Canada’s central bank is preparing to raise rates, and everyone is trying to guess what this means. The BC Real Estate Association (BCREA) is the latest to forecast the impact of a rising overnight rate. If the Bank of Canada (BoC) hikes as expected, BC home sales will see a modest decline. Home sales are cut in half if rates climb sharply over forecasts due to high inflation. In either scenario, they don’t see much of a drop in home prices.
BC Real Estate Sales Are Forecast To See A Drop
The industry is forecasting a sharp decline in home sales as rates rise. In their most mild scenario, the BoC’s overnight rate hits 1.75% — right around where most banks have forecast a peak. They forecast home sales will fall over 20% in the following two years.
The BoC estimates the neutral rate is 1.75%, making a higher overnight rate unlikely. Inflation would have to climb very sharply for this to even be considered. If that were the case, buying a home would probably be the least of your concerns.
The overnight rate hits 3.25% in their most extreme scenario, and home sales fall over 50%. Once again, it’s unlikely to hit that level since the neutral rate is forecast to be much lower. That’s an issue by itself. The overnight rate rising to a level seen less than two decades ago is enough to crater home sales.
BC Real Estate Prices Aren’t Expected To See A Big Impact
Rising interest rates are forecast to make home sales plummet, but not prices. If rates rise to 1.75%, the association forecasts a less than 5% drop in the average home price. If they grow to an unlikely but extreme 3.25%, they still see prices falling less than 10%. Apparently, a 50% drop in home sales leads to a minimal drop in home prices.
The BoC is forecast to raise rates as early as next week, which could significantly change the market. Fewer home sales and flattening home prices might seem extreme. In reality, the most severe scenario would need the overnight rate to rise to a very unlikely level. Even if it were to do that, the forecast drops would put sales and prices just below 2019 levels. That’s not exactly an extreme scenario, but it might feel that way for those that thought this was the new normal.
My hope is that, given we have a decent supply of homes and unprecedented demand, that slowing down that demand a bit leads to a place where the market comes to balance.
Once the market comes to balance, in a normal market the prices would stabilize. In an emotional market driven by HELOC’s and unsustainable growth, that means the balance comes due all of a sudden. It only takes a small shift in a market like this to set the whole thing on an uncontrolled downward slide – historically speaking.
Over the past years of owning a home pre-2000 ( 4 individual/family homes in two Provinces), I never had an interest in a home under 8%. Now we publish a doomsday report for interest rates over 3%. For the money launderers of illicit money hiding wealth, a 2% interest rate means nothing. Foreign investment just keeps driving up home costs for the real taxpayers in Canada.
I agree with you. These are all acting as fuel to fire and driving up the cost. For people buying homes at over 500k the listing price..do we really think will dent the market. Most of them don’t borrow from the bank lol
The government is bringing so many Immigrants in the country. They are adding fuel to the fire. House prices are already so high and this will worsen the problem with the housing market. Toronto real estate market needs to crash at least 50% so that most people can afford to buy a house. Someone should bring this article into a good politician’s attention who can take action and make things better for the country.