Bank of Canada rate hike expected to further dampen housing market
The central bank said its 25-basis-point increase could add pressure to a sector already projected to shrink this year.
OTTAWA · The Bank of Canada raised its key interest rate on Wednesday for the first time in over three years, moving it up by 25 basis points to 2.5 per cent. The central bank acknowledged the increase could add further pressure to a Canadian housing market already forecast to contract by one per cent this year. Its monetary policy report projected housing will contribute just one per cent to economic growth over the next two years, following a sector contraction in 2026. Senior deputy governor Carolyn Rogers said the outlook for housing is subdued.
"Borrowing rates are currently weighing a bit on the housing market (and) an increase will add to that a bit on the margin," Rogers said during a news conference. She expects the biggest impact to be felt in Ontario and British Columbia, particularly in Toronto and Vancouver. The central bank also cited persistently high energy prices from the Middle East war as a factor likely to keep inflation above three per cent for much of 2027. The average price of Brent crude oil was about $124 USD a barrel in October, up from $84 in July.
Mortgage broker Keisha Johnson said the hike will put additional pressure on an already cautious market. "Buyers are being much more cautious and even those who are financially qualified are taking longer to make decisions," said Johnson of RTS Mortgage Financial. She noted many people are worried about the economic outlook months from now. The increase means borrowers with variable-rate mortgages will qualify for smaller loans and could face higher monthly payments. Interest rates for fixed-term mortgages have also risen this year, with the average five-year fixed rate reaching 4.54 per cent in early October.
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High home prices continue to challenge affordability across the country, with the typical price at $651,400 according to the Canadian Real Estate Association. In the Toronto region the typical price was about $918,000 last month, while in greater Vancouver it was $1,076,000. Economist Kari Norman of Desjardins Group said higher borrowing costs add to significant existing affordability challenges. The market slowdown has prompted the national realtor group to downgrade its 2026 sales forecast three times this year, now predicting a 5.2 per cent decline compared to last year.
Real estate agent Nella Zourntos said homes in the Ottawa region are now taking an average of 48 days to sell. "General consumer confidence is lower," Zourntos said. "They're hearing about wars. They're hearing about the rising price of gas. And they're hearing about the rising cost of basket of foods ... buyers aren't getting off the proverbial fence as quickly." She advises potential buyers to secure pre-approved mortgage rates quickly and avoid variable rates. Homeowner Maria Mespolet said she felt fear upon hearing the news, as she faces added financial strain after using a line of credit for a new home while her current one remains unsold.
For developers, the rate increase raises the cost of capital in a sector with thin margins, said Hugh Gorman, CEO of Ottawa firm Colonnade Bridgeport. "When borrowing goes up, our cost of capital goes up and that has an impact," Gorman said. His company is building 1,000 apartment units in Ottawa with another 1,000 slated for next year. Gorman said the single hike is manageable but expressed concern it could start a trend of further increases. "If we had another 25, then another 50, then another 75 basis points increase coming along that would make things much more challenging."
Mortgage broker Neil Drepaul said he was receiving about five calls daily from variable-rate borrowers anxious about potential rate hikes before the announcement. Drepaul, director of Canadian Mortgage Services, said some borrowers will need to adjust their spending to accommodate higher payments. The Bank of Canada may implement another 25-basis-point increase at its next scheduled announcement in December. Yadude Books reported in October that KPMG Canada forecast a December hike, citing bond market demands. The central bank's report stated housing is expected to reduce Canada's average annual economic growth this year by 0.1 percentage points.
With files from BNN Bloomberg and The Globe and Mail