In an effort to curb inflation, the Bank of Canada is expected to raise its overnight policy rate later this year for the first time since 2018.
Amid speculation about rising interest rates, a new study by the British Columbia Real Estate Association (BCREA) attempts to forecast the impact on the province’s housing market, anticipating a decrease in home sales and pullback on price growth.
Examining the 10 most recent rate-tightening cycles since 1980, BCREA notes that home sales have dipped from 10 to 15 per cent two years following the start of monetary tightening.
“In the past, Bank of Canada tightening has usually led to falling home sales and flattening home prices, so it wouldn’t be a surprise to see the same happening in the upcoming round of tightening,” said BCREA chief economist Brendon Ogmundson in the report.
The study outlines four potential scenarios this time around, ranging from the overnight rate returning to pre-pandemic levels of 1.75 per cent, to reaching as high as three per cent.
According to the study, even a moderate rise in interest rates could result in home sales falling from their current record highs before levelling out to a point 25 per cent lower at the end of the next two years.
However, under a scenario where the rate increases to 1.75 per cent but the yield curve flattens, producing a minimal increase in five-year mortgage rates, home sales would level out near their long-run average.
“The severity of the decline in sales and the potential decline in home prices will depend on the final destination for the Bank of Canada and for Canadian mortgage rates,” said Ogmundson. “If the Bank does raise its policy rate more aggressively in response to an overheating economy, then our models show that home sales would decline more significantly.”
While home sales are expected to dip, the BCREA forecasts a minor impact on home prices in the first two years following the Bank raising its overnight rate.
The primary reason for that is the record low number of active listings in the B.C. housing market, a factor that also makes predictions more difficult this time around.
“Rate-tightening cycles that begin when market conditions are tight may lead to a more tempered impact on prices,” Ogmundson said. “The intuition being that an undersupplied market can better absorb a decline in demand arising from higher borrowing costs.”
That means prospective homebuyers shouldn’t expect a discount on B.C. home prices that currently average $927,877 across all property types, surging to $1,230,200 in Vancouver. Meanwhile, bidding wars and multiple offers should continue for the foreseeable future.
“The tempered impact on prices from future rate tightening is entirely the result of the starting point of record low active listings,” Ogmundson said. “Even with a significant drop in home sales, it will take a substantial period to rebuild existing home inventories.”
