RBC Economics says home buyers across the country will “feel the pinch of rising rates”.

The Bank of Canada has so far raised its interest-setting rate twice this year, and it’s not yet done.

RBC economist Robert Hogue believes that the central bank will hike rates by one percent more, bringing it to two percent by the end of 2022.

Hogue is convinced that rising interest rates will be a game changer in the Canadian housing market as this will make mortgages more expensive.

To illustrate, a one percent increase in the Bank of Canada rate translates to $526 more in monthly payments for a typical home in Vancouver.

Also, those who qualify for a mortgage will “see higher rates reduce the size of the mortgage they can get—and the price they can pay”.

Citing as example, Hogue noted that Canadian households earning the median income will have their maximum purchase budget reduced by 15 percent.

This will cool down the market that saw red hot activity in 2021 because of low interest rates.

“We now expect home resale activity to slow more quickly than previously anticipated and, perhaps more important, we see prices peaking this spring as market sentiment sours from extreme bullishness,” Hogue wrote in a report released on April 21.

“In this altered landscape,” the economist continued, “local markets could experience a mild price correction, partly reversing outsized gains recorded in the past year.”

Hogue wrote that the most expensive housing markets in Canada will feel the effects of rising rates the most.

“We expect downward price pressure to be more intense in Vancouver, Toronto and other pricey markets,” the economist wrote.

Hogue continued, “This will translate into larger annual price declines in 2023 in British Columbia and Ontario.”

“By comparison,” the RBC economist went on, “we expect activity and prices to be more resilient in Alberta, where local markets have more catching up to do following a prolonged slump before the pandemic.”

Although resale numbers are projected to decline and prices to experience a “modest” correction, prospects for the Canadian housing market are not really grim.

“While it can’t be completely ruled out, we view the odds of a market crash as low,” Hogue wrote.

The economist explained that “solid demographic fundamentals will continue to support Canada’s housing market”.

 “Millennials—in their prime home-buying years—will remain a force, and growing immigration will further boost demand for housing. These factors will keep demand from falling into a deep-freeze,” Hogue wrote.

Overall, Hogue believes that rising interest rates are “likely to bring welcome changes to the market—including more sustainable activity, fewer price wars, more balanced conditions, and modest price relief for buyers”.

“After the extreme price increases and heated bidding wars of the last year, this would be a positive shift,” Hogue concluded.

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Source:  Georgie Straight