What will be the Impact on the Real Estate Industry if Mortgage Rates Rise?

This article will look at the impact of higher mortgage rates in 2022.

interest raise

Despite the markets predicting a 70% chance interest rates would increase, the Bank of Canada decided to err on the side of caution and keep interest rates the same on its January 26th interest rate announcement. Even though our central bank kept rates the same, the message was clear: it’s not a matter of if; it’s a matter of when rates will be heading higher.

The Bank of Canada decided to keep the overnight lending rate the same at 0.25% due to the uncertainly surrounding Omicron. However, with Omicron cases peaking and springtime on the horizon, a rate hike at the Bank of Canada’s next interest rate announcement on March 2nd almost seems like a certainty.

A Recent History of Interest Rates

It’s been quite a while since the overnight lending rate has increased. It’s been over three years, to be exact. The last increase to the overnight lending rate was when our central bank increased it to 1.75%.

The Bank of Canada said it had plans to raise interest rates further. But those plans went out the window when Covid-19 happened, and our central bank was forced to dramatically slash interest rates to keep the economy afloat during an unexpected and challenging economic time.

How will Higher Rates Impact the Real Estate Market?

Mortgage Rates and home sales have an indirect relationship. Low mortgages rates stimulate the real estate market, as money is cheap to borrow. However, the opposite is true. Higher mortgage rates cause the real estate market to slow down. That begs the question, how will higher rates impact the real estate market.

It’s widely expected that Canada will see anywhere between 2 and 6 0.25% rate increases in 2022. That means that the prime rate, which variable-rate mortgages are priced based on, could increase by between 0.50% and 1.50%.

While this may sound like a lot, you must remember the mortgage stress test. Canadians are already stress-tested at a rate of 5.25% to qualify for a mortgage to buy a home. If the overnight lending rate increased 5 or 6 times throughout 2022, it would probably push more people towards fixed rates instead of the variable rate.

That being said, I wouldn’t expect the real estate market to come crashing down. I would expect home prices to have more modest home price increases going forwards. Maybe home price increases of 4% or 5%. This is good news for first-time homebuyers and those looking to upsize in the real estate market, as less competition will mean it’s easier to buy.

The Bottom Line

Are you curious how higher mortgage rates might impact your home shopping budget? Our mortgage experts are happy to help you figure it out.

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