The Bank of Canada’s decision Wednesday to keep interest rates near zero at least until early March will continue to add fuel to the country’s overheated housing market, with competition remaining fierce for the few properties for sale.
The central bank’s benchmark interest rate has been at 0.25 per cent for nearly two years, allowing Canadians to amass large mortgages for buying real estate. Although the Bank of Canada said it “expects interest rates will need to increase,” the cost of borrowing will continue to be cheap over the near term.
“The housing market will remain highly competitive,” said Laura Martin, chief operating officer of mortgage brokerage Matrix Mortgage Global. “A small rate hike will not deter home buyers in general, particularly when the opportunity cost of waiting to buy could be much higher,” she said.
Economists and mortgage experts say it would likely take several interest rate hikes to significantly slow demand for homes, and the central bank’s decision to hold rates steady for now means the start of that cycle has been delayed.
Since the COVID-19 pandemic started, home prices have appreciated at its fastest pace on record as home buyers looked for big properties in the suburbs and small cities. The typical price of a home across the country jumped 26.6 per cent to $811,700 in December compared with a year earlier, according to the Canadian Real Estate Association’s home price index, which adjusts for pricing volatility.
Over the past two years, the price of a home in Canada is up 43 per cent, with less populated cities shouldering steeper price gains than large ones. The typical price of a home is 70 per cent more expensive in London, Cambridge, Barrie and Brantford in Ontario, according to CREA data. In more expensive cities such as Oakville, just west of Toronto, the home price index is up 57 per cent, or $550,000 to $1,516,800, since December, 2019.
Douglas Porter, chief economist with Bank of Montreal, said the Bank of Canada’s no-rate-hike announcement may send an “all-clear” signal to the housing market just ahead of the start of the spring selling season, traditionally the busiest period to buy and sell real estate.
This year started with record low number of houses for sale, making it more difficult for prospective buyers. Realtors say homes have been snapped up in January within days of being listed.
“Buyers have come back to the market with renewed energy and interest,” said Cailey Heaps, who has been selling homes in Toronto for more than two decades, and demand is unprecedented.
This month, one of her clients’ houses received 46 showings in six days, drew five offers and sold $352,000 over the asking price at $3,647,000.
In its statement accompanying the rate decision, the central bank referred to the country’s housing market just once, saying the “elevated housing market activity continues to put upward pressure on house prices.” The bank’s next scheduled interest rate announcement is March 2.
Some economists have said a series of interest rate hikes is the only measure that will slow the rapid price increases. The most popular type of mortgage in Canada – the five-year fixed rate mortgage – is already slightly more expensive than in 2021.
“As soon as rates rise, we’ll see five-year mortgage rates head higher, with the anticipation of additional rate hikes starting to slow the housing market,” said Katherine Judge, a senior economist with CIBC.
After the country’s real estate boom in 2016, policy makers took steps to slow housing resale activity. Ontario and B.C. imposed real estate taxes on foreign buyers. The federal Finance Department and Canada’s bank regulator, the Office of the Superintendent of Financial Institutions, made it harder to qualify for a mortgage from a bank.
And the Bank of Canada hiked its benchmark interest rate five times in 2017 and 2018. Those policy moves contributed to weaker home price increases in 2018.
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