On June 7, the Bank of Canada (BoC) surprised economists and observers by announcing a 25-basis-point increase in the overnight lending rate, pushing it to 4.75%. The move aims to curb the continued expansion of the Canadian economy, which is still growing despite interest rates being at their highest level since 2001. One sector that closely watches these changes is the residential housing industry. With the central bank increasing interest rates, prospective homebuyers, homeowners, and real estate professionals are left wondering how this move will influence the housing market.

Ontario Residential Market Impacts

Interest rates play a significant role in shaping borrowing costs and housing affordability, and any changes in the key interest rate can have ripple effects throughout the market. Below, we explore how the rate hike could potentially influence the Ontario residential market, considering factors such as mortgage rates, demand, housing market activity, and home price growth. By examining current market conditions, we aim to provide insights for buyers, sellers, and industry professionals in the Ontario real estate market.

Mortgage Affordability and Demand

One of the most immediate effects of an interest rate hike is a decrease in mortgage affordability for homebuyers. As interest rates rise, borrowing costs increase, leading to higher monthly mortgage payments. This increase in mortgage payments may result in reduced purchasing power, particularly for first-time buyers and those with limited budgets. Consequently, the demand for homes might soften as prospective buyers find themselves unable to qualify for as large of a mortgage or afford the same level of housing they could prior to the rate hike. That said, mortgage professionals have indicated that in the past several months there has been a notable increase in pre-approvals, leading us to believe that the recent interest rate hike may not have a major impact on activity in the near term.

READ: Expert: Lip Service Alone Will Not Solve The Housing Crisis

In May 2023, the Toronto Regional Real Estate Board (TRREB) released updated housing market statistics, revealing that while the housing market in the Greater Toronto Area (GTA) continued to improve, there was still a notable gap between the demand for homes and the available supply for sale. The sales-to-new-listings ratio saw a significant increase compared to the previous year, indicating heightened competition among buyers, and hiking the average selling price close to $1.2 million last month.

Housing Market Activity

Housing market activity is expected to experience a slowdown as a result of the interest rate hike. As mortgage affordability declines, the number of qualified buyers in the market may decrease, leading to a lowering in overall transaction volume. Homeowners may also be discouraged from putting their properties up for sale, as higher interest rates make it less attractive to upgrade or downsize. This reduced housing market activity could contribute to a moderation in home price growth, as supply and demand dynamics shift. It is difficult to quantify the psychological impact of the change in approach by the Bank of Canada, as they had suggested earlier they were done with any further rate hikes, and have clearly done an about-face. It is also important to note that we are heading into the summer slowdown, which typically experiences a reduction in sales volume.

Housing Price Growth

Historically, interest rate hikes have often been accompanied by a slowdown in price growth. Higher interest rates can dampen demand and potentially lead to a decrease in competition among buyers. As a result, sellers may need to adjust their expectations and pricing strategies to align with the changing market conditions. However, it is worth noting that local market dynamics, housing supply levels, and other factors can influence the degree of impact on housing price growth. Aside from historically low inventory levels, the interest rate increases have caused builders to put a halt on many projects due to the steep cost of loans, materials and labour. As a result, new inventory will be very slow to come to market and will only further exacerbate the supply problem, thus helping to maintain current price levels.

AgentsCabbagetown Home (via STOREYS)

Regional Variations

The impact of the interest rate hike on the residential housing industry may not be uniform across all regions. Different regions may have varying degrees of exposure to interest rate changes, depending on factors such as local economic conditions and local housing market dynamics. Areas with already stretched affordability (such as Toronto and Vancouver), high levels of debt, or an overreliance on speculative investments may experience a more significant impact. On the other hand, regions with strong economic fundamentals, robust job markets, and balanced supply and demand dynamics may be better positioned to weather the changes.

Rental Market

While the interest rate hike primarily affects homeowners and potential buyers, its influence extends to the rental market as well. Some unable to afford homeownership may continue renting or delay their entry into the housing market. This increased demand for rental properties could lead to tighter rental markets, applying upward pressure to rental prices.


The Bank of Canada's interest rate hike can have a profound impact on the residential housing industry. Reduced mortgage affordability, slower housing market activity, and potential moderation in housing price growth are among its immediate effects. However, the degree of impact may vary across regions based on local market dynamics.

It is essential for prospective homebuyers, homeowners, and real estate professionals to carefully monitor the evolving market conditions, and adapt their strategies accordingly in response to these changes.

This article was produced in partnership with STOREYS Custom Studio.

Real Insights with John Lusink