The Bank of Canada’s recent decision to raise its key interest rate sets the housing market up for an even bigger correction next year, says a BMO Capital Markets economist.
Robert Kavcic pointed out that last week’s surprise one-percentage-point hike in the Bank of Canada’s key rate had the effect of a crushing blow on the housing market. In a note to investors, Kavcic said the hike, which prompted commercial banks to raise prime rates, made it harder to qualify for a mortgage under Canada’s stress test rules. .
The stress test imposed on borrowers to verify their eligibility for an uninsured mortgage sets the qualifying rate at the contract rate plus two percentage points or 5.25%, whichever is greater.
Kavcic notes that before the policy rate hike, variable rate borrowers still qualified with a rate of 5.25%, but that rate has now dropped to around 6%, which he considers “a huge pill for the market to swallow”. Fixed-rate borrowers qualify around 7%, which he says will also eat into their purchasing power.
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