The Bank of Canada’s rate hike Wednesday is set to translate to higher borrowing costs for homebuyers, adding further pressure as the real estate sector also copes with rising prices for construction materials.
The central bank raised its benchmark interest rate by a quarter-point to 2.5 per cent, the first increase in more than three years, as it warned that inflation driven by the war in the Middle East is likely to spread.
“There’s a number of things weighing on housing right now,” the bank’s senior deputy governor Carolyn Rogers told reporters, as she described a “subdued” outlook for the sector.
“Certainly, borrowing rates are currently weighing a bit on the housing market. An increase will add to that a bit on the margin, so I think the outlook we’ve got for housing in the forecast here takes all of that into account.”
The big question is whether the central bank’s move is a one-time adjustment or the start of a sustained tightening cycle, said Phil Soper, president and CEO of real estate firm Royal LePage.
He said the sector’s “prolonged weakness is already weighing on economic growth, and higher borrowing costs will only deepen that challenge.”
Shawn Zigelstein, a broker for Royal LePage Signature Realty, said he believes the rate hike won’t have a major effect on consumer confidence just yet.
“It’s not like we are in a market like we were back in 2022 where the prices are increasing substantially on a regular basis,” he said in an interview.
“A quarter-point adjustment really shouldn’t make too much of a difference on someone’s mortgage payments at this point.”
The central bank’s key policy rate had held steady for nearly a year following a series of cuts. Inflation ticked up to 3.1 per cent in September due to high gas prices, and the bank said an increase to the rate is necessary to reduce the risk that elevated energy prices spill over to other goods and services.
Zigelstein said clients he speaks with are more concerned about other day-to-day costs and whether the overall inflation environment makes it the right time to buy a home.
“They have been worried about other factors, including tariffs and such. Are they going to have the jobs that they had? Are their investments going to do what they’ve been doing? So they’ve got bigger concerns than worrying about interest rates,” he said.
“Now, of course, if the rates start to change a little bit, then we will start to see potentially a little bit of a pullback on what people are spending because borrowing costs will be higher.”
While Canada “is not facing a broad mortgage crisis,” there are signs of financial pressure concentrated in specific regions such as the Greater Toronto and Hamilton Area and southwestern Ontario, said Aled ab Iorwerth, deputy chief economist for Canada Mortgage and Housing Corp., earlier this week.
He said trade tensions are weighing on key manufacturing sectors such as the automotive industry in those areas, leading to labour-market uncertainty and softer housing market conditions.
CMHC said Ontario’s mortgage arrears rate reached 0.32 per cent in the second quarter, which is still below historical peaks but expected to continue rising through mid-2027. British Columbia and Atlantic Canada are expected to see a more moderate rise in mortgage arrears over the same period.
“The mortgage system is adjusting, but these early warning signs, particularly in parts of Ontario, need to be monitored closely,” ab Iorwerth said in a news release.
Don Kottick, president of Re/Max Canada, said that while an interest-rate increase “may give some buyers pause,” more balanced market conditions in many regions are creating opportunities for buyers, including greater choice and room to negotiate.
In September, the national average sale price fell 1.6 per cent year-over-year to $666,538, according to the Canadian Real Estate Association. National home sales were down 7.7 per cent from the same month last year, as the association cited higher fixed mortgage rates and the Bank of Canada’s “notably more hawkish tone.”
Fixed rates are largely unaffected by the Bank of Canada’s decision, having already moved higher in recent months in line with the bond market. But further movement in the bond market into 2027 could prompt mortgage costs to jump, which “would have a dampening impact on home purchases,” said Michael Waters, CEO of Minto Group, a real estate developer.
“Higher rates, everything else held equal, will reduce levels of purchaser activity for anything durable of size — cars and houses, certainly,” Waters said in an interview.
“The housing sector is very slow right now and so that obviously would be a concern for anyone in that sector.”
Meanwhile, the central bank said Wednesday that higher energy and import costs are expected to raise the costs of housing construction and maintenance through higher prices for materials and equipment.
Any increase to the cost of credit will also have an effect on the ability to build new projects, particularly new housing and supporting infrastructure, said Nicole Emmett, vice-president of communications, marketing and member services for the Canadian Construction Association.
“A home isn’t a home without the roads, sewers and watermains that support it, and higher borrowing costs put pressure on the margins of the contractors building them, which are already stretched by global supply chain disruptions and material costs,” she said in a statement.
“Many contractors also rely on financing for equipment, materials and day-to-day operations.”
Waters said higher interest — construction loans are based on a floating rate — along with rising input costs “will squeeze margins” and potentially lead to fewer large-scale project completions in the coming years.
“Certainly projects are far more challenged today than they would have been six months ago, pre-Iran war,” he said.
“The impact would be fewer projects meeting economic feasibility tests and more projects probably sitting idle until market conditions improve, so that could have a negative impact on the creation of new housing supply.”
This report by The Canadian Press was first published Oct. 28, 2026.
Sammy Hudes, The Canadian Press