Psychological impact of higher interest rates

Ontario’s Fair Housing Plan may not be the only thing having a psychological impact on the Toronto real estate market.
While the foreign-buyer tax has arguably encouraged buyers and sellers to take a “wait-and-see” approach, interest rates are also factoring into the housing head games, BMO Senior Economist Robert Kavcic suggests.
“The first impact of the follow-up BoC rate hike might be psychological,” Kavcic writes in a note titled “Housing: What the BoC Help Giveth, the BoC Help Taketh Away.”


SEE ALSO: The Bank of Canada hikes the overnight rate for the second time in 2017


“It’s no coincidence that, after a multi-year period of well-behaved price growth, the Toronto market began to explode after the Bank of Canada cut rates twice in the first half of 2015,” he continues.
In January 2015, the month of the Bank of Canada’s 25-basis-point key interest rate cut, the average price of a Greater Toronto Area home was $552,575. Today, it is $732,292.
Lower rates marginally improved affordability, it’s true. But the central bank’s tandem cuts signalled something to the market as well, and the ensuing demand that was generated pushed prices through the roof.


“It also sent a clear message that, after barely containing their enthusiasm for years as rates were expected to (eventually) normalize, buyers/investors/speculators had a free pass to run amok,” Kavcic notes.
Those days are over, Kavcic suggests, and gone with them (in all likelihood) is a period jaw-dropping price growth.
Housing Market News AlertsSign up for news alerts on the Toronto housing market
Email Confirmation SentIf the Bank of Canada’s July right hike — its first in the better part of a decade — wasn’t a clear enough sign, then the follow-up hike this week may have sealed the deal.
“A follow-up hike sends an even stronger message that past price growth shouldn’t be expected to continue,” Kavcic says.