Housing market key target of BoC increases

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This article was published 01/06/2022 (938 days ago), so information in it may no longer be current.

In an unprecedented move, the Bank of Canada has announced a major increase to its key interest rate for the second time in two months as it forecasts higher consumer prices to come this year.

The central bank increased its policy rate by half a percentage point to 1.5 per cent Wednesday and warned that rates will need to rise further to rein in inflation.

It will mean almost immediate increases to variable rate mortgages. Fixed rate mortgages typically move with bond markets which have anticipated rate increases and have already doubled in the past six months from about two per cent on a fixed rate five-year mortgage to today’s rates of between four and 4.5 per cent. Variable mortgage rates were at around 2.7 per cent on Wednesday.

Housing inflation is not the only target of the rate hikes, but it is a key one.

BMO economist, Benjamin Reitzes, said, “Housing has been on a tear. That is likely coming to an end here. We are already seeing early signs of that… There are still more rate hikes coming and we are only seeing data that has not felt the full impact of that yet.”

Pedro Antunes, chief economist with the Conference Board of Canada, told the Free Press, “The housing market was just nuts, really. Completely crazy. The housing market settling down is good news for everyone, whether it is caused directly by higher rates or the anticipation of higher rates… All these things are telling households perhaps things will slow soon. It is taking the fervor out of the housing market which is a good sign.”

But like everything else in the national housing markets, its effect is moderated in Winnipeg.

Daryl Harris, who runs the Winnipeg mortgage brokerage, One Link Mortgage & Financial, said Wednesday’s rate increase on the heels of the previous one in April with fixed rates clearly marching up higher has not necessarily meant a lull in business for him.

“But there are people who are likely pushing a little harder to get into the market before the rate hold expires,” he said referring to pre-approved fixed mortgages that are guaranteed for 120 days.

“Those rate holds will start to expire in August in which case home buyers will be faced with higher rates and may qualify for less,” he said. “And for people just getting into the market now it will have an impact on the mortgage payments for sure versus if they bought last year. We are a little ahead of the curve in demand. Come August the amount people qualify for might start to come down and that might change the demand a little.”

In the meantime housing prices in Winnipeg are still rising by double digits. Peter Squire of the Winnipeg Regional Real Estate Board said that while the number of sales in April were down 29 per cent compared to the craziness of 2021, sales in May – which numbers have not yet been publicly released – were down only 14 per cent and the number of sales increased from April to May and prices continued to go up.

“If you read stories nationally, sales are dropping from month to month,” Squire said. “We saw sales up from last month. The impact of interest rates I would say, in all honesty, has been very modest.”

Squire said he has detected some areas where affordability may be an issue, like in West Broadway and the West End, where sales in April and May dropped off a bit more than in other areas especially relative to the ratio between listings and sales.

For some economists, like John McCallum who recently retired after 48 years at the University of Manitoba, this is a unique situation. Among other things, he said it is unprecedented that the Bank of Canada and the U.S. Federal Reserve both have had to admit that they are behind the curve when it comes to using interest rates as a tool to fight inflation.

“We have had incredibly low interest rates since 2008,” he said. “After the financial crisis they took rates way down and they never really went up too much. Inflation stayed low. Now we are into a territory we have really not been in for a very long time.”

Bank rates have tripled in a year from 0.5 to 1.5 per cent as of Wednesday. But McCallum said his biggest fear is that the central bank will push the rate up until it becomes controversial and possibly lose their nerve.

“Then it will look look like there is a lull in inflation and it will come back even stronger,” he said which is what happened in the 1970s.

“What you hope will happen is they push the rate up to the three or four per cent level and inflation meets it on the way down,” he said.

Antunes agrees.

“The bank is now being very concerned. They are looking at more forceful action. Really what the Bank of Canada wants to do is convince people they are going to act and they are going to be successful in getting inflation down, down the road,” he said. “What the bank wants to do is hammer down our ability to consume, lower aggregate demand and by doing that we have less domestic inflationary pressure. Yes, it is going to be be painful.”

martin.cash@freepress.mb.ca

– with files from CP