Home prices growth my slow down, while Bank of Canada is ready for more rate hikes

It looks like we may see the first cracks in one of the world’s hottest real estate markets. Just a month ago, bidding wars between 20-60 potential homebuyers were quite common in Vancouver. Today, occasionally only a single offer appears, and some buyers even start haggling.

Following a home prices increase by about 50% during the previous two years, realtors and economists notice a change in the market direction. Higher mortgage rates are reducing people’s purchasing power while politicians are introducing more measures aimed at cooling the market. While these changes have yet to show up in aggregate price data, which keeps going up, industry veterans believe we may have finally reached a tipping point.

“We may see housing price drops,” – noted Robert Hogue, a senior economist at RBC. In his opinion, markets of Toronto and Vancouver may show “single-digit decreases” in the second half of 2022.

Predicting a crash in the Canadian housing market has been quite unsuccessful over most of the last 30 years, but there were still examples of at least a temporary decline. About five years ago, prices in Toronto and Vancouver went down, when government policies aimed at slowing the market coincided with the BoC’s raising rates. It’s the same situation we’re in right now.

When rates go up, “the prices suddenly need to go down to what a median household can afford,” he explained. “In case home prices have surged significantly, there’s potential for them to decline to where buyers are able to return to the market.”

On Wednesday, Governor Tiff Macklem is expected to raise the Bank’s key lending rate to 1%, with more increases to follow. Markets believe the overnight rate will reach 3% in a year. In addition to it, the BoC will probably stop purchases of government bonds.

The last time the Bank raised rates that much and that fast was in 1997 and 1998, when the rate rose by 2.75% during 14 months, as the central bank tried to stop a currency drop. Another aggressive hiking cycle was reported in 1994.

Macklem’s task is to restrain inflation without hurting growth or causing a recession. The BoC is optimistic it can provide a soft landing.

Last month, Deputy Governor Sharon Kozicki noted officials plan to “act forcefully” in order to control inflation. According to her, households are in better shape today than at the beginning of the last hiking cycle, which started in 2017 and stopped at a 1.75% rate.

Meanwhile, not everyone believes the Bank will act as aggressively as markets predict.

“Housing and a high level of household debts are the kryptonite” of the economy, Eric Lascelles, chief economist of RBC Global Asset Management Inc., says. “I’d be very surprised to see policy rates reach 3%,” as anything beyond “would cause significant damage for a high-debt world.”