Will key interest rate hike help cool the housing market?

According to economists, a hike by the Bank of Canada to the key interest rate is highly probable

“The Bank of Canada sent strong signals about six weeks ago during the last rate announcement that this was coming. So if they don't do anything here, that would be a big shock to markets and so that's seems very unlikely,” said Mike Moffatt, an assistant professor at Western University’s Ivey Business School

This would mark the beginning of the first substantial rate hike in nearly four years, needed to battle surging inflation, and a possible cool down in a housing market that has been soaring during the pandemic.

“I think higher interest rates will slow that down a little bit. Because it shrinks the amount that people can put into bids because their sort of monthly payment is higher,” said Moffatt.

That sentiment is cautioned by other factors affecting real estate.

For one, the inventory of homes for sale are at record lows. That is partly because of out-of-market buyers according to Randy Pawlowski, president of the London-St. Thomas Association of Realtors

“I think what we're seeing right now is about a third of our sales are coming from out-of-area realtors and prospective buyers. They're coming from the GTA and centres further to our east and really from all over the place, and they're coming with cash in hand,” said Pawlowski.

With such a high influx of buyers from outside the area, the local housing market cannot sustain the inventory of available homes.

“They're looking hard, they're ready to buy, but they're not adding to the inventory supply. You know, generally when a house is sold, there's a backup property that also needs to be sold that kind of stimulates the whole of the market,” said Pawlowski.

The February home sales report is expected to be released this week with the trend of less than a couple of weeks’ worth of inventory to continue.

Interest rate hikes may help slow inflation and could discourage some buyers to enter the market, but an all-out halt of the rising home prices isn’t expected.