Latest rate hike unlikely to cut house prices

"It's one of these things where the individual changes don't matter that much but now in the aggregate we are starting to get to a change that would have an effect," said Tsur Somerville, director of the UBC Centre for Urban Economics and Real Estate.

For example, a purchaser who bought a $450,000 house with 10 per cent down and a variable mortgage rate would pay $61 more a month after the latest increase. But since last August -- when the bank's rate was 2.5 per cent -- that homeowner would be paying $240 a month more, Somerville said.

If the Bank of Canada increases its overnight rate again -- which is expected to happen at least once and probably twice before the summer, which would bring the rate to 4.0 per cent -- the same homeowner could be facing monthly payments that are $360 higher than a year earlier, he said.

The Bank of Canada increased its rate on Tuesday, one of eight pre-specified dates each year set aside for announcing monetary policy. Canada's major banks immediately followed suit by raising their prime lending rate to 5.25 per cent.

In setting the rate, Canada's central bank said in a news release that it anticipated "some modest further increase in the policy interest rate [in order] to keep aggregate supply and demand in balance and inflation on target over the medium term."

But the rise in interest rates, and the resulting increase in mortgage payments, won't necessarily translate into lower house prices in British Columbia, said Cameron Muir, a senior market analyst with Canada Mortgage and Housing Corp.

The rise in rates may even increase demand for houses in the short run as people rush to take advantage of pre-approved mortgages rather than risk higher rates in the future, Muir said. But in the longer term, there should be little noticeable effect.

"A quarter-point increase is not going to be enough to reduce demand for housing given the fact that our economic fundamentals are doing so well," Muir said.

Benjamin Tal, senior economist with CIBC World Markets, says the rate increases have to be kept in perspective.

Even if the bank raises rates another 50 basis points, that's still well below the previous peaks of six per cent in 2000 and eight per cent in 1995, Tal said.

"In every cycle in the past 30 years the peak is much lower than the previous peak," Tal said. "The peak now is almost the bottom in the previous cycle."

But while consumers will not "suffer considerably" Tal believes the interest rate increase will cause a slowdown in consumer spending and consumer credit and a moderate increase in bankruptcies..

But rates would have to increase another 150 basis points "to shock the consumer."

"That's when mortgage rates get into dangerous territory," he said. "[But] I think the bank will stop much much much before that."

In fact, after another increase or two, Tal predicts that rates will be cut again in 2007.

(prepared by Fiona Anderson/Vancouver Sun)

PEAKS AND TROUGHS:

As interest rates creep up, they are still a lot lower than Canadians have seen in the past. Here are the peaks and troughs in the Bank of Canada overnight target rate over the last 10 years:

Jan. 1, 1996 5.78%

Nov. 8, 1996 3.0%

Aug. 27, 1998 5.75%

May 4, 1999 4.5%

May 17, 2000 5.75%

Jan. 15, 2002 2.0%

April 15, 2003 3.25%

April 13, 2004 2.0%

UP AND AWAY:

Since September 2004, the Bank of Canada has increased its overnight target rate six times, including Tuesday.

Sept. 8, 2004 2.25 per cent

Oct. 19, 2004 2.5 per cent

Sept. 7, 2005 2.75 per cent

Oct. 18, 2005 3.0 per cent

Dec. 6, 2005 3.25 per cent

Jan. 24, 2006 3.5 per cent

Source: Bank of Canada

RATE EXPECTATIONS:

$61: Increase in monthly mortgage payments under new rate for a homeowner who paid 10% down for a house costing $450,000 and took out a variable mortgage.

$240: The amount by which that same homeowner's monthly payments have risen since August.

$120: Mortgage payment increase the homeowner would face if rates rise twice more as predicted.

$360: Mortgage payment increase since August if rates rise twice more as predicted.

Source: Tsur Somerville/Sauder School of Business