Here’s How A Higher Inflation Rate Could Affect The Toronto Housing Market

Toronto Housing Market
Photo by Stephan Henning on Unsplash.
Toronto Housing Market
Photo by Stephan Henning on Unsplash.

With everything else going on in Toronto’s housing market — from high rents to an increasingly pricey condo market — inflation rates rarely make headlines. But they could have a bigger impact on the city’s real estate market than you might think.

Canada’s annual inflation rate jumped to 2 per cent in December, according to a new report from Statistics Canada, released on Friday. That’s up from 1.7 per cent in November, though still in line with the Bank of Canada’s target rate of between 1 to 3 per cent.

All of this matters to Toronto homeowners and would-be buyers for one key reason: Higher inflation rates could cause the Bank of Canada (BoC) to hike interest rates in the near future. Higher interest rates practically guarantee that Canadian banks will raise their variable mortgage rates, eating into the pockets of owners and the budgets of buyers.

READ: RBC Lowers 5-Year Fixed Mortgage Rate

Last week, BoC govenor Stephen Poloz chose to keep the overnight interest rate at 1.75 per cent, but noted that interest rate hikes will still be needed in the coming months to keep inflation number in check. The Bank began hiking rates in the spring of 2017, and has done so five times since.

Many economists are in agreement that rising inflation numbers mean that a rate hike is on the horizon — but they’re not sure just when it will come.

“The Canadian economy has ‘been performing well overall,’ but the Bank is also concerned about weaker-than-expected consumer spending and housing investment,” TD senior economist Brian DePratto said in a recently published note. “It is perhaps noteworthy that despite the overall tone of the statement, the conclusion that ‘the policy interest rate will need to rise over time into a neutral range to achieve the inflation target’ was the same as provided with their October hike decision.”

READ: Are Canadians failing the stress test after the interest rate hike?

In other words, while a rate hike is all but guaranteed in the second quarter of 2019, it’s likely still a few months away. National Bank deputy chief economist Matthieu Arseneau wrote that the Bank should be “patient in the coming months” when it comes to the decision, in his most recent note.

Over at RBC, senior economist Josh Nye writes that the economy has been operating at “close to full capacity” for over a year, which means that the Bank will be hiking rates again in 2019, but that it has a bit of leeway as to when it chooses to do so.

READ: 3 Ways Rising Interest Rates Will Affect You And How You Can Prepare For Them

“This inflation sweet-spot gives the BoC time to be patient in raising interest rates,” says Nye. “We think they’ll want to see how the economy is progressing through this latest oil price decline, and expect the current pause in their tightening cycle will extend through their next meeting in March.”

Toronto home buyers may want to take these predictions into account when considering when to enter the market — if the latest reports are any indication, mortgages rates will be going up in 2019, it’s just a question of when.

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