The Bank of Canada has raised its policy rate again, lifting the benchmark toward 1.75 percent and confirming that 2018 is a year of steadily rising borrowing costs. For a Canadian housing market already adjusting to the B-20 stress test, this latest increase is another turn of the affordability screw. Higher rates lift the qualifying bar, raise carrying costs, and further constrain buying power. This November report looks at how the rate cycle is compounding the stress test as the year approaches its close.
Bank of Canada (policy rate) and Statistics Canada (inflation).
The double squeeze on affordability
2018 has delivered a genuine double squeeze. First the stress test cut how much buyers could qualify for, then a series of rate hikes raised the very rate at which they must qualify and the payments they actually owe. The two forces reinforce each other: as rates climb, the stressed qualifying rate climbs with them, tightening budgets further. For buyers, this means the affordability picture has quietly worsened over the course of the year even where prices have been flat.
Bank of Canada policy rate, 2015–2018
Year-end overnight target rate. Source: Bank of Canada.
Variable-rate holders feel it
Rising rates affect more than new buyers. Existing homeowners with variable-rate mortgages and lines of credit have seen their carrying costs rise with each Bank of Canada move this year. Fixed-rate borrowers coming up for renewal are also facing higher rates than they locked in years ago. This gradual increase in household carrying costs is a quiet but real drag on discretionary spending and on the housing market's underlying demand.
Regional resilience tested
The rate cycle tests even the resilient markets. Montreal and Ottawa have led the country in 2018 thanks to affordability, but higher rates erode that cushion at the margin. So far both markets continue to advance steadily, suggesting their fundamentals remain strong. The expensive markets, Toronto and Vancouver, feel each rate hike more acutely because their high prices leave buyers with less room to absorb rising costs. The divergence that defined 2018 persists into its final weeks.
GTA and Vancouver into year-end
The Greater Toronto Area is holding its floor but not rebounding, with higher rates capping any recovery in volumes. Vancouver remains the softest major market, its policy-driven cooling now compounded by rising borrowing costs. Neither market is deteriorating sharply, but neither shows signs of reaccelerating. The likely path for both into 2019 is continued quiet stability at the reset levels reached this year, absent a change in the rate outlook.
Inflation (CPI), 2015–2018
Annual average consumer price inflation. Source: Statistics Canada.
What buyers should do
For buyers, the rate environment reinforces familiar advice with new urgency. Get a current pre-approval, because a quote from earlier in the year may no longer reflect your budget. Stress-test your own finances against the possibility of still-higher rates at renewal, not just at purchase. And use the cooler, more negotiable market to your advantage where you can. Buying within a comfortable margin, rather than at the edge of qualification, is the prudent approach as rates rise.
Verified · Jan 1, 2018
OSFI's B-20 stress test began requiring uninsured borrowers to qualify at a higher rate, reducing purchasing power and cooling demand nationwide.
Approaching the year's end
As 2018 winds down, the market has proven remarkably orderly given the twin pressures of tighter credit and rising rates. The overheated markets have cooled without collapsing, the balanced markets keep advancing, and buyers with secure financing enjoy conditions they have not seen in years. The central question heading into 2019 is how much further rates will rise and how the market absorbs the cumulative effect. We will close out the year next month with a full look back and a look ahead.
This analysis is built on Neighbourly.io — the real estate data API for Canada. Standardized addresses, boundaries, demographics, permits and market signals through a single interface.
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