Interest rate hike to ‘intensify’ Canada’s housing market downturn

Homes for sale in Ajax, Ont., on September 7. In the Toronto region, the home price index fell nearly 16 percent from March to August, with some of the city’s suburbs losing more than 20 percent.Fred Lum/The Balloon and the Mail

Canada real estate slump is about to deepen as rising borrowing costs push more buyers out of the market, economists predict.

Announcing its latest interest rate hike on Wednesday: at 3.25 percent 2.5 percent: The Bank of Canada said the overnight lending rate will have to rise further to dampen inflation.

Since the central bank began raising Interest rates Since a low of 0.25 percent in March, home sales have plunged along with home prices.

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“We see the recession deepening and spreading as buyers take a wait-and-see approach as they assess the impact of higher interest rates,” said Robert Hogue, deputy chief economist at the Royal Bank of Canada.

So far this year, home prices have posted their biggest drop in five months since the 2009 global financial crisis. The national home price index is down 6 percent from its peak in February. The index is the industry’s preferred measure of home prices because it adjusts for volatility and excludes the high end of the market.

In the Toronto region, the house price index fell nearly 16 percent from March to August, with some of the city’s suburbs losing more than 20 percent.

Mr. Hogue said the country’s most expensive real estate markets, which include suburban Toronto, were the most vulnerable to downturns due to their lack of affordability and past staggering price increases.

In the first two years of the pandemic, the typical price of a home in the Durham region, to the east of the city, rose nearly 90%, while prices rose nearly 70% in Halton, to the west. These suburbs are now leading the way with typical Durham home prices falling 21 percent or $249,300 in the past five months, according to the local real estate board. Prices in Halton are down 23 percent or $337,700 in the past six months.

After a slow summer in which sales fell below pre-pandemic levels in some parts of the country and homes lost value, realtors had hoped the market had bottomed out.

But economists say house prices will continue to fall. Economists at the Bank of Montreal said the central bank’s guidance solidified their view that the national house price index could fall 20 percent from the peak at the beginning of the year to the bottom sometime next year.

Borrowers will soon pay more in interest. It’s just a matter of when. Most adjustable-rate mortgage holders have static monthly payments, but will immediately see a higher portion going to interest rather than paying principal. People with fixed-rate mortgages will pay a higher monthly amount when they renew. Homeowners with a home equity line of credit will immediately pay a higher interest rate on their loan.

It will also continue to be more difficult for potential buyers to qualify for a mortgage and they will be able to get less. “Lending power is going to go down once again,” said Don Scott, CEO of mortgage brokerage firm Frank Mortgage.

Today’s interest rate hike will make the mortgage stress test more difficult. Under federal bank rules, borrowers must show that they can make their monthly mortgage payments at an interest rate that is at least two percentage points higher than their actual rate.

According to Mr. Scott, the cheapest variable-rate mortgages may soon be 4.35 percent and the lowest five-year fixed mortgage rate will exceed 5 percent. That means borrowers will have to show that they can cover their payments at an interest rate of 6.35 percent and 7 percent, respectively.

And this, in turn, means that potential homebuyers won’t be able to spend as much. It will be particularly difficult for first-time homebuyers, said Laura Martin, chief operating officer of mortgage brokerage Matrix Mortgage Global.

Ms Martin said regular buyers, however, have benefited “hugely” from rising prices over the last four years, and will be able to use their capital from any sale to help with another purchase.

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