Economists predict that the Bank of Canada will keep raising interest rates in an effort to slow skyrocketing prices in the real estate market and rein in inflation. Economists expect Bank of Canada interest rate to more than double, some even speculate that the rate could rise as high as 7% over the next 1.5 – 2 years.The Bank of Canada raised interest rates on April 13 to 1%. While this is still considered low, the effects of an increase of just 0.25 % from the position that has been in place for much of the past 24 months can already be felt in luxury category housing.Bryan Yu, a chief economist for Central 1 out of Vancouver told Postmedia he expects the interest rate to climb to 2% by the end of 2022 and to 2.% in early 2023. “There is clearly quite a bit more upside for the rates right now, just given that we are seeing inflation numbers . . . that will probably be around 6% for year-over-year inflation,” he said. “There’s enough rationale for the bank to continue its rate hiking cycle.”&nbsp;This prediction comes as both Royal LePage and the Canadian Real Estate Association produced separate reports that indicate the market has not cooled off in major Canadian markets.<figure class="image"><img src="https://files.rifo.co/CompanySite/12/12_Picture12_1.jpg"></figure>There is a worry about the ability of the Bank of Canada to raise rates just enough to cool the real estate market and slow inflation, but not spark a recession. In order to avoid recession and fight inflation Canada needs a sound fiscal policy as well as sound monetary policy. Raising interest rates does little to mitigate the risk of higher inflation as long as Bank of Canada keeps releasing excess billions of dollars into the economy.&nbsp;Mortgage rates are still lower than pre-pandemic levels when the BoC rate was 1.75 %. In 2008 the rate was over 4%. Many Canadians still remember the 13-19% mortgage rates they had to pay back in the ‘80s. Canada’s rising interest rate mirrors that of the Federal Reserve in USA.&nbsp;Some prominent economists are calling the predictions of the recession “alarmist”. According to Jack Mintz, President's Fellow of the School of Public Policy at the University of Calgary, Western Canada would do well with the rising rate since the provincial economy is supported by a commodities market that is churning out high prices for energy, lumber and grain. In his view, the interest rate increase by 2%, would work out to just over $100 per month on a $100,000 mortgage. This argument may hold true for the Western Canada, excluding Calgary which is red-hot property market, but the real estate market in GTA have not seen $100 K mortgages in over a decade. The average home price hit $1,1 Million.There are serious concerns when it comes to the housing market in Canada. It is not as simple as supply and demand any longer. In theory, rising interest rates make borrowing more costly, and thus cool the spending spree and demand. However, Government has been borrowing and spending money with unprecedented speed and more often than not such approach leads to a recession.&nbsp;<figure class="image"><img src="https://files.rifo.co/CompanySite/12/12_Picture12_2.jpg"></figure>Combined with inflation that is at a 30-year high, rising rate is hitting those with a variable rate mortgage hardest. Inflation and higher interest rates lead to loss of spending power and put those with already stretched finances in a tough position. Unemployment reached an all-time high of 13.70 % in May of 2020. While the unemployment decreased somewhat, it still remains alarmingly high in many regions. The Windsor region in Ontario has the highest unemployment rate in Canada with 11.8% in June 2022.MNP, one of Canada’s leading professional services firms, released a report showing an increasing number of Alberta households were being driven toward bankruptcy due to the increase in rates.The normally busy spring real estate market in the GTA is slowing as higher interest rates kick in. Real estate brokers instruct their clients to accept 15-20% lesser bids than the Listing price.The average price of a home in April has fallen by as much a 15% month over month and sales in April fell by 41.2% compared to April 2021. There were 8,008 homes sold in the month. That compares to 13,613 sold in April 2021. Homes sale dropped 27% in just one month, according to the Toronto Regional Real Estate Board (TRREB).“It certainly appears that the Bank of Canada is achieving its goal of slowing consumer spending as it fights high inflation,” said TRREB president Kevin Crigger.There are a number of other factors playing in real estate market. Federal government announced in its budget two weeks ago that it plans to freeze the purchase of Canadian homes by non-Canadians, while other provinces and jurisdictions have previously instituted taxes on foreign purchases. In March, a Land Transfer Tax Act which increased the Non-resident Speculation Tax up to 20% and eliminate any rebates for foreign nationals came into effect.&nbsp;There is still a bigger issue of housing supply, of course. The federal government announced it plans to build 100,000 homes in five years. Any expectations surrounding government attempts to mitigate the housing crunch should be divided in half by the possibility of construction strike risks which add to housing supply crunch.&nbsp;Federal government also announced a ramp up to its immigration program with intention to increase immigration to 400,000 people a year. The validity of the argument that increased immigration will keep pushing the housing prices raises some doubts though. Most new immigrants, with the exception of 1-2% in wealthy category, are either forced to rent or stay with the relatives or friends in hopes to save for a 1-2 bedroom condo. It is unlikely that they would contribute to demand for multi-million dollar properties.&nbsp;There is empirical evidence which suggests sustained increase in GTA condo prices and sales numbers while the single housing prices and sales numbers demonstrate slow gradual decrease.&nbsp;In the meantime, realtors in Durham Region said there has been a 6% drop in new listings from last month and the average price in that region fell from $1.18 million to $1,075,332.Interest rates may be heading even higher if the central bank raises its key rate on June 1. According to economists, higher interest rates are the best way to cool both inflation and the real estate market, but it will take time to have an effect.&nbsp;<figure class="image"><img src="https://files.rifo.co/CompanySite/12/12_Picture 12_3.jpg"></figure>According to Jason Mercer, Chief Market Analyst, TRREB, “It is anticipated that there will be enough competition between buyers to support continued price growth relative to 2021, but the annual pace of growth will moderate in the coming months.”&nbsp;Summer is coming fast and with the weather sizzling, the real estate market is bound to heat up. Let’s hope savvy buyers are ready for higher interest rates.

What Rising Interest Rates Could Mean for Canadian Housing Market?

Economists predict that the Bank of Canada will keep raising interest rates in an effort to slow skyrocketing prices in the real estate market and rein in inflation. Economists expect Bank of Canada interest rate to more than double, some even speculate that the rate could rise as high as 7% over the next 1.5 – 2 years.

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