Expected rate hikes 'significant headwind' for housing: Macquarie

Macquarie Group said the Canadian housing market is facing “significant headwinds” if the Bank of Canada does indeed increase its benchmark interest rate by another one-and-a-half per cent.

Macquarie Group Head of Economics David Doyle said the Canadian housing market is facing “significant headwinds” if the Bank of Canada does indeed increase its benchmark interest rate by another one-and-a-half per cent.

In a television interview Thursday, Doyle said if the central bank moves its benchmark rate of 2.5 per cent by the end of 2022 it would slam the brakes on domestic housing activity, which has become a significant contributor to overall economic activity in recent years.

“We do think the Bank of Canada will raise the overnight rate to 2.5 per cent by the end of the year, and I think if you see that, you will see absolutely significant headwinds for housing activity, which is actually what I’m most concerned about,” he said.

Markets are currently pricing in just such a rate scenario, with expectations for no fewer than the equivalent of six 25 basis point increases by the end of the year. Additionally, the Bank of Canada raised its view of the nominal neutral rate – essentially where rates are neither accelerating nor hindering growth – at the mid-point between two and three per cent.

Doyle said that while home prices could also dip as a result, he expects the extent of the declines could vary significantly by geography, with further flung locales outside of urban centres that have seen pandemic-era prices surge seeing more substantial drops.

“There will be, I think, negative consequences for house prices – whether that means there’s flat or declining prices, I think is a bit ambiguous, it might depend where in the country you are,” he said.