Metro Vancouver and the Fraser Valley have seen a massive run up in home prices during the pandemic, but our country’s banking regulator is warning rising interest rates could prompt a reversal in some markets.

Peter Routledge is the head of the Office of the Superintendent of Financial Institutions (OSFI). Speaking on The Herle Burly podcast, he says some markets could see home prices fall by as much as 20 per cent if and when the Bank of Canada raises its benchmark overnight rate.

However, given how quickly home prices have gone up, he wants that put in context.

“And my expectation is that as rates go up, assuming they do, some of that fever is going to abate a little and you’ll see a slowdown in prices. In some markets, where you had a really rapid increase in prices, you could see a fall of 10, 20 per cent even,” he explained on the podcast.

“But that’ll just be a return back to … a little bit more sanity after a sudden build up in prices. And by the way, we went through that in Vancouver in 2015, 2016, and then Toronto in 2016, 2017, and you’re talking peak to trough declines of 10 to 20 per cent, so we can absorb that volatility.”

The OSFI is an independent agency of the federal government. It was set up to ” protect depositors, policyholders, financial institution creditors and pension plan members while allowing financial institutions to compete and take reasonable risks,” according to the office’s website.

Routledge’s comments are in contrast to real estate industry groups which project slower price growth in 2022 — but not declines.

Just this week, the BC Real Estate Association forecast home prices around the Lower Mainland will go up as much as 8.5 per cent in some areas this year.

The BCREA’s latest forecast suggests home sales will slow in 2022. However, the lack of supply across Metro Vancouver and the Fraser Valley remains one of the biggest factors at play when it comes to upward pressure on prices in the coming months.

“We started the year at an all-time low in terms of listings. There’s just not a lot of product out there to buy. Demand is still pretty strong and that means a lot of upward pressure on prices,” said BCREA chief economist Brendon Ogmundson.

The Real Estate Board of Greater Vancouver notes the effect low supply has had on prices recently, saying on Wednesday that the “listing inventory on MLS® is less than half of what would be optimal to begin the year.”

“As a result, hopeful home buyers have limited choice in the market today. This trend is causing fierce competition for a scarce number of homes for sale, which, in turn, increases prices,” REBGV economist Keith Stewart said.

The BCREA forecast estimates the combination of higher fixed interest rates and higher variable rates will eventually soften demand in the market, though it does not foresee this happening until at least the second half of 2022 or even 2023.

The Bank of Canada decided in January to keep its key interest rate at 0.25 per cent, signaling a potential hike in March.

If the rate rises, people with fixed-rate mortgages won’t see an immediate impact. However, those with variable mortgages could see payments increase by hundreds, if not thousands, of dollars per year if the central bank increases its overnight rate by a quarter percentage point at a time.

Some economists have said they see rates rising through this year and the next.

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Source:  City News