Canada's Housing Bubble

Mar 19, 2010

The expected rise in interest rates will quickly reduce affordability in Canada

From: The sudden rally in Canada’s residential real estate market is surprising and troubling

If we combine our scenario of rising interest rates with the Desjardins affordability index, we can see the extent to which the affordability of properties is likely to diminish in the years to come, assuming that the other variables of the index remain constant. Higher interest rates could discourage prices from rising, causing them to stagnate or even decline. The current deviation between the actual price and the estimated equilibrium price could easily be absorbed, but if that deviation widens further in the next few months, the adjustment might happen either gradually or quite abruptly, depending on the impact of higher interest rates on the estimated equilibrium price.

Despite rising prices, the low interest rates make the Canadian real estate market relatively affordable