How Inflation is Affecting the Housing Market Right Now

The Canadian real estate market has been a rollercoaster for the last two years and inflation — and efforts to manage it — have made things much rockier.

As of August 2022, the Canadian inflation rate is 7.0%. The same time last year, it was at 4.1%.

The increase is due in large part to monetary policy during the COVID-19 pandemic, where interest rates were lowered to encourage people and businesses to borrow (and spend) in hopes of fending off a recession. It worked, but it had the effect of driving up the cost of real estate (among other goods). This was particularly true in popular markets like the GTA, where more people could afford to borrow more on their mortgage, increasing the competition for homes for which there was already limited supply.

Canadian housing prices have been on the rise steadily since the 1980s, but the rise we’ve seen in the last couple years in unprecedented. As of October 2022, the average GTA townhome is worth $1.1 million. Detached homes are roughly $1.6 million, and condos are $700k.

All this has triggered deep concerns over the cost of living. Home prices and rents are not just rising uncontrollably, but basic goods such as groceries, fuel, etc. Now, the Bank of Canada is trying to slow runaway inflation by doing the opposite of what it did during the pandemic: hiking interest rates.

Interest rates are now approaching 6% and with new more stringent stress tests (to lower the risk of people defaulting on payments) the average Canadian’s buying power has shrunk. Someone who could afford an $800,000 home when rates were less than 2% may now be unable to afford even a $650,000 home.

This, of course, is having a knock-on effect on home prices. With less competition, prices are no longer increasing at the rate they were last year and may soon begin to dip. This may be true even in markets with huge demand like Toronto.

The Bank of Canada is aiming to bring inflation back down to 2% in hopes of controlling the cost-of-living crisis, but that will take time and is likely to result in economic hardship for many ordinary Canadians and businesses, all of whom are affected by interest rates.

“Given the lag between changes to interest rates and their impact on inflation — and the considerable uncertainty surrounding the outlook — getting inflation back to 2% will take some time,” Senior Deputy Governor Carolyn Rogers at The Bank of Canada said recently.

“We also know there could be bumps along the way.”