Bank of Canada Raises Interest Rate to 2.5%, Adding Pressure to Slumping Housing Market
The Bank of Canada has raised its benchmark interest rate by 25 basis points to 2.5 per cent, the first increase in three years. The move is expected to further cool a residential real estate market already weakened by economic uncertainty and rising mortgage costs.
The Bank of Canada raised its main interest rate by 25 basis points to 2.5 per cent on Wednesday, marking the central bank's first rate hike in three years. The decision is expected to further slow Canada's residential real estate market, where home purchases have been tepid since late 2022.
Sales had resumed their decline after a brief spurt earlier this year. Economic uncertainty and a higher cost of living, attributed to worsening U.S.-Canada trade disputes and high oil prices caused by the Middle East war, have weighed on prospective buyers.
Keisha Johnson, a mortgage broker with RTS Mortgage Financial, stated that the rate hike puts additional pressure on an already cautious market. Kari Norman, a senior economist with Desjardins Group, noted that high home prices and broader economic uncertainty continue to weigh on prospective buyers. Bank of Canada senior deputy governor Carolyn Rogers agreed that borrowing costs and economic uncertainty are weighing on the housing market.
Interest rates for fixed-term mortgages are currently higher than earlier in the year. The five-year fixed-rate mortgage averaged 4.54 per cent in early October, up from 4.13 per cent in August and 3.91 per cent in January. Meanwhile, variable-rate mortgage interest rates have started to rise in lockstep with the central bank's benchmark. Before the rate hike, the average five-year variable home loan had been around 3.5 per cent.
Neil Drepaul, director of Canadian Mortgage Services, reported receiving about five calls a day from variable-rate borrowers worried about higher interest rates ahead of the announcement.
According to Canadian Real Estate Association data, the typical home price across Canada is $651,400. The typical home price in the Toronto region was about $918,000 last month, and in the greater Vancouver area, it was $1,076,000.
Housing is expected to drag down Canada’s average annual economic growth this year by 0.1 percentage points, according to the central bank’s quarterly monetary policy report. The Canadian Real Estate Association forecasts 2026 home sales to be 5.2 per cent lower than last year, having downgraded its sales forecast three times this year.
The Bank of Canada may raise its benchmark interest rate by another 25 basis points at its next scheduled announcement in December.