Canadians will have to adjust their expectation of what a normal mortgage rate level looks like going forward, one economist says.

Speaking with BNN Bloomberg on Friday, BMO Capital Markets’ senior economist Robert Kavcic said the rates Canadians have gotten used to since the 2008 financial crisis are much less than what they will be moving forward.

“This is an adjustment we’re going to have to make as homebuyers and investors. A lot of people were lulled into the belief that what we saw over the last decade was normal, I would argue that the interest rate levels we saw post-financial crisis through the early days of the pandemic were the exception, not the norm,” said Kavcic.

The Bank of Canada resumed its rate hiking cycle earlier this month, boosting the main lending rate in Canada to 4.75 per cent. Kavcic acknowledges this is a high level, but stands firm in his belief that rates will stay above two per cent.

“Five to six per cent lending rates are very restrictive and high, but don’t sit on the edge of your seat and hope we’re going to go back to two per cent or below mortgage rates in the next couple of years,” Kavcic said. “Maybe neutral mortgage rates now are even 100 basis points higher than what we were used to last cycle.”

MOMENTUM COULD SLOW THIS SUMMER

For those looking to buy a house, Kavcic believes demand levels seen over the past couple of months could start to moderate.

“Momentum is going to be tested in the housing market as the Bank of Canada came off the side lines and raised rates in June,” Kavcic said.

He is weighing consumer psychology against demand levels to predict the market’s next move.

“There’s a big psychological component to this market because it started to accelerate almost the minute the Bank of Canada said they’re done raising rates,” Kavcic said. “Who wants to jump into the housing market and pay a million dollars for an average priced home when it’s falling at a 20 per cent rate?”

“Now that the Bank of Canada is tightening again, I think you’ll be seeing that psychology cool off and you’re probably going to see some listings linger on the market a little longer throughout the summer and take some momentum out of the price gains we’ve seen.”

However, Kavcic is worried high population growth is boosting demand and will challenge the psychology of homebuyers looking to stay away from a higher rate market.

“End of the day we still have the strongest population growth we’ve seen since at least [since] the early 1970s. Those new families and Canadians need a place to live and we just physically cannot meet that demand with supply,” said Kavcic. “Fundamental demand will come to a bit of a stalemate with consumer psychology in the second half of this year.”

THE ROAD AHEAD FOR HOUSING SUPPLY

When it comes to boosting housing supply, Kavcic doesn’t think accelerating new build projects is the answer.

 “It’s just not the solution, it’s a noble and commendable goal but it’s just not something we can come to,” said Kavcic. “The industry is already operating at 100 per cent capacity with employment rates at a record low in construction. To think that we can double output from a level that is already fully stretched seems like an ambitious goal and I don’t think we’re going to get it.”