Bank of Canada predicts further dip in home prices after delivering quarter-point rate hike

With mortgage rates at their highest levels in years, many would-be buyers have been shut out of the real estate market.JONATHAN HAYWARD/The Canadian Press

The Bank of Canada is predicting home prices will decline further after it raised interest rates Wednesday for the eighth consecutive time, but it expects sales activity to pick up later in the year.

The typical home price across the country is already down 13 percent from its peak last February amid the bank’s attempts to rein in runaway inflation by reducing access to cheap loans.

Now, with mortgage rates at their highest levels in years, many would-be buyers have been shut out of the real estate market.

“The pullback in housing activity that began in 2022 is expected to continue over the near term,” the central bank said in the monetary policy report that accompanied its decision to hike the overnight lending rate by 25 basis points, to 4.5 percent.

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“House prices are projected to decline further, particularly in markets that saw significant increases during the pandemic,” the report said.

Those areas include the Toronto suburbs, smaller Ontario cities and the Chilliwack region of BC, where home prices jumped more than 50 percent over the first two years of the pandemic, when the central bank’s overnight rate was near zero. Home prices in some of those markets have fallen more than 20 percent over the past 10 months.

“The pullback will continue in the first couple of quarters of this year,” the bank’s senior deputy governor, Carolyn Rogers, said at a news conference. She said it was important to remember that some of those markets have come down from “extreme highs.”

The bank’s interest rate hike will immediately ratchet up mortgage costs for first-time homebuyers, homeowners whose mortgages are up for renewal and those with variable-rate mortgageswhich move in tandem with the Bank of Canada’s overnight lending rate.

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The latter have experienced the greatest shock with the benchmark rate’s 4.25-percentage-point rise in less than a year. Variable-rate mortgage holders with fixed payments have seen more of their monthly payments go toward interest, but now the majority have reached a point where those payments no longer cover the principal portion. Anyone unable to come up with extra cash could be forced to sell.

“We might see some increase in distressed sales, so therefore we might see additional downward pressure on prices before things stabilize later in the year,” said Benjamin Tal, deputy chief economist with the Canadian Imperial Bank of Commerce.

The real estate industry is also expecting the market to stabilize, especially after the central bank said it could hold rates steady in the future.

“I believe it would be a sign of confidence,” said Phil Soper, president of the national real estate brokerage Royal LePage. Mr. Soper does not expect a rush of activity but said a large number of would-be homebuyers and sellers have been waiting for a sign that this era of pricing volatility will end.

Tracy Valko, a mortgage broker who has worked in Southern Ontario for 26 years, echoed Mr. Soper, saying she believes a pause in interest rate hikes will encourage buyers and sellers back into the market. “The worst of it is over,” she said.

The central bank predicted that activity will start picking up in the latter half of this year, owing to the dearth of homes for sale and the expected influx of immigrants.

Canada has increased immigration levels to compensate for the shortfall during the first year of the pandemic and to help fill holes in the labor market. Last year, the country took in a record number of newcomers, and Ottawa plans to admit an additional 1.45 million new permanent residents over the next three years.

All those people are coming to Canada as the volume of homes for sale has declined. Last year, many prospective sellers postponed putting their properties up for sale because values ​​were plummeting. “Immigration is picking up again, so we do expect housing to come back,” the central bank’s Ms. Rogers said.

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