It’s all a sign of just how important low interest rates have been to Canada’s epic, years-long housing boom — and how little it takes to pierce an overinflated balloon.
Starting in the mid-1980s, Toronto saw an unprecedented housing frenzy, with prices jumping 25% per year for four straight years. When the Bank of Canada reacted to this and began raising interest rates, house prices flattened, and then began to fall, triggering a decline that would go on until the mid-1990s.
During the period of falling house prices, Toronto’s employment rate — the percentage of people with a job — dropped from a record high around 70% to around 60%, Dunning’s research found. The city’s jobless rate rose from 4% in 1990 to a high of 11.4% in 1992, and“At that time there was such a turn in sentiment, and expectations of future price drops combined to hit consumers very hard, very quickly,” Dunning said in an interview.
Moreover, he thinks the Bank of Canada’s fight against inflation may prove to be futile, because of the nature of today’s inflation, which Dunning says is driven by supply-chain disruptions resulting from the pandemic. That’s not something higher interest rates can fix. That was an almost worst-case scenario, with prices falling 40% or more in some markets in California, Florida, Nevada and the US Midwest. But market analysts today largely agree that, whatever Canada is facing today, it isn’t a repeat of that crisis.
So for the vast majority of mortgage borrowers, the shock from higher interest will come slowly, one household at a time, as mortgages are renewed at higher rates. But what this means is there likely won’t be a huge spike in mortgage defaults, like the US saw during its crash, says National Bank economist Matthieu Arseneau.
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