Personal Finance By Erica Alini 986 Views

Rising interest rates will be ‘No. 1 issue’ for Canada’s housing market, economists say

As Canada’s housing market shows tentative signs of homebuyers’ fatigue, some economists are looking ahead at another factor that’s widely expected to put a damper on the real estate frenzy: rising interest rates.

With economic activity revving up again amid soaring vaccination rates and signs of inflation, several analysts believe the Bank of Canada will start raising its trend-setting interest rate sometime in the second half of 2022.

The question is how rising borrowing costs might affect the housing market, which has grown to account for an outsized share of the country’s $2.4-trillion economy.

“That’s the number one issue facing the Canadian economy: the increased sensitivity to higher interest rates,” says Benjamin Tal, deputy chief economist at CIBC.

With many Canadians shouldering large mortgages, even a small increase in interest rates would have a significant impact on household balance sheets, he warns. An increase of just 1.5 percentage points in interest rates could double the monthly mortgage payment for some homeowners, he says.

The Bank of Canada has left its key interest rate at an historic low of 0.25 per cent since March 2020, when the central bank quickly slashed borrowing costs to soften the impact of the economic crisis linked to the COVID-19 pandemic.

Higher interest rates are widely expected to provide a welcome breather from breakneck home price growth, Tal says.

“Even a small increase in interest rates would be sufficient to slow down the market — and that would be a very good thing,” he says.

But too much of a good thing could expose heightened vulnerabilities in the Canadian economy, Tal and other economists say.

“If interest costs were to go up one to two percentage points, because of the level of debt, households could be put in a position where they’re devoting a significant share of their income to making their mortgage payments,” says Diana Petramala, senior economist at Ryerson University’s Centre for Urban Research and Land Development.