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A for sale is sign is displayed in front of a house in the Riverdale area of Toronto on Sept. 29, 2021.Evan Buhler/The Canadian Press

The Bank of Canada’s aggressive rate hike will push up borrowing costs and likely start to slow the country’s booming real estate market after two years of rapid home price increases.

Mortgage rates had already spiked before the central bank raised its benchmark interest rate by 50 basis points to 1 per cent on Wednesday – its second increase in two months and its largest hike since the turn of the century. Now, borrowing is becoming more expensive as the typical home price across the country nears $900,000. Within hours of the Bank of Canada’s decision, major lenders raised their prime lending rate, which will increase borrowing costs for homeowners with a variable mortgage.

“As rates move up, it’s going to become harder and harder for households to be able to qualify or afford mortgages at the price levels that we’ve reached,” said Jimmy Jean, chief economist at Desjardins Securities. “Given the cumulative effect of interest rate hikes, we could see prices coming down a bit.”

Toronto-Dominion Bank economist Rishi Sondhi said home prices in Toronto and other hot markets could start to ease in the second half of the year. “Higher interest rates will cool demand, with the most pronounced impacts likely to take place this year,” he said.

Bank of Montreal senior economist Robert Kavcic said: “There was a lot of excess demand built on the fact that home prices were expected to keep rising quickly. As that expectation changes, the demand disappears, and does so very quickly,” he said.

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In its announcement, the Bank of Canada said higher rates will be needed to tame inflation, and predicted that housing activity will moderate. But the bank’s senior deputy governor, Carolyn Rogers, said home prices are expected to remain high. “We should remember that it’s starting from an extremely elevated level, so even as it moderates, we still think it will stay high,” she said at a news conference on Wednesday.

The last time the central bank successively raised interest rates was in 2017 and 2018, in response to the real estate frenzy in Toronto and Vancouver. The overnight rate moved to 1.75 per cent from 0.75 per cent. The higher borrowing costs, combined with tougher mortgage qualification rules and foreign buyer taxes, helped to calm the market frenzy.

Today, the popular five-year fixed rate mortgage is between 3.49 per cent and 4.29 per cent, according to mortgage broker Angela Milosevic, who has brokered home loans in the Cambridge and Kitchener-Waterloo area for about 16 years. “Obviously, the borrowing cost will increase and it will affect the borrowing power,” she said. “It may curb some buyers.”

Borrowers seeking mortgages from banks, which usually have the cheapest loans, will have to prove they can make their home loan payments at a higher interest rate. Under the mortgage stress test, the minimum qualifying rate is the higher of 5.25 per cent or two percentage points above the borrower’s mortgage contract. With the five-year fixed mortgage rate now around 4.29 per cent, that means borrowers must prove they can pay their loans with an interest rate of 6.29 per cent.

Even before Wednesday’s announcement, the volume of buyers had started to wane in some of the country’s hottest markets, such as Milton, a growing Toronto suburb.

“We’re definitely seeing a shift,” said Melissa Charlton, broker with the Charlton Advantage real estate team, who has sold homes in the Milton area for about 17 years.

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The latest stats for the Toronto region show that monthly home price increases slowed in March. In the Halton area, which includes Milton, the typical home price dropped 2 per cent after rising 7 per cent from January to February, according to the local board. National resale and home price stats are expected next week.

“Buyers are a little bit more wary and also they have more options,” Ms. Charlton said. She added that she noticed a change around mid-March after the first interest rate hike. Homes are taking longer to sell and not drawing as many bids.

However, she does not think demand will dry up. She said her buyers are not that concerned about rising interest rates. Ms. Charlton said she has found that when interest rates rise, prospective buyers start looking at cheaper alternatives to a detached house. “Maybe they could just barely afford that detached and will shift into a semi, but they’re still looking and interested,” she said.

With a report from Mark Rendell

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