“On Wednesday, June 7th, the Bank of Canada announced it was increasing interest rates by another 0.25%. The last 15 months saw the Bank of Canada rapidly increase its policy rate from 0.25% in March 2022 to the current level of 4.75%.  However, Wednesday’s announcement carries one of the biggest punches that might impact the stability of a real estate market that has started to show signs of recovery.

After eight increases over the past 15 months, you would think Canadians would be sensitized and at peace with the pattern of raising rates to squash inflation, however, it’s also the first time that Canada’s central bank has raised its trend-setting interest rate since January 2023, when the bank signaled it would conditionally pause its rate hikes to wait and see if it had done enough to bring down inflation.

FOMO’s back…for a minute

Shortly after the January pause was announced, buyers who were waiting for more than a year on the sidelines, took the opportunity to jump back into the market.  After more than a year of pent-up demand, full out FOMO ensued. 

National home sales surged 11.3% month-over-month in April.  In May, Toronto’s Real Estate board reported a 24.7 percent increase compared to May 2022.  For the first time in months, prices started appreciating in key markets.  In Toronto, Low-rise home prices were up $200K since January and up 2% over last year.  Multiple offers and bidding wars were back in style, across major markets.  You can clearly see the impact of this surge of activity on home prices across the country in the graph below, which covers the Home Price Index (HPI).   For the first time in more than a year and after a significant decline, prices ticked up again.

From FOMO to a Roller Coaster Ride: How the BoC's latest hike will rattle the Real Estate market!

It’s easy to explain the surge in the market we’ve seen in the last couple of months. January’s pause gave most buyers and investors hope that they were signing up for the highest interest rates they’ll ever see.  It also came after months of price declines and all indicators were that the market has pretty much hit bottom and that price decreases will pretty soon reverse course.  That meant that the time to buy was – now!  

Marry the house, date the rate

Most buyers in February through May also signed up for a narrative that the Bank of Canada will not raise rates any further.  They made a bet that if they will buy now – at the highest possible interest rate, interest rates can’t go anywhere but lower (does the cliche term “marry the house, date the rate, ring a bell?). 

In essence buyers bought into that narrative.  They married the house.  But dating the bank of Canada, who has previously proven that its decisions and policies can shift on a dime, may not always work out.  For those buyers who took the BoC’s word and decided to buy now, absorb the pain of higher rates, and eventually refinance when rates go down, it may have turned out to be one bad “date”.

After the rate hikes this week, “marry the house, date the rate” no longer holds up.  At least in the short term, which buyers were banking on.  The BoC came out swinging and indicated it was clearly not done raising rates, and if anything it may be a long time until rates start going down.  The bank’s latest move to increase its target for the overnight rate from 4.5 per cent to 4.75 per cent takes the bank’s benchmark to its highest level since 2001.  The market has priced in further increases, as early as next month and bond yields, which impact fixed rate mortgages, went wild and increased by at much as 40 basis points so far.

Where does that leave would-be buyers? The 25 basic points increase this week, isn’t what’s relevant.  It’s by no means an insignificant amount, but that’s not what matters here.  What matters is that consumer confidence has been shattered as the narrative that most were willing to transact under, is no longer true.  This puts buyers back into a “wait-and-see” pattern until they feel stability again, which may be a while.  In fact, according to BMO’s research, of Gen Z homebuyers (ages 18 to 24), 71% say they’ll defer their home purchase until rates are lower, while 69% of younger Millennials (ages 25 to 34) say the same. But wait…there’s more.

The chicken-and-egg game

It’s easy to read this post and others and point right at the Bank of Canada as the party to blame. 

Does the BoC really want to see Canadians lose their home?  Is inflation ever really going down or are high prices already “baked” into our system and are nearly impossible to reverse course on? 

The reality is that despite the January “pause”, the BoC has been crystal clear on their plans.  They will continue to raise interest rates until inflation is under control. We may not agree with it, but that’s their mandate and what they signed up for.   In April, after months of seeing positive signs of inflation coming down, Canada’s annual inflation rate unexpectedly rose again (from a March figure of 4.3% to 4.4% last month)

Now here’s the kicker.  The primary reason for inflation rising in April were the surging costs associated with holding a mortgage and renting a home.  Mortgage interest costs ballooned by a huge 28.5% last month from the same time last year.  If you’re a renter, what happens when mortgages go up?  Your rent goes up.  Year-over-year rental costs spiked by 6.1% and accelerating over the previous month.  

So if you’re following so far, what you’re seeing is a chicken-and-egg scenario unfold.

  1. The BoC raises interest rates to reduce inflation
  2. Those same higher interest rates impact mortgages, which therefore also cascade to renters (because their landlord likely has a mortgage)
  3. The higher cost of mortgage and rent payments causes even more inflation 
  4. The BoC reacts by repeating step 1 

Reality is, it’s a vicious cycle and the BoC knows it, however, as the central bank with a mandate to keep inflation under control, interest rates are the only economic mechanism they have at their disposal to keep inflation under control.   

The bottom line – What does it all mean

We’re not out of the woods by any means when it comes to stability in the Real Estate market.  While there were clear early signs of recovery, the June 7th interest rate hike was merely a symbolic one, but made the message very clear.  The Bank of Canada is not done yet.   This puts buyers and sellers in a funny spot again, where consumer uncertainty rules the day, and when it comes to a free market economy, that’s not a good place to be in.

Important note: This article is not Legal Advice. No one should act, or refrain from acting, based solely upon the materials provided on this website, any hypertext links or other general information without first seeking appropriate legal or other professional advice.”