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Bank of Canada moves to quash high-flying economy

Strong job growth and housing markets help end pause in rate increases as overnight rate raised to 4.75 per cent
Housing sales and prices are up across Western Canada, but higher mortgage rates will bite. | Submitted

It may have been the surprisingly robust housing market that pushed the Bank of Canada (BoC) to raise the overnight rate by 25 basis points at the June 7 setting, bringing the rate to 4.75 per cent and the prime rate up to 6.95 per cent.

This marks the first hike since the BoC briefly paused raising rates after hiking in January 2023 for the eighth time in a year.

As examples, housing sales in Greater Vancouver were up 15.7 per cent in May to 2,947 transactions and have now increased month-over-month for six months straight.

The composite benchmark price in May hit $1,188,000, up 6 per cent from January, with detached house prices at $1,953,600, a cash increase of more than $150,000 from the start of the year and blowing past price projections.

“Back in January, few people would have predicted prices to be up as much as they are –ourselves included,” said Andrew Lis, REBGV’s director of economics and data analytics. “Our forecast projected prices to be up modestly in 2023 by about 2 per cent at year-end. Instead, home prices are already up about 6 per cent or more across all home types at the midway point of the year.”

In Calgary, housing sales hit a record high for May and the benchmark home prices was up 3 per cent from its former peak a year earlier, to $557,000.

“Calgary’s housing market continues to exceed expectations with the recent gain in sales activity this month,” said Calgary Real Estate Board chief economist Ann-Marie Lurie, adding that Calgary is seeing healthy job growth.

Housing sales were reported higher across Canada in May and the national unemployment rate is flirting with record lows in the sub-5 per cent range.

The BoC rate is now at the highest level in more than two decades.

“Based on the accumulation of evidence,  governing council decided to increase the policy interest rate, reflecting our view that monetary policy was not sufficiently restrictive to bring supply and demand into balance and return inflation sustainably to the two per cent target,” the Bank of Canada said in a news release.

Residential investors, who often opt for the lowest short-term rates, will be the first affect, mortgage brokers say.
“Variable- rate holders will feel the sting of this rate hike first,” said Victor Tran, a mortgage and real estate expert with “Especially investors with months of continuous negative cash-flow.  We will likely see some forced sales due to pressures from rising housing expenses. It will take up to a month for these households to feel the full effects of the hike. Inventory has been tight, and this is likely to increase it over the coming months.” 

Concern is also growing over renewals. A recent analysis from Desjardins Capital Markets showed that first-time homeowners that took out five-year fixed rate mortgages during the pandemic will renew in 2025 and 2026 at an increased price of approximately 15 per cent. Five-year variable rate holders that took out mortgages in the same time period can anticipate an increase of up to 40 per cent. 

“It’s not just higher payments that will affect homeowners,” says Tran. “Despite owing less on their mortgages than at the beginning of the term, their choice in lenders may be limited due to higher stress tests. Lenders know this and are not likely to offer them a better deal because of it.” 

For example, a five-year fixed rate insured mortgage holder with a rate of 2.99 per cent (based on the average insured fixed mortgage rate of Q1 2018), would have monthly payments of $2,363.67 (based on $500,000 mortgage, 25-year amortization). Renewing this year at a rate of 4.99 per cent, mortgage payments would increase to $2,805.53, a difference of $441.86 (based on $427,290.42 mortgage, 20-year amortization). To renew with a different lender, the mortgage holder would have to qualify at a rate of almost 7 per cent, according to calculations on 25-year and 20-year amortizations, respectively.