The short- and long-term impacts of further increases could be stark
Canada’s central bank provided no certainty on when it plans to end its rate-hiking cycle in last week’s policy rate announcement, a development that will give little comfort to Canadian homeowners and buyers alike.
The Bank of Canada would only say that its governing council believed rates needed to rise further after its three-quarter-point hike on September 7, appearing to bely some predictions that a September increase would be its last rate jump of the year.
That oversized rate increase – the Bank’s fifth hike of the year – is likely to pour further cold water on Canada’s already rapidly cooling housing market as fall comes into view, according to a prominent economist, with the potential for even higher rates also weighing down on future activity.
Benjamin Tal (pictured), deputy chief economist of CIBC World Markets, told Canadian Mortgage Professional that while a pronounced downturn was unlikely, the market would probably continue moderating significantly in the coming weeks.
“The market is already slowing. Now you get an extra push, so [it] will continue to slow,” he said. “I think that will be the story for the fall.
“It will not be a bad fall, but it will not be a strong fall by any stretch of the imagination. I think that the market is still trying to find equilibrium, so therefore I believe that this rate increase, and the fear that there will be another one coming, will definitely have an impact on the market with buyers and sellers.”
Even amid the most dramatic spate of central bank rate hikes for decades, Royal Bank of Canada (RBC) has indicated that it believes prospects of the oft-discussed “soft landing” targeted by the Bank of Canada are rapidly dwindling.
On Monday, RBC economist Josh Nye said plans by central banks to frontload rate increases – in other words, reach their targeted final destination on benchmark rates as early as possible – would still not be enough to prevent mild recessions in Canada, the US, UK, and eurozone either this year or next.
Robert Hogue, of the same bank, indicated last week that buyers are increasingly being priced out of the market by interest rate increases throughout this year, with prospective buyers likely to hit pause on their plans as they weigh up the possible impact of higher rates.
That trend has already taken root across many Canadian cities, resulting in a spike in rental prices – particularly in Toronto, where the median price of a two-bedroom rental unit soared by 22.7% in July compared with the same time last year.
Across the country, Rentals.ca said that the median rent for all property listings was up 7% in the second quarter over the same time in 2021, sitting at $1,750 after plummeting to a low of $1,635 at the height of the pandemic.
Tal told CMP that rising rents were an issue, although he also noted that they had seen little upward movement during the first two years of the COVID-19 pandemic.
“I’m very concerned, but we have to remember that rent prices did not rise during the pandemic, so now we’re playing catch up,” he said. “That’s something that we expected – the ratio of home prices to rent was in the sky. Now it’s starting to correct, and that’s a very healthy adjustment.”
While rent is rising, the cost of construction for developers has risen even faster – a matter of some concern in terms of Canada’s housing market, according to Tal.
That’s resulting in a significant wave of delays or cancellation of projects, with a third of projects in the Greater Toronto Area (GTA) currently being either cancelled or delayed.
“This means that in two years from now, when [conditions have improved] and people are ready to buy, the supply that’s supposed to come now will not be there,” he said. “Guess what will happen to [house] prices, and guess what will happen to rental prices? So yes, I’m very concerned.
“The risk is that the slowdown in the US market will provide some sort of a euphoric feeling that everything is fine, but it’s not. The fundamentals of this market suggest a very tight market when the fog clears, and without dealing with the supply issue, the affordability crisis will get worse.”