Following a decade of low interest rates, the Bank of Canada is expected to gradually raise rates until they reach 2.5 – 3.5 per cent. These are rates identified by the major banks as neutral. Rate increases of 50 basis points are expected in the second half of 2019, if the Canadian economy and inflation grow in line with expectations.

Higher rates also cause higher qualification rates. These gains, combined with continued weakness in labour incomes, are expected to weigh on housing demand in 2019.

What you should know about housing and interest rates:

  • The Bank of Canada’s overnight target rate is expected to rise from 1.75 per cent at the end of 2018 to 2.25 per cent by the end of 2019, potentially pushing up qualification rates to near six per cent.
  • The pace of rate increases may slow if the national economy does not grow as expected.
  • While overnight target rates may continue to rise, there is some speculation that banks may not raise fixed rate mortgages, limiting the impact on housing markets.
  • Stricter lending conditions, combined with higher rates, have weighed on housing demand in 2018, as households adjust expectations regarding their housing choices. Also, economic recovery has not been substantial enough to offset the impact of the changes.
  • Activity has slowed across all price ranges, except the most affordable ownership product for each property type.

Note: understanding the impact of B20

The mortgage stress test has changed what all borrowers will qualify for based on their income levels. The Canadian Real Estate Association (CREA) estimated purchasers who previously qualified for the average detached benchmark home in our city would now need to save an additional $76,000 to purchase that same home.

CREA also estimates it would take a minimum of 12 months to save the additional funds, and only if all income goes towards the additional down payment.

This highlights that the adjustment to these changes will take time and will weigh on the housing market well into 2019.