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The typical selling price of a home across the country has dropped 9 per cent to $766,000 in September from $840,000 in February, according to CREA data.Eduardo Lima/The Globe and Mail

Canada’s housing market is expected to slow further with the Bank of Canada’s latest interest rate hike set to increase mortgage costs again.

The central bank’s benchmark interest rate has climbed to 3.75 per cent from 0.25 per cent in early March, and the bank said it will continue on the same upward path until inflation is under control. However, Wednesday’s half-percentage-point increase was smaller than markets expected, and Governor Tiff Macklem said the bank is “getting closer” to the end of the rate hiking cycle.

Even with the smaller-than-expected rate increase, real estate experts predicted that home resales and property prices will continue to cool.

Activity has already shrunk to levels not seen since early 2020, when most of the economy was shuttered by the pandemic. Over the July-to-September period this year, there were $72-billion worth of real estate transactions across the country, according to the Canadian Real Estate Association or CREA. That compares with $121.7-billion worth of resales in the first three months of the year. (The numbers were adjusted to eliminate seasonal factors.)

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The typical selling price of a home across the country has dropped 9 per cent to $766,000 in September from $840,000 in February, according to CREA data. That marks the steepest decline since the global financial crisis when the typical home price fell 9.1 per cent from March of 2008 to March, 2009.

Home prices are still significantly higher than they were two years ago, especially in some Toronto suburbs and less populated areas in Ontario which experienced a near doubling of prices when interest rates were near zero.

The Bank of Canada said home prices are “projected to continue to decline, particularly in those markets that saw larger increases during the pandemic.”

Scott Ingram, a realtor in the Toronto region, said Wednesday’s rate hike will contribute to the negative sentiment in the market. “There are more buyers who are out of the game now,” he said.

Mr. Ingram said would-be buyers are regularly making offers under the seller’s asking price. That contrasts to earlier this year, when it was common to see offers well above the listed price.

Concerns over the pace of rate increases has motivated more borrowers to take out a fixed-rate mortgage instead of a variable one, where the interest rate changes with the central bank’s benchmark rate. As of August, variable-rate mortgages accounted for 46 per cent of the new uninsured home loans, compared with 60 per cent in January, according to the latest data from Statistics Canada.

When the central bank’s benchmark rate climbs, lenders typically pass on the increased costs to their customers. The banks are expected to soon raise their prime lending rate from the current 5.45 per cent.

That will immediately push up the cost for home equity lines of credit, or HELOCs, as well as variable-rate mortgages. For variable-rate mortgages with fixed payments, more of the borrower’s mortgage payment will go toward interest and less toward paying down the principal. But for variable mortgages without fixed payments, the monthly amount will increase immediately.

There have been staggering monthly increases for borrowers over the course of this year. Rate comparison website Ratehub.ca used the example of a homeowner who got a 0.9-per-cent variable rate mortgage in January on a home loan of about $450,000, plus mortgage insurance.

After this year’s six interest rate increases, that homeowner’s monthly mortgage payment would have climbed by $815. The Ratehub example assumes that the homeowner made a 10-per-cent down payment on a $500,000 property and received a mortgage with an amortization of 25 years.

The Bank of Canada acknowledged the financial pain for mortgage holders. “We are mindful that adjusting to higher interest rates is difficult for many Canadians. Many households have significant debt loads, and higher interest rates add to their burden,” Mr. Macklem said in remarks accompanying the monetary policy announcement.