BoC interest rate hike will limit purchasing power of homebuyers: expert

The Bank of Canada is raising its key interest rate to one per cent from 0.5 per cent, the country’s central bank announced on Wednesday. The increase of 50 basis points is the largest interest rate hike Canadians have seen in more than 20 years.

Toronto-based real estate expert David Fleming said he anticipates this increase will affect the affordability of homes on Canada’s real estate market, which will have a significant impact on those looking to enter the market.

“What we're talking about with an increase in rates is purchasing power decreasing,” Fleming told CTV’s Your Morning on Wednesday, before the BoC announcement.

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If someone was previously approved for a home that costs $750,000, for example, they would only be able to afford something that costs $650,000 following a hike in interest rates, he said. However, when looking at the long-term impact of higher interest rates on Canadian home prices, Ian Lee, an associate professor at Carleton University’s Sprott School of Business, suggests there’s light at the end of the tunnel for homebuyers. A hike in interest rates will ultimately result in lower home prices, he said.

“There's a very clear correlation [that as] interest rates go up, real estate demand and real estate prices move down,” he told CTV News Channel on Wednesday. “I think we can see moderating house prices in Canada.”

For those who already own a home, particularly anyone holding a variable-rate mortgage, they can expect to see a direct impact on mortgage rates, Fleming said. This also applies for those with personal or home equity lines of credit, as these products are directly linked to the central bank's benchmark rate.

“The variable rate is tied to the overnight lending rate,” said Fleming. “[With] a 50 basis-point increase … the variable rate is going to go up probably a corresponding 50 basis points.”

Those with fixed-rate mortgages, however, will only see a change in rates once they renew their mortgage, Fleming said.

“The five-year fixed rate is … tied to the bond market, and anybody in finance can tell you the bond market's been quite erratic this year,” he said. “There's certainly upward momentum on all rates as we go through the end of the year.”

In March, the Bank of Canada increased its key interest rate for the first time since the start of the COVID-19 pandemic by 25 basis points to 0.5 per cent in an effort to help fight rising inflation.

As of late, Canada’s real estate market has been characterized by bidding wars as some homes sell for hundreds of thousands of dollars above asking. The average national home price stands at a record $816,720 in Canada as of February, according to data from the Canadian Real Estate Association.

As the year progresses, Fleming said he expects to see a rush to purchase homes among Canadians, as they try to take advantage of rate holds granted by their banks prior to what are anticipated to be more interest rate hikes throughout the year.

After an exciting start to the year with rising average home prices from January through to March, Fleming said he predicts the market will begin to cool down in April, May and June as inventory spikes.

“[By then], a lot of buyers have already bought,” Fleming said. “I think we're going to see a very balanced market as we get into the end of spring.”

With files from The Canadian Press.