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A revival of the real estate market could lead to further interest rate increases
Published on January 25, 2024 • 2 minutes reading time
Will the Bank of Canada's rate lock-in cause buyers to come back into the market? Photo by LARRY WONG/Postmedia
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The Bank of Canada's decision to keep its key federal funds rate stable at five per cent for the fourth time was widely expected by the real estate industry, but whether it will be enough to bring buyers back into the market remains controversial.
“(The) decision to maintain interest rates will certainly be welcomed by many Canadian homebuyers,” said Christopher Alexander, president of ReMax Canada, in response to the central bank’s Jan. 24 announcement.
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Alexander, pointing to the rush to the market in the early days of the pandemic, said he was confident the restraint would be enough to spur more activity, “particularly for those who have taken a wait-and-see approach and are waiting for the right one.” Time to re-enter the market.”
However, mortgage strategist Robert McLister pointed to another recent historical precedent.
“Last January we saw CREA’s average house price skyrocket by 19 per cent in just five months after the bank’s first interest rate pause. This is an extraordinary step,” said McLister. “Will we see the same thing this spring?” That’s not the expectation, but if mortgage rates slip into the mid to low four percent range, I certainly wouldn’t bet against it.”
James Laird, co-CEO of Ratehub.ca and president of mortgage lender CanWise, said if the central bank had revealed details of a cut it would have boosted the housing market.
“Any hint of rate cuts by the Bank of Canada would have immediately put upward pressure on housing prices,” he said.
Without it, there could be a shift in the opposite direction as lenders held off on raising mortgage rates following the recent rise in bond yields.
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“Lenders will consider increasing fixed rates in the absence of new information from the bank,” Laird said.
One factor counteracting a continued rise in housing prices could be the Bank of Canada itself: Central Bank Governor Tiff Macklem said a rise in housing prices could prompt the bank to raise interest rates again.
According to the Canadian Real Estate Association (CREA), home prices are expected to rise in 2024 and 2025 after the MLS Home Price Index (HPI) ended December 2023 up 0.7 per cent. The average price also rose by 5.1 percent to $657,145 compared to the previous December.
If there is a revival in the real estate market, McLister said the rate cut will likely be gradual.
“If real estate activity increases more than expected, mortgage rates could remain at higher levels for longer. This does not mean that the key interest rate will remain at 7.20 percent, but it would mean less interest rate relief,” he said. “The pace of cuts could be slower and the bottom of interest rates could be higher.”
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McLister says the Bank of Canada will face a difficult decision if housing demand continues to contribute to inflation. It may have to decide whether to tolerate higher property prices or risk a negative impact on the broader economy by maintaining high interest rates.
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