The Bank of Canada has raised its key interest rate to 0.75 per cent from 0.5 per cent, which could lead to more people looking to rent rather than own in Metro Vancouver, says a University of British Columbia economist.
The Bank of Canada's move affects those with debt and also makes it likely consumers will pay more for variable-rate mortgages and lines of credit.
For the rental market in B.C.'s Lower Mainland, it could mean increased rental prices as well, said Tom Davidoff, a professor with UBC's Sauder School of Business.
"The biggest impact is people deciding not to get into the owner market," said Davidoff speaking with guest host Gloria Macarenko during On the Coast.
"People will say, 'I pay less in rent than I would even in interest' … They're going to say 'Forget it, I'm going to keep renting.' "
Davidoff added people may also decide to capitalize on the high interest rate, sell their property, and transition to renting.
He said when people shift from owner units to rental units, it puts an upward pressure on rental prices. A big part of why housing prices have been so high, relative to rental prices, is due to low interest rates, he said.
What about construction mortgages?
Property owners who haven't closed the deal on land they've committed to could see the land pricing go up, said Davidoff.
"A lot of big construction projects in Vancouver are behind schedule," he said. "It's so hard to find labour around Vancouver. Just the delay increases your borrowing costs — now compound that with rising rates."
Davidoff said rates are still extremely low by historical standards and with room for them to get significantly higher it could adversely affect housing prices.
Beyond that, he said increased rates will make it harder for first-time buyers to break into the housing market.
"Banks won't lend to you if you can't qualify based on your income relative to your mortgage payments," he said. "When rates rise it makes it harder for people to get into homes in the first place."
Hear the full intervew with Tom Davidoff:
Despite the rate hike, Davidoff said it's not all bad news.
"The good news is, I think the bank is going to take it slow and steady," he said.
Davidoff said the reason the bank is increasing interest rates is to combat inflation. He said a significant part of why the national economy is doing well is the strong housing markets in Vancouver and Ontario.
"Should those markets start to sputter, I think that takes away a lot of the reason for future rate hikes," added Davidoff.
He said a rate-driven crash in housing markets, while conceivable, is not a likely scenario.
With files from On the Coast