The Bank of Canada’s unexpected jumbo interest rate increase this week surprised heavily indebted households, who took up huge mortgages during the recession but were less prepared for the sudden surge in borrowing prices than Bay Street investors.

Higher interest rates are also putting a damper on Canada’s once-hot property market, and when consumers feel the squeeze, they may cut down on spending on vacation, eating out, and luxury items.

On Wednesday, the central bank lifted its policy rate by 100 basis points to 2.5 percent, the greatest rise in over 24 years. Its goal is to cool scorching inflation, which reached a four-decade high of 7.7 percent in May, with the bank pledging more increases. 

Money markets expect three more hikes this year, bringing the policy rate to 3.5 percent -3.75 percent by the end of the year. 0#BOCWATCH

The changes have pushed mortgage rates skyrocketing, which is a problem for Canadians with variable rate mortgages, which accounted for about 50% of new mortgage loans in Canada in May, compared to around 7% pre-pandemic, according to official statistics.

Most Canadians with variable mortgages have static payments, which means that when interest rates rise, the monthly payment remains constant but less principal is paid. However, around 20% of variable loans are not steady, which means that each increase might add hundreds of dollars to a payment.

According to Lowestrates.ca, a monthly payment of C$2,845 ($2,171) on a typical property would increase by C$323 due to the hefty jump.

Nonetheless, with consumers criticizing their unexpectedly increased payments and plummeting property prices on social media, real estate professionals believe Wednesday’s 100-bp boost has added to Canada’s already cooling housing market.

The average selling price in the Toronto area fell 14.1 percent from its high in February, restoring some of the region’s significant economic gains.

Brown of Capital Economics predicts that home prices in Canada will decline by around 20% from peak to trough, and he is worried that the Bank of Canada is being too fast to sacrifice the housing market in order to reduce inflation.

However, the Bank of Canada may be searching for a chill. On Wednesday, Senior Deputy Carolyn Rogers maintained that restoring equilibrium in the Canadian housing market will help to control the excess demand that is fueling inflation.

Source: Reuters

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