from the boom caused by the COVID-19 pandemic. By February 2022 when the price rose 52.4% in two years.
The Bank of Canada has raised interest rates by 350 basis points since March to 3.75%, making borrowing costs higher, and is expected to raise rates again in December. "It's scary for anyone looking to buy something," said Victor Tran. Variable-rate mortgages, which are mortgages whose rates fluctuate depending on market conditions, have more than tripled since March, and rigorous stress testing has made it even harder to qualify. And it's not just the resale market that's feeling the effects of the crisis. Pre-sales of Toronto-area condos fell 79% in the third quarter, with 189 projects reporting no sales this quarter, according to Urbanation data.
