Canada home prices may fall 20% if interest rates rise, regulator warns

As rapidly rising home prices continue to plague markets across Canada, the country’s banking regulator warns that increasing interest rates could spur a steep decline.

During an interview on the Herle Burly podcast, Canada’s Superintendent of Financial Institutions Peter Routledge said that some markets could see home prices fall by as much as 20% when the Bank of Canada raises its benchmark overnight rate.

“My expectation is that, as rates go up — assuming they do — some of that fever is going to abate a little, and you’ll see a slowdown in prices,” Routledge said. “In some markets, where you had a really rapid increase in prices, you could see a fall of 10, 20%, even. That’ll be a return back to, I don’t want to say normal, but a return back to sanity after a sudden buildup in prices.”

“And by the way, we went through that in Vancouver in 2015, 2016, and then Toronto in 2016, 2017, and you’re talking peak to trough declines of 10-20%, so we can absorb that volatility.”

The Bank of Canada dropped its overnight interest rate to a historically low 0.25% in March 2020, encouraging many would-be buyers to purchase homes. This, in turn, increased competition in many markets where inventory levels were already low. The bank has maintained the rate ever since, but increases are expected to come this year, with the next announcement set for March 2.

You might also like:
• These are the cheapest houses for sale in every province in Canada
• What to do when a seller has COVID? Buy the house over Zoom, of course

Routledge’s predictions come in contrast to what many real estate industry leaders have predicted: noticeable, albeit slower, price increases across the country. The Canadian Real Estate Association projected a 7.6% price growth across the country in 2022, predicting the national average home price will rise to $739,495. Royal LePage is forecasting a 12% jump in prices for Vancouver and an 11% increase in the Greater Toronto Area.