After eight successive rate hikes and two rate pauses, the Bank of Canada (BoC) has yet again increased its prime lending rate. While analysts were predicting another rate pause, the Bank announced a rate increase of 25-bps, bringing the overnight lending rate up from 4.5% to 4.75%.

The rate increase comes amid a lot of speculation – with analysts divided on the possibility of either another rate pause or hike to continue the Bank’s policy of quantitative tightening. While inflation has eased from an all-time high of 8.13% last June, the BoC is still short of reaching its target of 2%.

As the consumer price index continues to come down (in part due to lower energy prices), underlying inflation has remained high. As the Bank notes in its press statement, interest rates have to rise further to restore price stability.

Canadian economy more persistent than anticipated

The Canadian economy’s resilience, strong consumption growth, increased spending on interest-sensitive goods, and a tight labour market have necessitated quantitative tightening to help cool down the economy.

“Canada’s economy was stronger than expected in the first quarter of 2023, with GDP growth of 3.1%,” the Bank notes. “In addition, spending on interest-sensitive goods has increased and more recently, housing market activity has picked up.”

Meanwhile, the labour market remains tight, with high immigration, an increased supply of workers, and a record low unemployment rate at 5%.

“Overall, excess demand in the economy looks to be more persistent than anticipated,” the Bank states.

What does this mean for homeowners?

A BoC rate hike means increased cost of borrowing and a tighter budget for homeowners.

“BoC raising the overnight rate will hit variable-rate mortgage holders first,” explains Victor Tran, a mortgage specialist with RATESDOTCA. “Those renewing fixed-rate mortgages this year will likely face much higher mortgage payments, even though they have paid down a significant portion of the principal.”

Prospective homeowners may find that they qualify for less than they anticipated. “Those that took out pre-approvals are likely to try and secure a home before the pre-approval time limit is up,” he adds.

Lastly, those who are looking to invest at variable rates are often at a negative cash flow. Nearly 20% of home purchases in Canada are made for investment purposes and as the BoC increases its lending rate, some may choose to re-evaluate their investments.

Factors of demand and supply at play in the housing market

Speaking of increased housing market activity, Tran notes that summer months are traditionally the hottest real estate seasons of the year. “The market was sluggish after the BoC began raising interest rates in March of last year, and it remained so in the beginning of 2023,” he says.

However, as we’re now seeing a return to market conditions favouring sellers, those who have been waiting on the sidelines for the market to stabilize will capitalize on this opportunity. “Buyers are now looking to purchase, but inventory is very low. Thereby, creating stiff competition for homes.”

The Canadian real estate market is seeing an all-time low of housing inventory – meaning that there are more people looking to buy versus the number of houses available to purchase. As a result, prices of homes will go up, making it difficult for Canadian homebuyers to afford a home.

The Bank notes that it will continue to evaluate the evolution of excess demand, inflation, wage growth, and corporate pricing behaviour in alignment with the inflation target.

“The Bank remains resolute in its commitment to restoring price stability for Canadians,” it adds.

The next BoC announcement is scheduled for July 12, 2023.

Read more:

April: After eight successive rate hikes, Bank of Canada maintains policy rate at 4.5%

January: Bank of Canada enters 2023 with a 25-bps hike, policy rate now 4.50%