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Low Rates Help Keep Housing Afloat for Now

June 21, 2021
5 mins
A person uses a calculator while holding a tablet at a desk covered with jars of coins

Despite national average home values zooming 38.4% in just 12 months, it could be a lot worse for young buyers if it weren’t for one thing: interest rates staying ultra-cheap.

The lowest borrowing costs in history have helped drive up prices, no doubt. But buying a house would be even less “affordable”—if you want to call it that—if rates were rising.

Or, should we say, when rates start rising.

The Bank of Canada holds the key

Much could change once our trusty central bank starts its rate hike cycle. That’s slated to happen next year.

What's more, investors are increasingly betting that the BoC’s key lending rate will surpass the peak reached of the previous rate-hike cycle (which was 1.75%). Swap markets are forecasting the BoC will raise its overnight target rate—currently at a record-low of 0.25%—up to 2% over the next five years.

The last time interest rates were above 2% was back in 2008, amid the Global Financial Crisis.

Today's Lowest 5-Year Fixed RatesUpdated 09:22 ET on Feb 23, 2024

Rates are based on a home value of $400,000

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Verico - Fair Mortgage Solutions - Anson Martin
4.79%
Term
5 Yr Fixed
Loan to value
80.01% to 95%
Insurance
Insured
Rate held until
May 25
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4.84%
Term
5 Yr Fixed
Loan to value
80.01% to 95%
Insurance
Insured
Rate held until
May 25
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4.89%
Term
5 Yr Fixed
Loan to value
80.01% to 95%
Insurance
Insured
Rate held until
Mar 26

What Could a Rate Boost do to Canada’s Hot Housing market?

Continued low rates are a “powerful force” keeping affordability from deteriorating even more, Charles St-Arnaud, Alberta Central’s chief economist wrote in a recent analysis.

It won’t take a large increase in interest rates to have a serious impact on financing accessibility, he says. Higher monthly carrying costs will pressure family budgets and a tougher government "stress test" will lower maximum loan amounts, taking some wind out of buyers' sails.

“A 150-bps increase in mortgage rates could be enough to generate significant headwinds on some housing markets and house prices,” he says. Some regions could be forced into “overvalued territory” with as little as 100 bps of tightening, he writes.

What would happen in that case? According to a new report from Moody’s Analytics, “The combination of restricted mortgage lending and the expectation of higher mortgage rates suggests that house prices are likely to experience a slowdown in the next year and a half,” it says (thus improving affordability).

“Affordability as measured by the ratio of median dwelling price to median family income” is already at a record low, the credit rating firm writes, “making it difficult for house prices to maintain the same momentum as before.”

Moody’s adds that the pace of new construction is also likely to decline in late 2021 and into 2022 as the housing market “comes under pressure” from rising interest rates.

Mortgage rates to drag prices.png

“House prices are sure to correct,” Moody’s forewarns. “It is a matter of when, not if.” But not before they rise further, it predicts.

If all of this sounds like a bunch of noise, it may well be. As CMHC learned the hard way with its fateful 2020 predictions, not even the best-informed housing analysts this country has to offer have a window into the future.

RATESDOTCA Team

The RATESDOTCA editorial team are experienced writers focused on sharing stories and bringing you the latest news in insurance and personal finance. Our goal is to provide Canadians with the information and resources they need to make better insurance and financial decisions.

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