The Bank of Canada is expected to hike the key interest rate Wednesday for the first time in nearly seven years.
Thomas Davidoff, associate professor in the UBC Sauder School of Business, explains how raising the key interest rate might homeowners and first-time buyers.
Why is the Bank of Canada considering raising the key interest rate? How could it affect the housing markets in Vancouver and Toronto?
Central banks raise interest rates when the economy is doing well to head off inflation. It’s possible that part of their motivation in this case is also to cool off the housing sector.
The most significant impact will likely be that rising interest rates make it more difficult to qualify for a mortgage loan. Also, mortgage interest increasing makes renting more attractive relative to buying.
What are the pros and cons of raising the interest rate?
The main pro is that when interest rates rise, inflation is kept under control. In the current environment, deflating home prices, or at least slowing down their rate of growth may also be desirable. Also, rising rates will strengthen the loonie relative to other currencies and make consumer goods cheaper.
On the downside, however, rising rates tend to slow down the economy. Weakening the housing market is nice for renters able to make significant down payments, but hard on homeowners and people hoping to buy a home with a large mortgage loan. Also, improving the exchange rate makes it harder for firms to export to other countries.
Should homeowners consider renewing their mortgages before the interest rate hike?
Possibly, although banks are already starting to adapt to expected rate increases. Also, owners should check with their lender about penalties before renewing early.
For first-time buyers, I expect there may be some pressure to buy sooner rather than later both because rates are rising and because strict new rules about borrowers’ ability to make payments are likely to come this fall. That said, there are now significant headwinds facing housing markets that were very hot in the spring.