top of page

How will the Bank of Canada's rate hold impact the housing market?

The Bank of Canada's recent decision to maintain its key policy rate at five per cent has sparked discussions about the potential consequences for the country's housing market. Experts are warning that this move could reignite housing market activity, similar to what occurred in 2023 after a rate pause. The central bank's shift in tone, emphasizing a "restrictive stance" rather than hinting at further hikes, has raised questions about its impact on the real estate landscape.

Bank of Canada Senior Deputy Governor Carolyn Rogers addressed concerns about a potential surge in house prices during a news conference, acknowledging the risks associated with upward pressure on inflation. However, she emphasized that this scenario is not the central bank's base case, and it is not currently driving their decision-making process.

Economists have varied opinions on the possible outcomes. Beata Caranci, Chief Economist at TD Bank, suggests that the housing market was already showing signs of heating up before the rate decision. She believes that the rate hold itself may not reignite the market but acknowledges the recent resurgence in housing activity.

Bank of Canada Governor Tiff Macklem has identified housing inflation as a key factor contributing to inflation above the two per cent target. He highlighted that inflation in shelter services, driven by elevated mortgage interest costs and high rents, remains just under seven per cent.

Contrary to some expectations, real estate expert Victor Tran from Ratesdotca does not believe that the rate hold will prompt increased demand for housing. He noted that sales activity is still relatively low, indicating that potential buyers may not be rushing to enter the market based on the recent announcement.

Daniel Vyner, Principal Broker at DV Capital, mentioned that there are murmurs among realtors suggesting an uptick in housing market activity. Karim Buckle, an account executive at Deaglo and former executive director of investment banking at Goldman Sachs, emphasized the need for the Bank of Canada to proceed cautiously. He warned that any reduction in interest rates could fuel a mortgage repricing wave and contribute to inflation.

The issue of shelter inflation continues to loom over the economic landscape. Caranci referenced TD analysis indicating that even with a cooling shelter inflation to six per cent, the Bank of Canada would still need to run the rest of the basket of goods at around zero to meet the inflation target. She cautioned that a deeper recession could be inevitable if shelter inflation remains stubbornly high.

Caranci believes that elevated shelter inflation doesn't prevent the Bank of Canada from lowering interest rates, but it does suggest that any rate cuts will need to be gradual. Consequently, she predicts that interest rates are unlikely to normalize until 2025.

In conclusion, the Bank of Canada's decision to hold interest rates has sparked debates about its potential impact on the housing market. While some experts anticipate a resurgence in activity, others remain cautious, emphasizing the need for the central bank to proceed carefully in the face of lingering challenges such as shelter inflation. The evolving economic landscape will undoubtedly shape the trajectory of the Canadian housing market in the coming months.