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Rate Hike Amplifies Canadian Home Affordability Fears

Amid the Bank of Canada's recent interest rate hike and anticipated subsequent increases, concerns over home affordability have escalated among Canadians, with many potential homebuyers facing an uncertain future in the country's housing market.

The Bank of Canada’s recent decision to raise its benchmark interest rate to 4.75 per cent, the highest level in over two decades, has sent ripples of concern through Canadian households. Particularly in the context of the nation’s ongoing home affordability crisis, many Canadians worry that this hike—along with anticipated additional increases—will make the dream of homeownership increasingly out of reach. The fear is grounded in the reality of escalating household debt, soaring property prices, and fluctuating mortgage rates which are already making the path to homeownership a steep uphill climb.

The anxiety is palpable among existing homeowners with 69% choosing to wait for lower mortgage rates before considering refinancing their homes. The rate hike has caused a wave of deferred decisions, with 51% holding off on home purchases due to economic concerns, and a significant 18% planning to wait until 2024 or later. A further 20% are unsure about their plans to purchase a home, signalling a troubling uncertainty amidst the backdrop of high housing costs, fears of unforeseen expenses, and overall financial worries, which are affecting an overwhelming majority of Canadians. In this climate of financial anxiety and market volatility, the path to home ownership in Canada is more fraught than ever.

Waning Hope for Homeownership

Despite the robust performance of Canada’s economy in the first quarter of 2023, with a GDP growth of 3.1 per cent, the homebuyers’ perspective paints a different picture. Consumption growth was unexpectedly strong, yet a notable portion of it was likely diverted away from potential homebuyers into other sectors of the economy, as interest rates have continued to rise.

The surge in demand for services and spending on interest-sensitive goods also suggests a shift in Canadians’ spending patterns, possibly indicative of the increasing inaccessibility of the property market.

Squeezed Out by Rising Interest Rates

The Canadian housing market, recently revitalized, is causing worry among Canadians, particularly first-time homebuyers and those with variable-rate mortgages. Amidst these economic shifts, the labour market remained tight. However, the soaring house prices combined with high interest rates are forcing many prospective homebuyers to delay or completely abandon their plans.

Inflation Pressures and The Housing Crisis

The rise in CPI inflation to 4.4 per cent in April has further fueled the fire of Canadians’ concerns over the affordability crisis. Despite predictions that inflation will ease to around three per cent in the summer, the continued rise of goods and services prices indicates a sustained pressure on Canadians’ wallets.

A Bleak Outlook for Home Affordability

In the face of these trends, the Governing Council’s decision to increase the policy interest rate reflects a focus on balancing supply and demand and returning inflation to the two per cent target. While this may be beneficial from a macroeconomic perspective, from the viewpoint of potential homebuyers, it’s a different story.

With the bank’s commitment to restoring price stability, it appears Canadians may have to brace themselves for a future with even more rate hikes. The continuation of the bank’s policy of quantitative tightening suggests a tough road ahead for those striving to navigate the country’s increasingly challenging housing market.


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