A record number of homes were sold in Canada in October 2016 and prices are high.

A record number of homes were sold in Canada in October 2016 and prices are high.
Photo Credit: Graeme Roy/Canadian Press

Housing prices could plummet if interest rates go up

While it says it’s not likely to happen, Canada’s federal housing agency says a hike in interest rates could cause the average price of a house to drop 30 per cent. The Canada Mortgage and Housing Corporation (CMHC) ran stress tests involving extreme scenarios on its mortgage insurance business and securitization businesses.

In one scenario, interest rates went up one percentage point during this year, followed by a 1.4 percentage point hike next year. Under these conditions, the CMHC found its mortgage insurance business would lose $1.13 billion. It could however, withstand such loss.

Rates went up this week

Two of Canada’s biggest banks did raise mortgage rates from between 0.05 and 0.4 per cent this week. But housing rates are so high and homeowners have such a high level of debt, there is concern that further interest hikes could burst the housing bubble.

Interest rates have generally dropped over the past decade, but soared in the 1980s. They currently range in the two-to-three per cent range depending on the length of the loan. In 1980, the mortgage rate soared to 16.75 per cent.

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