Rate hike expected to slow sales in Canada’s slumping housing sector

Canada’s slumping residential real estate market is expected to slow further after the Bank of Canada raised its main interest rate for the first time in three years.

Home purchases have been tepid since late 2022. After a brief spurt earlier this year, sales resumed their decline as the U.S.-Canada trade dispute worsened and oil prices remained high because of the Middle East war. Both have created economic uncertainty and raised the cost of living.

Now, the central bank’s 25-basis-point hike to 2.5 per cent will make more mortgages more expensive and add to the general malaise among buyers.

“It will put additional pressure on an already cautious market,” said Keisha Johnson, mortgage broker with RTS Mortgage Financial.

“Buyers are being much more cautious and even those who are financially qualified are taking longer to make decisions. Many are simply concerned about what the economy and their financial situation might look like six months or a year from now,” she said.

Six ways the rate hike could cost or benefit you

Interest rates for fixed-term mortgages, which are based off of yields on government bonds, are higher today than earlier in the year. Now the interest rate on variable-rate mortgages, which normally moves in lockstep with the central bank’s benchmark rate, has started to go up.

Although home values are lower than 2022, the typical home price across the country is still out of reach for many at $651,400, according to Canadian Real Estate Association data.

In the Toronto region, the typical home price was about $918,000 last month, and in the greater Vancouver area, the value was $1,076,000, according to the data.

Kari Norman, senior economist with Desjardins Group, said high home prices and broader economic uncertainty continue to weigh on prospective buyers.

“Higher borrowing costs add to already significant affordability challenges,” she said.

Ms. Johnson at RTS Mortgage Financial said the increase in the variable-rate product means borrowers will qualify for a smaller mortgage and potentially face higher monthly payments.

So far this year, the five-year fixed-rate mortgage has increased by more than half a percentage point. The interest rate averaged 4.54 per cent in early October, according to MortgageLogic.news data. That is up from 4.13 per cent in August and 3.91 per cent in January. The price of a fixed-rate product has risen because the cost of funding them has become more expensive in the bond market.

David Rosenberg: The BoC’s rate hike is totally unnecessary and premature

Until the central bank’s interest-rate hike, the average five-year variable home loan had been around 3.5 per cent.

Bank of Canada senior deputy governor Carolyn Rogers agreed that borrowing costs and economic uncertainty are weighing on the housing market.

“People don’t tend to make big purchase decisions like housing in that kind of an environment,” she said.

Housing is expected to drag down Canada’s average annual economic growth this year by 0.1 percentage points, according to the central bank’s quarterly monetary policy report released on Wednesday.

Ahead of the announcement, mortgage broker Neil Drepaul said he was getting about five calls a day from variable-rate borrowers worried about the potential for higher interest rates.

Mr. Drepaul, director of the company Canadian Mortgage Services, said some of those borrowers will have to adjust their spending to make higher monthly payments.

And the Bank of Canada may raise its benchmark interest rate by another 25 basis points at its next scheduled interest rate announcement in December.

The market slowdown has led Canada’s national realtor group to downgrade its home sales forecast three times this year. The Canadian Real Estate Association is forecasting 2026 sales to be 5.2 per cent lower than last year. In January, it predicted that this year’s sales would be 5.1 per cent higher.