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The Bank of Canada’s latest rate hike could trigger an even “deeper” housing market correction within the next year, affecting different parts of the country more profoundly than others, economists suggest.

Robert Hogue, assistant chief economist at RBC, said in a Friday report that the BoC’s latest rate hike will “no doubt” chill the housing market even more in the coming months. The Canadian Real Estate Association reported Friday that June home sales were down 24% compared with the previous year and prices dropped 1.9%.

Hogue said RBC projects home sales to fall 34% by early next year and for benchmark prices to decline by 13%.

“Higher mortgage rates will spoil or delay homeownership plans for many buyers, especially in British Columbia and Ontario where affordability is particularly stretched,” Hogue wrote.

“The prospects for further rate hikes — we believe our central bank will raise its policy rate to restrictive levels by the fall — will deepen the correction in both provinces, and broaden it to other parts of the country,” he said.

BMO senior economist Robert Kavcic wrote in a report released Friday that the Bank of Canada’s 100-basis-point hike last week “sets us up for an even deeper correction in housing through next year.”

Variable mortgage rates now sit at around 4%, he wrote, an increase from about 1.5% at the beginning of this year. Five-year fixed rates remain around 5%.

“Moving a variable rate up from 1.5% to 4% with a fixed payment would effectively increase the amortization from 25 years to 45 years,” Kavcic wrote. “Another 50 basis-point rate hike in September would take that above 60 years — many will reach the point where payments are no longer taking down principal.”

Borrowers coming off five-year fixed rates at around 3% will face a monthly payment increase of roughly 15%, Kavcic noted.

The BoC rate hike has also moved the goal posts in terms of stress test requirements. Prior to the hike, variable-rate borrowers were qualifying at 5.25%, Kavcic said. However, that has changed to around 6%. Fixed-rate borrowers are now qualifying at around 7%.

“Unlike previous rounds of tightening, this move now also begins to carve into purchasing power on paper,” he wrote.

Although the cost of borrowing remains low compared to rates seen in the late 1980s, Kavcic noted going from 1.5% at the start of 2022 to the around 4.5% on the same loan value would “crank” the monthly mortgage payment by roughly 40%, “making the current episode an even more abrupt shift than the late 1980s.”

Kavcic said fear of missing out had done a lot to drive recent increases in housing prices.

“Indeed, the proof is that even just an initial nudge in interest rates was enough to crack expectations and trigger a correction,” he wrote. “The latest move by the Bank of Canada will wash away any remaining froth.”