The Bank of Canada has refrained from increasing interest rates since July 2023. Despite expectations of another hold next week, a growing number of economists and traders anticipate the central bank to raise its trend-setting rate to combat persistent inflation. Experts in mortgages and debt suggest that higher rates could significantly impact Canada’s struggling real estate market. Variable-rate mortgage payments would immediately increase, and new fixed mortgage rates would also rise. This could reduce the pool of potential buyers, giving more leverage to those who qualify for financing. Consequently, home prices may experience a decline.
Scott Terrio, manager of consumer insolvency at Hoyes Michalos & Associates in Ontario, likened the effect of rising rates to throwing an anchor to a drowning person, indicating the potential substantial repercussions.
Ben Rabidoux from Edge Realty Analytics in Ontario highlighted that the volume of home sales nationwide has hit a 25-year low, attributing this to weak buyer confidence due to various economic uncertainties, including the Canada-U.S. trade conflict and the impact of AI on jobs. He warned that if interest rates increase, a gradual decline in home prices over the next few months is plausible.
Concerns about the impact of rising energy prices have prompted warnings from Governor Tiff Macklem about the possibility of raising borrowing costs. Uncertainties in the Middle East have further complicated the economic outlook, with no apparent resolution in sight.
Recent data from Statistics Canada emphasized the escalating energy costs, with businesses preparing for potential price hikes. While the consensus in a recent Bloomberg survey leans towards maintaining rates, some financial institutions have revised their forecasts from a hold to a rate hike. Traders now place an 87% probability on a 25-basis point rate hike by the Bank of Canada next week, indicating a shift in market sentiment.
Economists such as Derek Holt from Scotiabank and David Doyle from Macquarie Group anticipate a rate hike, with projections of multiple rate increases in the future. This aligns with the general expectation of a rate hike at the upcoming meeting. Mortgage expert Leah Zlatkin also sees the potential for a rate hike cycle, emphasizing that the current market conditions, including falling prices in the Greater Toronto Area, could present opportunities for buyers, especially those who qualify for financing amid rising rates.
