How can the central bank’s interest rate increases influence rent?

Specialists say the Bank of Canada’s attempts to restrain inflation with the help of interest rate hikes will keep on affecting the national rental market.

According to rentals.ca, the average rent for all property types was up by 15.4% annually to $2,043 in September.

In case of Toronto, rent was up by 20.4% on a year-over-year basis, the recent report by the Toronto Regional Real Estate Board (TRREB) shows.

“This rent growth is not surprising”, – noted John Pasalis, the president and broker of Realosophy Realty Inc.

“I believe the series of interest rate increases we’ve seen this year, including Wednesday’s 0.5% hike, will push rental prices even higher during the next 12 months,” – he said.

The Bank of Canada’s recent decision brought its key lending rate to 3.75%, marking the sixth hike in 2022.

In Pasalis’ opinion, the growth of rental demand is also directly caused by a limited housing supply.

“When we see weakness in the re-sale real estate market, brought now by higher borrowing costs and limited inventory, this is usually followed by a hike in the rental market,” – he added.

Stephen Brown, a senior economist at Capital Economics, believes there are short- and long-term consequences of higher interest rates on the national rental market.

He says the central bank rate increases have created more demand and competition for rental units as people are waiting for a decline in borrowing costs.

Brown expects even stronger worries over the rental situation in the future.

“One long-term consequence of higher interest rates is the slowdown it caused for the construction of new homes,” – he noted.

The country is already facing lack of housing supply, and a drop in housing starts will only reduce the number of homes available in the long run, pushing rental prices even higher.