Possible interest rate increases could pose “significant headwinds” for real estate market

According to Macquarie Group Head of Economics David Doyle, Canada’s real estate market will face “significant headwinds” in case the central bank really raises its key lending rate by another 1.5%.

On Thursday, Doyle said if the Bank of Canada decides to increase its overnight rate to 2.5% by the end of this year, it would slowdown the national housing activity, which has become one of the main drivers of the overall economic activity.

“We expect the BoC to raise the overnight rate to 2.5% by the end of 2022, and in this case, the housing activity will face significant headwinds. That’s what I’m concerned about,” – he noted.

Now, markets predict this very scenario, with forecasts of at least the equivalent of six 0.25% hikes by the end of the year. Moreover, the BoC raised its outlook for the neutral rate (the one which doesn’t accelerate or slows down the economic growth) to the range of 2-3%.

In Doyle’s opinion, although real estate prices may also go down, the extent of the decreases will depend on the region, as the suburbs that have seen sharp prices gains during the pandemic may face larger declines.

“There will be negative consequences for home prices – whether it’s a flat or declining trajectory. It could depend on where in the country you are,” – he said.

“I think there will be stronger headwinds in the more rural areas that have faced a significant activity hike over the pandemic. The closer you are to the centre of the city, the less affected by it you might be.”

In February, the average non-seasonally-adjusted home price in Canada showed an annual increase of 20.6% and reached a record $816,720. Meanwhile, average prices in Toronto are almost hitting $1.3 million.


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