Kids are back to school. Parents are back at work. And the Bank of Canada is back to hiking rates. 

The Sept 7^th hike of 0.75% marks the 5th rate hike since the Bank started raising something called the “overnight rate” this past March. Those hikes have increased the overnight rate from 0.25% in the spring, to 3.25%.  

The overnight rate is also known as the Bank’s “benchmark rate” or “policy rate”, and it’s the main tool the Bank uses to influence the interest rates that commercial banks charge for things like loans and mortgages. (The way it works is a little arcane, but banks borrow and lend money amongst themselves, and from the Bank of Canada, on a daily basis in order to balance their books every night. The “overnight rate” is set by the Bank of Canada and determines the interest rate for this kind of borrowing between them. As that rate goes up, the banks raise other rates for mortgages and loans to businesses and consumers so that the interest rates they charge to borrowers always exceeds the costs of this rate).                               

The bottom line is, as the Bank of Canada’s overnight rate goes up, mortgages rates go up, too. And by making commercial loans, credit card rates and mortgage rates go up, the Bank of Canada effectively cools demand for borrowing. That in turn slows down spending and related economic activity, which ultimately cools inflation, which is the goal in all this. 

 And its working, at least in the Ottawa housing market. It shows up in a variety of statistics, two of which are summarized below.

1. Interest Rates, Asking vs Selling Prices

The first graphic depicts the median listing price of all homes for sale in the Ottawa area over the last 12 months. (“Median” means that half of all places that sold did so at a price above the number referenced, and the other half sold below it). 

What the graphic shows is that until March of this year, the trend was for homes to sell ABOVE their listing price. That phenomenon was particularly pronounced in December last year, when the median asking price was $380k (blue bar), but the median selling price (pink bar) was $435k, fully 15% ABOVE asking prices.

That trend ended the month after that Bank of Canada started to hike rates, in March of this past year. It was only a measly 1/4% rate hike, but that’s all it took. The next month (April of this past year) the trend reversed itself, and places started to sell for LESS than their asking price. 

That trend really picked up speed this summer. In both July and August, the median selling price for all homes was a whopping 25% LESS than the original asking price, and that trend has continued into the first week of sales data for September. 

2. Interest Rates and “Days on the Market”

Another way that interest rate hikes affect the market shows up in statistics that track how long a place is for sale before it actually sells (“days on market”).

The graphic below indicates that in February and March of this year, the median home for sale was sold within 6 days of being listed. Remember from the chart above, that period coincided with the peak in sales above asking price. There is a term for those two trends coming together. It’s called “frenzy”. 

Since the spring, as interest rates have begun to rise, days on market have continued to climb right along with them, as offers dry up because buyers are sitting on the sidelines, in anticipation of further rate rises that make mortgages more expensive, and / or drive home prices down, or both. 

The good news for buyers in all of this is that most observers believe that inflation has peaked. At 7.6% in July, the rate is down slightly from 8.1% in June, which was the highest since the 1980’s (when mortgage rates peaked at 22%!!!). It’s current level is well above where the Bank of Canada would like it to be (about 2%) but as the overall economy slows like the housing market is doing, inflation will fall, and the need for further interest rate hikes may dissipate. 

The (potentially bad news) for buyers sitting on the sidelines waiting for prices to continue falling, is we could be approaching a tipping point this fall. If observers are correct, and the Bank of Canada pauses its interest rate hikes because the economy is slowing down, that will eventually arrest the decline in home prices, and at some point, they will start to rise again. And the maddening thing about the market bottom is you don’t know where it is until you’re past it, looking back!

In the weeks and months ahead, check back here for further updates on the trends in the market, and how these trends are playing out at a more granular, given that they can vary by home type, neighbourhood, price band, or combinations of all three. If you would like further information…