Home prices under ‘full-scale attack’ as interest rates, taxes rise: economist

Home prices across the country could drop as the Bank of Canada ratchets up interest rates and provinces target real estate speculators, a BMO analyst projects.

The Bank of Canada’s path to rising interest rates coupled with new provincial taxes on non-resident buyers could send home prices down more than 10 per cent, according to an analyst with the Bank of Montreal.

BMO senior economist Robert Kavcic wrote in a note to clients Wednesday morning that “there is now a full-scale attack on Canadian home prices across various levels of policy.”

He cited marked expectations of surging interest rates in the months ahead and new or higher taxes on real estate speculators and non-resident buyers in some provinces as the biggest factors that could see home prices take a hit in the year ahead.

Reuters reported this week that money markets are betting the Bank of Canada could raise its key overnight rate target by up to 225 basis points before the end of 2022.

To do so, the central bank might take the rare step of raising interest rates by half a percentage point at its next meeting on April 13. BMO is expecting 50-basis-point hikes in the next two Bank of Canada announcements, followed by a return to 25-basis-point hikes in July.

The Bank of Canada first hiked interest rates by a quarter percentage point earlier this year, a move that some observers say has already had a “cooling effect” on the country’s hot housing market.

In an interview with Global News on Wednesday, Kavcic said it’s arguable that the Bank of Canada is “well behind the curve” on raising interest rates as inflation surges and home prices continue to set records.

“Because of that, they’re going to move quickly,” he says. “That’s the single biggest measure we can take here to cool down the pace of home price growth and inflation more broadly.”