BCREA analysis says looming interest rate hikes “unlikely to result in significant home price declines”

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      The Bank of Canada is expected to begin increasing interest rates in 2022.

      This means that mortgages or loans for purchasing houses will become more expensive.

      So what will become of home sales and prices?

      Nothing earthshaking, based on a paper by the B.C. Real Estate Association that examines this issue.

      It’s titled “Too Tight? The Impact of Bank of Canada Tightening on BC Housing Markets”.

      A bullet presentation in the document that came out Tuesday (January 18) summarized the main points of the analysis.

      It noted that increasing interest rates has historically “led to falling home sales and flattening home prices”.

      However, with current limited number of homes for sale, it will “take a substantial decline in demand to return active listings to a healthy state”.

      The bottom line?

      “Model simulations show that the most likely outcome of this round of Bank of Canada tightening will be home sales falling to near their historical averages and for home price growth to moderate, but because of severely low supply, it is unlikely to result in significant home price declines,” the paper stated.

      The BCREA arrived at this conclusion after considering four scenarios.

      Scenario 1 involves the overnight rate, which determines variable-rate mortgages, returning to its pre-COVID-19 pandemic level of 1.75 percent.

      The other one is for the overnight rate to increase to 1.75 percent, coupled with a moderate increase in five-year mortage rates.

      At present, the overnight rate is 0.25 percent, which the Bank of Canada has maintained since March 27, 2020 in response to the COVID-19 pandemic.

      “Home sales under Scenario 1 show sales falling from current elevated levels before levelling out to a point that is approximately 25 per cent below their starting point by the end of two years,” the paper noted.

      It added that this “impact is in line with historical outcomes and, in this cycle, sales are coming down from a record-high level”.

      In the other scenario of an overnight rate of 1.75 percent and wherein five-year mortgages see a moderate increase, “home sales would level out near their long-run average”.

      “We view these as the two most likely scenarios,” the BCREA analysis stated.

      How about home prices?

      “Our model simulations show only a minor impact on home prices in the first two years following the Bank raising its overnight rate,” the paper noted.

      Again, it’s all about limited supply of homes in the market.

      “The tempered impact on prices from future rate tightening is entirely the result of the starting point of record low active listings,” the BCREA analysis stated.

      In short, “an under-supplied market can better absorb a decline in demand arising from higher borrowing costs”.

      On January 12, the BCREA reported that the 2022 market started with 12,179 homes for sale,

      Brendon Ogmundson, chief economist with the association, described this as the “lowest level of active listings on record” in the province.

      The new year follows the record-setting sales of 124,854 homes in 2021, shattering the previous all-time best of 112,425 in 2016.