This Wednesday, the Bank of Canada delivered its sixth-consecutive rate hike, pulling its Overnight Lending Rate up by 50 basis points (bps) to 3.75%.

That brings the cost of borrowing to a 14-year high -- but the market reacted with a sigh of relief. The central bank’s increase was smaller than the anticipated three-quarter hike economists had called for, and prompted optimism that it may soon calm its aggressive tightening cycle.

“Is this the pivot [that] markets, businesses, and homeowners have been waiting for?” posits Randall Bartlett, Senior Director of Canadian Economics, in a research note. “It looks like it could be. With monetary policy acting with long and variable lags, the Canadian economy hasn’t yet felt the full impact of interest rate hikes this year and the risks remain tilted to the downside.” 

However, other market insiders aren’t convinced the Bank of Canada is slowing its roll, given its lingering inflation challenges.

“Only 50 basis points, hurray!” quipped Christopher Alexander, President of Re/Max Canada, to STOREYS. “I think what that probably means is they’re going to go 50 in December and not 25, but it’s anybody’s guess.”

“We’re desensitized now -- everybody was expecting a hike, and I think there will be some relief because the majority believed it was going to be at least 75 points.”

Adam Jacobs, Senior National Director of Research for Colliers says he’s surprised by the optimism the relatively smaller hike has spurred, pointing out it’s still a significant increase with steep consequences for borrowers.

“I understand that when it doesn’t go to the full level of expectations people react and say, ‘This is a new paradigm, they’re easing up.’ I guess they’re easing up a little, but if this increase happened a year ago, we would have said, ‘Oh my god, this is a nuclear, unprecedented increase.’ Now we’re saying, ‘If it’s not the highest increase ever, then the Bank is easing up.’ In my mind, if they were really pivoting, we would see no increase at all.”

A poll out this week found that 88% of polled economists are expecting another round of hikes, with a baked-in December increase and possible smaller move in January.

That means the rate pain being felt in all corners of the real estate industry -- from beleaguered would-be homebuyers, to commercial developers -- will persist for at least the foreseeable future.

Softer Months to Come for the Residential Market

The impact of rate hikes on the real estate market can’t be understated; both sales and average prices have tumbled across the country since March, with comparisons to the February peak revealing steep declines in Canada’s largest markets. According to the Canadian Real Estate Association, home prices dipped nearly 7% year over year in September, with sales down -32.2%. From late winter, the average home price has plunged by 21.5%, reflecting a dollar loss of $176,241.

READ: Home Prices Could See a Peak-to-Trough Decline of 10% by Early 2024: Moody’s

This downward trend is expected to linger through the winter, says Alexander, though recovery is on the horizon.

“My hunch is it’s going to be late spring, early summer -- call it mid- to late-June,” he says. “The big challenge that we have is inventory is tightening. There is going to come a time when people can’t wait anymore to make their buying or moving decisions. We saw that already in August and a little bit in September, where all those people who were waiting out for a bottom decided to jump in. I think we’re going to see that again towards the late spring.”

He points out that this year’s market declines are in direct comparison to a record-breaking 2021, and that he still hears of multiple offer situations in strong markets, despite interest rates’ impact on buying power. However, rising rates have fuelled demand for the most affordable market entry points.

“Condos have rebounded in a huge way, and that also tells us that Canadians want to buy real estate. The expensive, single-family freehold market is taking the brunt of the rate increase uncertainty, but condos are performing very, very well, and so that is a big indicator that people believe in the long term health of real estate,” he says.

Credit is Tightening Up in the Commercial Sector

On the commercial side, rising rates have made it all the more challenging for developers to get builds off the ground; lenders have grown increasingly wary of funding projects that don’t have an immediate cash flow, says Jacobs. This is especially evident among land deals and land assemblies, where the asset may be held for years before any kind of construction breaks ground. 

“I think there’s still interest in the perceived safe assets. So, apartments and warehouses, just the leasing side of that is so strong -- there’s growth, there’s demand for it, the demographics are in your favour. A lender can still look at that and say, ‘Ok, even if there’s an increase in borrowing costs, there’s still huge potential here. A tenant expires and then you lease it at double what you were leasing it before,” he says. “It’s just the other assets -- office, land, retail -- people are taking a pretty close look at that and trying to bake in a little bit of a downside, I think.”

Lenders have become increasingly picky about the quality of borrowers, as well. “When the market was really roaring, it was, ‘Ok look, most people are able to make a profit out of this, we don’t have to comb over everything, like the board of directors and how long is your company in business, and how could the deal have been done -- basically most people can make this work,’ and now there’s starting to be a pullback,” he says. 

However, a tougher borrowing environment doesn’t spell bad news for all industry players. Entities with lots of cash on hand -- such as REITs -- aren’t as dependent on borrowing, and are benefiting from today’s lower real estate prices.

“They are not so sad about the situation that’s developing,” Jacobs says. “They found it very difficult to do deals during COVID because prices were running up so much and there was so much liquidity because everyone was getting into every asset. And I’ve heard some of them say, ‘This is good for us, we can actually get some properties at a price that we feel is reasonable because we’re not speculating.' The balance of power has kind of changed -- if you really need to borrow with leverage, this is terrible. If you don’t, this isn’t so terrible and you might find yourself on the right side of the market here.”