Canadian housing market ‘on its knees’ as odds of Bank of Canada rate hike rise

The Bank of Canada has not raised interest rates since July 2023.

And while an eighth-consecutive hold is widely-predicted next week, a growing number of economists and traders are now expecting the central bank to hike its trend-setting rate to tamp down stubborn inflation.

Mortgage and debt experts say higher rates would have significant impacts on Canada’s sagging real estate market. Payments on variable-rate mortgages would rise immediately, along with rates for new fixed mortgages. The pool of eligible buyers would shrink, shifting power from sellers to those who can qualify for the financing needed to make a purchase. Home prices could dip lower.

“The housing market is kind of on its knees right now, and rising rates is like tossing a drowning guy an anchor,” said Scott Terrio, manager of consumer insolvency at Ontario-based Hoyes Michalos & Associates.

He says a hike “would reverberate massively.”

Could an interest rate hike see home prices fall?

The volume of home sales nationwide is currently at a 25-year low, says Ben Rabidoux of Ontario-based Edge Realty Analytics.

He describes confidence among buyers today as “unbelievably weak across the country,” owing to a slew of economic uncertainties ranging from the Canada-U.S. trade war to the impact of AI on jobs.

“The reality is that when we look at per capita home sales, we’re already back to 1990s levels, which [was] a really terrible recessionary environment.”

On home prices, Rabidoux believes “a gradual grind lower over the next three or six months is very plausible” if interest rates start rising.

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Last week, the Canadian Real Estate Association downgraded its forecast for 2026 home sales activity for a third straight quarter.

The industry group referenced a “notably more hawkish tone from the Bank of Canada,” as it called for 444,530 homes to be sold by year-end, a 5.2 per cent drop from 2025.

The Bank of Canada’s policy rate has stood still at 2.25 per cent since a quarter-point cut in October 2025.

Governor Tiff Macklem has recently warned the bank may need to raise borrowing costs if energy prices remain elevated. On Saturday, he said there is “no resolution in sight for the conflict in the Middle East” that has roiled global energy markets for the past several months. 

On Monday, the latest inflation data from Statistics Canada put a spotlight on soaring energy costs. The report showed rising fuel prices have yet to meaningfully spill into other sectors of the economy. However, the Bank of Canada’s latest survey, also released on Monday, found businesses are bracing for higher prices.

Odds of rate hike ‘not a slam dunk’

The consensus in a recent Bloomberg survey still points to a hold, but so far this week, the Bank of Montreal, RBC Dominion Securities and Desjardins Group have flipped their predictions for Oct. 28 from a hold to a hike.

According to Bloomberg data, traders in the overnight swap market now put the odds of a 25-basis point rate hike from the Bank of Canada next week at 87 per cent, up from 70 per cent earlier this week. Swap market data measures the gap between today’s interest rate and the future rate traders are betting on. 

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Derek Holt, head of capital markets economics at Scotiabank, is among those calling for a rate hike.

“It’s not a slam dunk call, but there is probably enough supporting evidence for a hike,” he wrote in a research note on Monday. 

Macquarie Group economist David Doyle agrees. He predicts the Bank of Canada will raise its policy rate by 125 basis points by the end of 2027.

“Our baseline case remains for a rate hike at this month’s meeting,” he wrote in a note to clients on Monday. “We continue to see a steady rate hike cycle ahead.”

Leah Zlatkin, a licensed mortgage broker and an expert commentator with LowestRates.ca, agrees.

“If there is a hike, I do think it’s gonna be a cycle,” Zlatkin said. 

She points to a recent price drop in the notoriously expensive Greater Toronto Area as a sign that now is a “good time to buy.”

“There’s a possibility [that] housing prices are going to continue falling, but the reality is, if you’ll qualify for the property today, then you’ll qualify again later on if rates rise.”