Interest-rate hike unlikely to cool Montreal’s sizzling housing market: experts

“Demand is so strong right now — and inventory so low — that the overall effects will be limited. The market will continue to favour sellers.”

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Higher interest rates might soon push some would-be homebuyers to the sidelines — but don’t expect Montreal’s red-hot housing market to cool down significantly anytime soon.

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The Bank of Canada on Wednesday raised its benchmark interest rate by half a point to one per cent and promised further increases in a bid to ward off soaring inflation. Wednesday’s move represents the biggest single hike in borrowing costs since 2000.

Along with dwindling supply, historically low interest rates are one of the factors that have propelled property prices to new highs. The median price of a single-family home in Greater Montreal jumped 20 per cent in the first three months of 2022, according to data compiled by the Quebec Professional Association of Real Estate Brokers. Across Quebec, first-quarter housing prices advanced 21 per cent on average amid a dearth of available properties.

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“We don’t see today’s rate increase as having a major short-term impact on the market,” Dominic St-Pierre, vice-president and general manager of Royal LePage for Quebec, said in a telephone interview. “It is probably going to drive some people out of the market, but demand is so strong right now — and inventory so low — that the overall effects will be limited. The market will continue to favour sellers.”

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Wednesday’s increase, the Bank of Canada’s second in as many months, “won’t put properties back on the market, but it’s going to make buying a home much harder at a time when the cost of living is accelerating,” Charles Brant, QPAREB’s head of market analysis, said in an interview. “First-time buyers are probably going to be the hardest hit because they have to amass enough money for a down payment and support monthly mortgage payments. So there will probably be fewer people on the market as a result of this.”

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Not only does the Bank of Canada’s move “impact people who are trying to get into the market, but also people who hold any sort of variable-rate product” such as mortgages or home equity lines of credit, said Sung Lee, an interest-rate expert and licensed mortgage agent at the comparison website Ratesdotca. “A significant amount of people will be affected.”

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The half-point rate hike will boost monthly payments for the average Quebec homeowner with variable-rate debt by $53, Lee said. The average mortgage in Quebec was about $220,000 in the fourth quarter of 2021, according to Canada Mortgage and Housing Corp. data.

Rising property prices during the first quarter already reflected homebuyer expectations that interest rates were headed higher, said Brant. Many shoppers went house-hunting equipped with bank pre-approvals and reserved mortgage rates, he said.

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Active home listings remain in rock-bottom territory. Some 9,759 Greater Montreal properties were listed for sale in the Centris database as of the first quarter — 13 per cent less than in the same period a year ago.

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As of Wednesday morning, Centris showed about 40,000 houses for sale across Quebec. That’s less than half of the more than 85,000 that would normally be expected to be on the market at this time of year, St-Pierre said.

This persistent lack of supply has led to a change in consumer behaviour that will be hard to reverse absent a sudden surge in new home construction or a recession, St-Pierre said.

“Typically, people who were looking to buy a home would start by putting their house on the market, but this is not what’s happening,” he said. “Nowadays, people start looking for a house before they even list their property, which creates even more scarcity. We’re stuck in a vicious circle that we’re going to have trouble exiting.” 

That’s why St-Pierre said he’s advising clients who want to sell their property to specify an occupancy date that’s sufficiently remote — say, six months away — so that they have enough time to find a new home.

“People are worried they won’t be able to find another home,” he said. “You have to take that into account.”

Royal LePage recently revised its full-year forecast to reflect the first-quarter surge in prices. The brokerage firm now expects property prices in Greater Montreal to climb 10 to 12 per cent for all of 2022, up from 8 per cent previously.

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