Interest rate hike ‘not enough’ to cool Hamilton housing market

A hike to Canada's interest rate is likely not enough" to take the edge off Hamilton's already overheated housing market, according to experts.

The Bank of Canada announced this past week that it was raising its key overnight lending rate by a quarter of a percentage point to 0.5 per cent, as it attempts to fight inflation driven higher by everything from energy prices to supply-chain woes caused by the COVID-19 pandemic.

Several banks soon followed with increases to their prime rates, which in turn affect the rates paid by consumers with variable rate mortgages and lines of credit.

It is expected to be the first in a series of incremental quarter-point hikes that could put that key rate at 1.75 per cent by the second half of next year.

But with supply continuously playing catch-up with demand in Hamilton, Lou Piriano, president of the Realtors Association of Hamilton-Burlington (RAHB), expects very little to change in the city housing market.

Piriano said the adjustment will reduce the pool of eligible buyers," but the question remains if those other prospective buyers will be enough to keep prices where they are.

Last month, the average sale price of a detached home in Hamilton was $1,134,153 - marking a new record for the city.

If you have 15 offers on a property, it's reasonable to think two or three of them might drop out because of the interest rate," he said. That still leaves you with 12 people bidding on that property."

Piriano said that when interest rates climb, demand on the market tends to drop. The same goes for prices, described as having an inverse relationship" with interest rates.

Even then, what could happen is still a mystery.

You'd need a crystal ball to figure it out," said Piriano.

Boyce Collins, principal broker at the Personal Mortgage Group, said the interest rate bump will likely not mean a whole lot" when it comes to people's ability to borrow and buy. And that's all due to the stress test.

That test requires homebuyers to qualify for a loan of 5.25 per cent, more than their lender actually charges. That means buyers have already been qualified for a higher rate than they actually have to pay.

Collins said for those on less-costly variable rate mortgages, it will likely take five to six hikes of the interest rate for their rate to be on-par" with a fixed rate they would have locked into Day 1 had they chosen that route

It's not something to get super anxious about," said Collins, noting that even if a client does get weary, they can always pivot" to a fixed-rate mortgage.

What is certain is that those who have yet to enter the housing market will likely feel the greatest pinch, according to Piriano.

First-time homebuyers are usually younger and typically have lower salaries, while those who already own their home have likely accumulated equity and their mortgage is lower in comparison to the value of their home.

But for Toronto writer Mary Jennifer Payne, who is hoping to buy a house in Hamilton, the situation has become precarious. Even with a condo that has garnered a fair amount of equity" under her belt.

Payne said her condo requires renovations before sale, which are not only costly but will also take time. With prices in Hamilton growing every month (she began looking last year) and with rates set to climb, she said a move is looking less and less feasible."

I'm already in the market, which is such a better position," said Payne. But I'm kind of shocked that it really looks like I probably can't own a house there."

Fallon Hewitt is a reporter at The Spectator. fhewitt@thespec.com