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‘Mortgage rates heading up, home prices down’

November 4, 2021

Mortgage rates will rise and home prices will fall early in 2022, if lenders and real estate analysts are correct in their forecasts.
Such predictions have been proven wrong during the past two years.
On October 27 the Bank of Canada held its key overnight lending rate at 0.25 per cent but warned that higher rates are coming—perhaps as early as during the second quarter of 2022.
A number of lenders expect rates may rise sooner resulting in a series of increases. TD Bank senior economist Sri Thanabalasingam, for example, expects the Bank of Canada will raise rates three times in 2022, taking its key rate to 1 per cent by the end of 2022 as the economy improves.
RBC senior economist Robert Hogue predicts an increase of closer to 0.5 percentage points in the Bank of Canada’s interest rate by the end of 2022—with a rise in variable mortgage rates as a result.
BMO chief economist Douglas Porter said that the bank now expects the Bank of Canada to begin increasing interest rates in mid-2022 and continue raising rates by a quarter of a percentage point every three months until late 2023, bringing its key interest rate.
Major banks are already raising rates.
BMO recently raised its insured 5-year fixed rate by 20 basis points (bps) bringing it to 2.19 per cent, and hiked its uninsured 5-year fixed by 10 bps to 2.39 per cent.
RBC increased its 5-year fixed rates by 25 bps to 2.44 per cent.
National Bank of Canada hiked its 5-year fixed rates by five basis points to 2.29 per cent.
The higher lending rates, which are partly a reaction to a dramatic increase in the inflation rate over the past three months, will lead to lower housing sales and moderating home prices, according to Moody’s Analytics.
“We expect that households will be able to adjust to the increase in debt-service obligations. However, given that Canadians’ high debt loads make them relatively more sensitive to changes in interest rates, house price appreciation is likely to reach a near standstill in late 2022,” said Moody’s Analytics Senior Economist Abhilasha Singh.
Singh noted that house price appreciation notched its slowest pace in seven months in September. “Building permits and housing starts appear to have peaked in March, with the last five months of data showing a noticeable slowdown,” he added. However, both government analyst and Moody’s had predicted early in 2020 that the pandemic would lead to dramatic declines in mortgage demand, housing sales and prices. Instead, demand for mortgages hit an all-time high a year later, with home sales and prices rising across the country.


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