Despite COVID-19’s disastrous effect on Canada’s economy, the country’s housing market continues to boom and experts predict affordability will continue to worsen in coming years. Over the last 2 years, total home sales have grown by a whopping 76% while property values continue to climb. As rent and property costs soar, wages have been lagging, making homeownership more difficult for many. Canadians are taking on more debt than ever before and with all this money moving toward the housing market, other industries and sectors are left pining for investment.

August Inflation Rate

In August alone, prices of new homes in Canada increased by 0.7% from the previous month after showing signs of slowing for 3 months in a row. New house prices were up in 13 out of 27 metropolitan areas like London (3.9%) and Toronto (0.8%) where prices rose at an even faster rate than the market average. Looking at the data annually, house prices jumped 12.2% during the month of August which is one of the steepest increases ever recorded. [Trading Economics]

How Do Inflation Rates Impact The Housing Market?

The Canadian housing market is complicated. Influenced by immigration, demographics, the rate of construction and speculative demand, there is a clear relationship between price and interest rates.

As interest rates continue to fall, lifetime carrying costs rise, which means buyers need to take into consideration what kind of investment they’re looking for in real estate, whether it’s a forever home or a property to rent out for profit.

Mortgage Rates

Last month, Canada’s inflation rate came in above expectations and rose to a record high over the last decade. The central bank can only allow high inflation to continue for so long before a policy response is required. While the economy continues to move through its reopening phases during the pandemic, the bank is willing to tolerate higher inflation, but once the economy recovers, it will respond to more lasting price pressures by reducing monetary accommodation.

While average mortgage rates remain slightly above their all-time lows from December 2020, the question is how long until we can expect a hike? Rest assured that we won’t see an immediate rate hike as the central bank has estimates it likely won’t occur until the second half of 2022.

The bond market’s read on future rate hikes is that consumers can expect one quarter-point rate hike over the next year, which would take the BoC’s overnight lending rate from its current record low of 0.25% to 0.50%. Despite the current high inflation figures, the bond market is actually anticipating one less rate hike than it did a few months ago as it’s now expecting three 25-bps hikes over the next 2 years instead of four. Over the next 3 years, the Bank is expecting to deliver five quarter-point rate hikes in total, bringing the overnight rate to 1.50% from the 0.25% it is currently.

Home Prices

Since the pandemic began, home prices have soared about 25% and around 200% in the last 16 years, according to Canadian Real Estate Association data. An August poll of 16 economists showed that after an expected 16% rise this year alone, average house prices nationally are expected to increase only 3.2% next year, which is a downgrade from the 3.7% increase predicted 3 months ago.

The August poll also identified that over the next 12 months, the biggest downside risk has been identified as higher interest rates with some respondents also noting the risk of new coronavirus variants spreading through the country.

Demand For Homes

Economists are predicting that demand for housing will decrease across the country this coming year, even in real estate hot spots like Toronto and Vancouver, though it’s likely to continue being competitive for a while longer before it drops off.

Prepandemic, Canada’s housing market was already unbalanced when it came to supply and demand with demand pushing housing prices much too high for most first-time buyers, and inflation now at an all-time high, this decade is not making things any easier. The issue of supply is also directly related to the lack of affordable housing across the country. Experts say Canada needs to start building housing options that are best suited to the whole population and not just a select percentage who can afford inflated rates and climbing prices. Some economists believe that there is no end to the home supply shortage in sight, even beyond the standard 2-year horizon.

Buying Vs. Renting

Canada is currently dealing with two crises: One created by the unattainability of homeownership and another created by the unaffordable cost of rent as an alternative. This affordability crisis is so bad right now that it may lead Canada to revise its deep-rooted bias in favour of homeownership. Owning has always been seen as the desired outcome and the ultimate end-goal. You rent to save up money and improve your credit so you can one day own a home instead. This isn’t surprising given that those who can afford to buy are doing so to avoid precarious, irrationally expensive rent. This ideology and approach to housing needs to be revolutionized if we ever expect to cool off the market and rebalance the supply/demand for housing.

What Does This Mean For Homeowners?

As a homeowner, seeing these rates rise can cause some anxiety and may have you feeling uncertain about the future and how you’ll be affected. If you currently own your own home, it’s important to keep your debt in check and make sure you don’t take on any additional debt you may not be able to manage when rates rise as expected in the second half of 2022. Spend the next few months updating your budget, focusing on your savings and making sure you have a solid emergency fund in place.

Historically speaking, acquiring residential property has always acted as a hedge against inflation. When inflation goes up, the value of real estate tends to outpace it. If you’re currently carrying a mortgage or thinking about buying a new home and are concerned about the projected inflation increase, one step you can take to protect yourself is to lock into a fixed-rate mortgage. Doing so during inflationary periods can offer a significant financial advantage over paying rent, which tends to rise alongside inflation as well.

Will Mortgage Rates Increase?

So how do rising rates and inflating hikes affect homeowners working to pay off their mortgages? These hikes will cause the prime rate to increase, which will lead to higher monthly payments for many borrowers with variable-rate mortgages and directly impact the purchasing power for many.

For those with fixed-payment variable mortgages, the amount of their payment going toward paying down the principal will definitely decline, and the amount going toward interest will increase. Do keep in mind that borrowers with fixed-rate mortgages would not be immediately impacted by rising rates as they wouldn’t see any changes until their mortgage comes up for renewal at the end of their term, or if/when they choose to refinance.


The Canadian housing market is way beyond the growing stage. As the trend of property inflation continues despite a global pandemic, it’s clear that while the market will cool off eventually, it will also see a dramatic increase in rates as the economy rebounds and recovers. Whether you’re a current homeowner or on the hunt for your first home, being aware of (and prepared for) these forecasted market changes is so important. Do your research to ensure you’re set up to weather the storm of increased rates and how they’ll impact your current monthly mortgage payments. Take a long, hard look at your 2022 budget so you can focus on saving money and paying off as much debt as you can in the meantime.

Looking for more insight into mortgage options and rates? Aren’t sure what to do next? Reach out to our team and let’s get the conversation started.