The Bank of Canada is attempting to rein in inflation again, raising its benchmark interest rate by 50 basis points to 3.75 per cent.

A pool of economists predict the cycle of rate hikes will continue through the year, with another increase coming in December. But the pace should wind down. In Finder’s BoC Overnight Rate Survey, only 18 per cent of expert economists believe Canada’s central bank will forge ahead with rate hike policy at its January 2023 meeting, although a small minority of 6 per cent think another hike could happen next March.

Ahead of last night’s hike, CIBC’s Chief Economist Avery Shenfeld was among the majority who foresee one more small increase coming in December. “But we are close to levels needed to slow growth and inflation in 2023,” he said.

Impact on real estate

Rising interest rates are one factor affecting Canada’s housing market and contributing to the decline in home sales. All economists on the Finder expert panel agreed that the downturn will continue into the first part of 2023 during the colder winter season.

Before the end of 2022, a third (33 per cent) of experts believe the housing market price declines will fall between 7.5 and 9.99 per cent. Another 25 per cent believe housing prices would drop between 2.5 and 4.99 per cent.

Moshe Lander, professor at Concordia University, predicts price declines before the end of 2022 to fall between 5 and 7.49 per cent. “The rapid increase in interest rates raised the mortgage payment necessary to buy a home—the market’s demand-side,” he explained. “Rising interest rates also increased how much interest now had to be paid on existing mortgages. This pressure will prompt the most leveraged to sell their homes.”

CoStar Canada Chief Economist Carl Gomez forecasts a smaller price decline— below 2.59 per cent by year-end. “Big price increases at the beginning of the year will leave the year-over-year changes barely positive despite the monthly declines seen over the second half of the year.”

Will Dunning, economist and independent housing analyst and CEO of Will Dunning Inc, was the only voice among the panel calling for rate cuts. He’s concerned the economic impacts of excessive rates have “barely started to develop,” let alone with looming future hikes. “There is a possibility that employment could fall by a half million by the middle of next year, which will have long-lasting economic effects,” he predicts.

Rising rates could particularly affect newer homeowners who bought at record-high prices over the past couple of years, especially if the value of their home drops below what they owe in their mortgage. For 62 per cent of Finder’s economics panel this could prompt recent homeowners with high loan-to-value mortgages into a negative equity position.

The Finder BoC Overnight Rate Survey can be accessed here.