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Raising interest rates to deal with Metro Vancouver home prices has pros, cons: expert

Last Updated May 17, 2021 at 7:55 am PDT

A real estate sign is pictured in Vancouver on June, 12, 2018. THE CANADIAN PRESS Jonathan Hayward

Housing expert says hike in lending rates by the Bank of Canada could keep home prices in check

While there are pros to raising interest rate, housing expert says it can also keep prospective homebuyers out of market

Bank of Canada has said it doesn't anticipate making any moves on interest rates until post-pandemic revival begins

VANCOUVER (NEWS 1130) – A UBC-based housing expert suggests any call to raise interest rates across the country to ease home prices could be a double-edged sword.

Tom Davidoff with the Sauder School of Business says a hike in lending rates by the Bank of Canada could keep home prices in check. However, he says it could also keep prospective homebuyers out of the market and impact job growth.

“The problem with high housing prices is that people can’t afford homes,” he said. “If prices are rising because mortgages make homes affordable, that’s a bit less of a concern.”

The Bank of Canada’s governor has said he doesn’t anticipate making any moves on interest rates until the country begins its post-pandemic revival, which is likely next year at the earliest.

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Davidoff suggests hiking the current rate is probably not necessary at this point, either.

“We’ve got a fundamentally strong market, good incomes, lots of immigration, and very constrained supply,” he told NEWS 1130, adding stress tests by banks are also getting tighter. “The issue with low interest rates is people can qualify to buy a bigger home, but with the stress test, banks, when they lend, are required to make sure that people can make payments at a higher interest rate.”

A recent Nanos survey found that around 70 per cent of Canadians are concerned about the impact high home prices are having on the economy.

Almost half of respondents were in favour of the central bank raising its overnight rate, which has sat at 0.25 per cent for months, in order to address rising home prices. They expressed this support even though doing so would also increase the cost of credit cards and other types of debt.

The Canada Mortgage and Housing Corporation’s recent forecast for the next three years predicted rising prices and tighter budgets for homebuyers, with hopes the local markets will cool.

Sales in the Greater Vancouver housing market have hit record highs in recent months. However, despite surging home sales, the BC Real Estate Association predicts the region could be heading for a pullback next year.

-With files from Martin MacMahon