Just as Canada’s housing market was starting to rebound, the Bank of Canada has dealt it another blow.

We apologize, but this video has failed to load.

Try refreshing your browser, or
tap here to see other videos from our team.

The Bank of Canada just 'stomped' on the housing market rebound Back to video

We apologize, but this video has failed to load.

Try refreshing your browser, or
tap here to see other videos from our team.

Play Video

The bank’s decision to raise its key interest rate 25 basis points to 4.75 per cent on June 7 will put downward pressure on home prices, which have rebounded faster than the bank had expected, according to James Laird, co-chief executive of Ratehub.ca and president of CanWise mortgage lender.

The rise brings the policy rate to the highest it’s been since April 2001.

“The Bank of Canada just stomped on housing sentiment in a way that only it can,” mortgage analyst and strategist Rob McLister said on Twitter, adding that the stress test will get “meaningfully more stressful” for borrowers at the margin.

House prices had started to firm up again in April, when sales increased by 11.3 per cent — the largest monthly rise since 2009.

Benchmark home prices in Toronto increased 3.2 per cent in May to $1.14 million on a seasonally adjusted basis, the biggest increase since the market peaked in February 2022, according to the Toronto Regional Real Estate Board.

Meanwhile in Vancouver, the Real Estate Board of Greater Vancouver said May home sales rose 15.7 per cent from a year earlier, while prices increased for the sixth consecutive month, showing signs of heating up heading into the summer.

Royal LePage chief executive Phil Soper said he was not surprised with the rate hike due to the rapid rise in prices.

He said the rate hike may be the “borrowing straw that breaks the camel’s back” for some people, as it will keep them from buying and they’ll decide just to step back.

“Rising rates have an oversized psychological impact on people buying and selling properties in this country, and so it will create a small stall in the market,” Soper said in an interview.

Variable rate borrowers will feel the pain first. According to Ratehub.ca’s mortgage payment calculator, a homeowner who put 10 per cent down on a $716,083 home, the average price in Canada in April, with a five-year variable rate of 5.55 per cent amortized over 25 years, will pay $98 more per month or $1,176 per year on their mortgage payments with the 25-basis-point rate increase.

“Those with a variable-rate mortgage and home equity line of credit (HELOC) who are already fatigued by rate hikes, will see their interest rate increase further,” said Laird.

The lowest variable rates at present will go up to 6.05 per cent, according to LowestRates.ca. For every $100,000 in a mortgage with a variable rate, this change should result in an increase of approximately $18 per month, it said.

Leah Zlatkin, a mortgage broker at LowestRates.ca, said the rate hike adds to existing financial stress for many mortgage borrowers and hopeful buyers, but there is hope for stabilization at the central bank’s next announcement in July.

• Email: dpaglinawan@postmedia.com | Twitter: denisepglnwn

Listen to Down to Business for in-depth discussions and insights into the latest in Canadian business, available wherever you get your podcasts. Check out the latest episode below: