The Bank of Canada hiked its Overnight Lending Rate by 50 basis points to 1.5% this morning, slightly below where it was before the pre-pandemic level of 1.75%. While the combination of higher rates with today’s exorbitant home prices should soften buying activity, it's the latter that is much more impactful on demand rather than tighter monetary policy, says Royal LePage CEO Phil Soper.

“If you were to look at the impact of a 50-basis point increase on mortgage payments compared to the impact of a 27% rise in the value of a home, the interest rate impact is much more modest,” he told STOREYS. “The primary reason the real estate market is correcting is because home prices were overshooting and it needed to correct.”

It is reasonable to presume that many buyers will delay their home purchasing plans, but with plenty of fair warning from the central bank that it has embarked on an aggressive rate hiking campaign, home sales have already cooled in recent months. Although it is too early to predict when buyers will return to the market, historical trends all but guarantee they will.

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And with inflation showing nary a sign of abating any time soon, many Canadians are stretched thin. But the cycle will continue.

“This will likely be short-term in nature. The demand for housing was so high, and Canadians’ financial standing so solid, that when buyers, particularly first-time buyers, see prices soften -- and they are starting to soften modestly in pockets across the country -- and prices decrease, there will be a subset of buyers who rush into the market,” Soper said. “It happened in 2009, 2012, and most recently in 2020.”

Everything is relative. Despite home sales in the Greater Toronto Area slowing down a couple of months ago, it was still the third-highest April on record for transactions. In fact, 2021 was replete with monthly records because pent up demand was unleashed into the market.

And while buyers are stepping back from the market as they wait for the dust to settle, Soper says bargain hunters don’t need prices to come down significantly as much as they need less competition.

Soper thinks market activity will heat up, at earliest, this fall, or by spring 2023 at the latest. He added that Wednesday morning’s rate hike, while not negligible, won’t much affect the market.

“The rate hike was widely anticipated. Banks have been preparing their customers and realtors have been preparing their clients, so the actual rate increase itself isn’t going to trigger a sharp change in behaviour,” Soper said.

READ: "It's Not a Question of If": Housing Market Correction to Come Says BMO

However, the overnight rate will have to rise far higher than 1.5% if it’s going to taper inflation, and to Daniel Johanis, owner of Pekoe Mortgages, that's evidence of a looming headwind.

“High inflation and low unemployment are typically indicators that we could be slipping into a recession. As inflation goes up and there’s talk of interest rate increases, if our incomes struggle to support the higher cost of everything, then we get into trouble,” Johanis said. “Recessions happens all the time. Are we there in the cycle? It looks that way.”