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BCREA Market Intelligence : The Impact of Rate Tightening on Housing Markets


Under Market Updates

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January 26th, 2022

Vancouver, BC – January 18, 2022. The number of home sales in British Columbia is expected to fall and home price growth will moderate because of rising interest rates according to a new report from the British Real Estate Association (BCREA) examining the potential impacts of the Bank of Canada’s rate tightening widely expected this year.

BCREA’s Market Intelligence report, Too Tight? The Impact of Bank of Canada Tightening on BC Housing Markets, was written by the association’s Chief Economist Brendon Ogmundson and explores both the historical impacts of the Bank raising its policy rate and a number of scenarios likely to play out in BC’s housing market as a result.

“In the past, Bank of Canada tightening has usually led to falling home sales and flattening home prices, so it wouldn’t be a surprise to see the same happening in the upcoming round of tightening” says Ogmundson. “Based on previous trends and our model simulations for what might be to come with respect to rates, we have outlined a number of likely scenarios in this report.”

The Bank of Canada has signaled that in response to elevated Canadian inflation, it will begin raising its policy rate or “tightening” monetary policy this year. The impact of this type of action on housing markets is generally predictable, however, with BC’s housing markets currently undersupplied with record-low numbers of active listings, the impact on prices may not be as significant.

“With markets so out of balance, we expect home price growth to slow but to what extent depends on the final rate destination for the Bank of Canada and for Canadian mortgage rates,” adds Ogmundson. “Our model simulations show only a minor impact on home prices in the first two years following the Bank raising its overnight rate.”

British Columbia set a new record for home sales last year with 124,854 residential unit sales were recorded by the Multiple Listing Service® (MLS®) in 2021, a 32.8% increase from the 94,001 units sold in 2020.

Later this year, the Bank of Canada is widely expected to embark on its first interest rate tightening cycle since 2018. In this Market Intelligence, Too Tight? The Impact of Bank of Canada Tightening on BC Housing Markets, we will consider how high interest rates might rise and using both historical data and model simulations, we analyze how BC housing markets may be impacted.

Summary Findings :

• The Bank of Canada is signalling that in response to elevated Canadian inflation, it will begin raising its policy rate or “tightening” monetary policy this year.

• Historically, Bank of Canada tightening has led to falling home sales and flattening home prices.

• With markets so out-of-balance, it will take a substantial decline in demand to return active listings to a healthy state.

• Model simulations show that the most likely outcome of this round of Bank of Canada tightening will be home sales falling to near their historical averages and for home price growth to moderate, but because of severely low supply, it is unlikely to result in significant home price declines.

Click here to view the full report.

Too Tight? The Impact of Bank of Canada Tightening on BC Housing Markets by Brendon Ogmundson | Chief Economist | BCREA

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