{"id":223787,"date":"2022-03-24T09:51:47","date_gmt":"2022-03-24T13:51:47","guid":{"rendered":"https:\/\/www.livabl.com\/articles\/?p=223787"},"modified":"2022-03-24T09:51:47","modified_gmt":"2022-03-24T13:51:47","slug":"interest-rate-hikes-declines","status":"publish","type":"post","link":"https:\/\/www.livabl.com\/articles\/news\/interest-rate-hikes-declines","title":{"rendered":"Interest rate hikes could ‘topple’ housing market: Capital Economics"},"content":{"rendered":"

<\/h4>

\"Hikes<\/a>Photo:\u00a0karamysh<\/a> \/ Adobe Stock<\/em><\/p>\n

With the Bank of Canada having recently moved its target for the overnight rate<\/a> to 0.5 per cent, more interest rate hikes are expected this year<\/a>. One economist is warning that this may \u201ctopple,\u201d the country\u2019s housing market and lead to moderate price declines.<\/p>\n

In a publication note<\/a>, Stephen Brown, senior Canada economist with Capital Economics, said that the surge in interest rate expectations is \u201ca key risk to housing.\u201d<\/p>\n

Due to a larger portion of variable rate mortgages compared to pre-pandemic times, Brown explained that the Bank of Canada would need to increase its policy rate to 2.5 per cent in order to achieve the same average mortgage rate on new borrowing as when the rate peaked at 1.75 per cent back in late 2018, which is what markets are now pricing in for 2023.<\/p>\n

\u201c\u200b\u200bThe question, therefore, is can the housing market withstand a return to pre-pandemic mortgage rates, even though prices have risen by more than 50 per cent in the interim? The answer is a firm \u2018no,\u2019\u201d said Brown in his note.<\/p>\n\n

In a television interview<\/a> with BNN Bloomberg, Brown said that 90 per cent of the mortgages before the pandemic were fixed-rate, but now almost 60 per cent of mortgages are variable-rate. In the past six months, fixed-rate mortgages have been hiked over 100 basis points, but this hasn\u2019t done much to slow down the housing market as most people are now taking out variable mortgages, he explained.<\/p>\n

\u201cWhat really matters now is the extent to which the Bank tightens the policy rate, because that will feed through more or less one-on-one to the variable rate mortgages,\u201d said Brown. \u201cIt does depend on the assumptions you use for what share of mortgages are variable- or fixed-rates, but I think sort of a broad number we can say that there\u2019s probably going to be a hit to affordability in the range of 15 percent within just the next year or so from this point.\u201d<\/p>\n

The senior economist said that Capital Economics is forecasting that the policy rate will peak at two per cent, with the anticipation that housing price inflation will slow \u201cto little more than zero next year.\u201d If the policy rate were to go higher, this could set off a drop in home prices.<\/p>\n

In the Bloomberg interview, Brown said that there could be a hit to affordability by at least 15 per cent and as high as 20 per cent. Assuming you are constrained by your mortgage payment, paying more interest would mean that the home price you could purchase may be lower in a year’s time.<\/p>\n

\u201cThe question is can the housing market withstand a hit to affordability of 20 per cent, or simply as another way of looking at it, a return to pre-pandemic mortgage rates, even though we\u2019ve had that surge in house prices in the interim?\u201d said Brown. \u201cI think it\u2019s going to take a very optimistic view to say \u2018Yes, that\u2019s not going to cause any problems at all.\u2019 I think at the very least, we\u2019d expect to see some moderate house price declines,\u201d he said.<\/p>\n

\"See\r\n SEE ALSO:<\/span>The number of \u2018severely unaffordable\u2019 housing markets has doubled in Canada<\/a><\/strong>\r\n <\/div>\n

Brown pointed out in his report that we \u201cshouldn\u2019t assume,\u201d that the BoC wants to avoid house price declines. According to the most recent data<\/a> from the Teranet\u2013National Bank National Composite House Price Index (HPI), Canada recently reported its 20th consecutive month of property price growth.<\/p>\n

As home prices are a \u201ckey driver of shelter inflation,\u201d Brown said that moderate declines may help to control consumer price inflation without jeopardizing the economy.<\/p>\n

\u201cBut with house prices now so elevated versus traditional valuation metrics, the risk is that an initial decline could trigger a downward spiral of lower house prices and lower house price expectations,\u201d said Brown in his note.<\/p>\n

<\/div>\n","protected":false},"excerpt":{"rendered":"

In a publication note, Stephen Brown, senior Canada economist with Capital Economics, said that the surge in interest rate expectations is \u201ca key risk to housing.\u201d<\/p>\n","protected":false},"author":49,"featured_media":223790,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","apple_news_api_created_at":"","apple_news_api_id":"","apple_news_api_modified_at":"","apple_news_api_revision":"","apple_news_api_share_url":"","apple_news_coverimage":0,"apple_news_coverimage_caption":"","apple_news_is_hidden":false,"apple_news_is_paid":false,"apple_news_is_preview":false,"apple_news_is_sponsored":false,"apple_news_maturity_rating":"","apple_news_metadata":"\"\"","apple_news_pullquote":"","apple_news_pullquote_position":"middle","apple_news_slug":"","apple_news_sections":["https:\/\/u48r14.digitalhub.com\/sections\/09b86915-7d2b-3acd-915b-b215002d01b7"],"apple_news_suppress_video_url":false,"apple_news_use_image_component":false,"footnotes":""},"categories":[11108],"tags":[11132,11163,11202],"coauthors":[10332],"apple_news_notices":[],"yoast_head":"\nInterest hikes may 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