According to the Polls
In a recent joint Nanos and Bloomberg poll, that took place in May, it was revealed that Canadian’s would welcome rate hikes if it means that it could help cool the housing market. According to the poll, 49% of respondents would support or somewhat support the Bank of Canada to increase the interest rate. This is because they believe that a rate hike would help relieve the very hot housing market. However, in order to soften the activity in the housing market, but this could also torpedo the economy.
The President of Mortgage Architects, Dustan Woodhouse was interviewed about this potential rate hikes and stated, “who in their right mind would want interest rates to rise? Anyone who’s thinking they want interest rates to rise to slow home prices doesn’t understand how mortgage approval rules work because all mortgage approvals were written to 4.79%, now 5.25%, so what the actual interest rates are don’t actually mean anything as far as home prices have gone, because nobody is qualifying for any extra money over and above what they would if the actual interest rates were 4.79%, and 5.25% (as of June 1),”
Material Slowdown
When you slow down the amount of money people have to purchase homes, you then need to rise the interest rates to 7.5-8.5%, says Woodhouse. This would cause housing prices to more than just slow down, the entire economy would in fact, grind to a halt. As Woodhouse puts it, “that would be like trying to kill a mosquito with a nuclear bomb.”
Woodhouse also believes that there’s a fundamental misunderstanding of how interest rate policy works. According to Dr. Sherry Cooper, “the problem is that interest rate policy is a blunt instrument and it leads to all sorts of unintended consequences. If you were to raise rates too much, you’d dampen the whole economy, which makes no sense given all the problems we still have in terms of jobs and getting the economy restarted. The Bank of Canada will never do it for that reason. It will raise rates when it thinks the economy is growing rapidly and is close to full employment.”
Rate Hikes to Rise in 2022
It’s been reported that interest rates are expected to rise by 2022, one year earlier than perviously warned by the Bank of Canada. This is because the economy seems to be healthier than everyone had thought it would be during the COVID-19 pandemic.
The Bank of Canada also recently sated that it’s anticipating a return to full capacity a month sooner than expected. However, while other things are remaining constant, Dr. Cooper says, “it would reduce buying power. The question is would it lead to a decline in home prices? It would take quite a tightening in monetary policy for that to happen, and tightening is unlikely. Even the housing market isn’t one market nationwide; it’s many, many different markets, so we could see home prices reverse in one area or one sector without seeing it happen in another. To see the overall average home price decline, which means it would have to be a widespread phenomenon outside of both Toronto and Vancouver, it’s not that it can’t happen but it’s unlikely.”
Contacting Lori VanDinther and Team
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