The Bank of Canada’s interest rate hike Wednesday was less than many economists had predicted, which one economist said may indicate the rate is close to peaking, but that doesn’t mean the sting won’t still be felt by Canadians.
Many experts had predicted a jump of 75 basis points, but Canada’s central bank instead boosted its target for the overnight rate 50 basis points, to 3.75 per cent.
“It looks like the Bank of Canada might be close to finishing tightening,” said Brendon Ogmundson, chief economist with the British Columbia Real Estate Association (BCREA). “They did say they expect rates to go higher, but maybe instead of going from four to five, they might stop at 4 per cent instead. So, there is some good news in that it looks to me like we're getting close to a peak.”
The effects, although less economists had forecast, will be felt by potential homeowners looking to qualify for a stress test, those with adjustable-rate mortgages and developers who are looking to invest.
“The bigger impact is really about potential homeowners: those that are looking to get into the market,” said Ogmundson.
One in five say rising rates will result in them taking significantly longer to pay off their mortgage than originally planned. In addition, nearly one-in-ten expect that in order to afford their current mortgage, they will need to take on additional debt, according to Dye & Durham and the Angus Reid Forum.
Data from Dye & Durham also shows that 47 per cent of Canadians are expecting to delay a real estate transaction or major purchase in the next 12 months due to rising interest rates.
Housing starts should start to come down in 2023 as the ripple effect from the rates kick in, says Ogmundson. However, the resale housing market will be affected immediately by the rate hikes.
The Bank of Canada says that the impact of these rate hikes are being seen in the real estate market with housing activity retreating sharply and a softening in spending by households and businesses. Overall, the economy continues to see excess demand with labour markets remaining tight, according to the Bank of Canada. They say the next scheduled date for announcing the overnight rate target is December 7, 2022.
Ogmundson says that these rising interest rates will start to have an effect on the labour market in the first half of 2023. He says he wouldn’t be surprised if unemployment went up during that time.
However, it seems that the labour market is already seeing unprecedented times as job vacancies see an all time high. For the first time in both Canada and British Columbia, there are more unfilled jobs than there are unemployed people, says rennie.
In addition, there is a strong positive relationship between the extent to which British Columbians are working and earning incomes and the scale of total listings in the resale market, according to rennie’s Fall 2022 edition of the rennie landscape.
Jacky Chan, CEO of BakerWest, says that times like these can offer an opportunity for financial review and reflection.
“These rate hikes are necessary to combat what has been happening with inflation, demand and the inflow and outflow of capital versus expenditure for the country as a whole. If this doesn't happen, then we might have worse longer term issues,” he said.