Economists warn that the Bank of Canada is not done raising interest rates in an effort to slow growth in the real estate market and rein in inflation.
Twenty economists weighed in on the topic in a Finder.com panel this week, and 59 per cent of them expect the current booming economy to cool down starting in 2023 or 2024.
The Bank of Canada raised interest rates on April 13 to one per cent — still considered low but an increase from the 0.25 per cent that has been in place for much of the past 24 months.
Bryan Yu, a chief economist for Central 1 out of Vancouver and one of the panellists, told Postmedia he expects the interest rate to climb to two per cent by the end of 2022 and to 2.5 per cent in early 2023.
“There is clearly quite a bit more upside for the rates right now, just given that we are seeing inflation numbers . . . that will probably be around six per cent for year-over-year inflation,” he said. “There’s enough rationale for the bank to continue its rate hiking cycle.”
This comes as both Royal LePage and the Canadian Real Estate Association produced separate reports that indicate the market has not cooled off in major Canadian markets.
Earlier this month, the Calgary Real Estate Board reported continued record sales in March, despite low supply and already one increase to the interest rate to 0.5 per cent.
Calgary’s red-hot real estate market is being outpaced by Toronto and Vancouver. Those markets are having a trickle-down effect in southern Alberta as people look for a more affordable place to live, and the proximity to the mountains is a major draw.
Yu said the challenge for the Bank of Canada is to raise rates just enough to cool the real estate market and slow inflation, but not spark a recession.
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Jack Mintz, president’s fellow at the School of Public Policy at the University of Calgary, called it “alarmist” to say there would be another recession. Especially in Western Canada, the economy has been buttressed by a commodities market that is churning out high prices for energy, lumber and grain.
“The only thing that I think will start pushing the economy down is not what Canada does in terms of its interest rate, it’s what the federal reserve does in the United States, and that will depend on what happens to world growth,” said Mintz, who was not part of the panel.
Mortgage rates are still lower than pre-pandemic levels when the BoC rate was 1.75 per cent. In 2008 the rate was over four per cent.
“We’re at a point where the economy is strong and interest rates still need to rise, in fact they’ve been way too low for a long time,” said Mintz.
Still, there are concerns when it comes to the housing market.
Mintz said if the interest rate increases by two per cent, it will work out to just over $100 per month on a $100,000 mortgage. Combined with inflation that is at a 30-year high — driven by supply chain issues and the conflict in Ukraine — it is hitting those with a variable rate mortgage hardest. He said it could put those with already stretched finances in a tough position.
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MNP on Monday released a report showing an increasing number of Alberta households were being driven toward bankruptcy due to the increase in rates.
According to economists, higher interest rates are the best way to cool both inflation and the real estate market, but it will take time to have an effect.
The federal government announced in its budget two weeks ago that it plans to freeze the purchase of Canadian homes by non-Canadians, while other provinces and jurisdictions have previously instituted taxes on foreign purchases.
Yu said there was a small short-term effect on the Vancouver real estate market when the measure was introduced in B.C., but it was short-lived. The average home price has since jumped from $1 million to about $1.3 million in the Lower Mainland.
The bigger issue is supply, and Canada — especially in the larger markets — cannot keep up. The federal government also announced it plans to increase immigration to 400,000 people a year while announcing a program in its budget that will build 100,000 homes in five years.
Mintz said this will not keep up with immigration, let alone the number of Canadians trying to enter the market.
Twitter: @JoshAldrich03
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