Homebuyers might want to buckle up.

The Canadian housing market may be in for quite another ride in 2022.

Interest rates are widely expected to start increasing next year.

One might expect that higher interest rates will cause housing sales to go down, with lower prices following not far behind.

However, a TD Economics report suggests otherwise.

“Only time will tell, but we are not convinced that higher rates will be enough to prevent another year of elevated sales activity and home price increases in 2022,” states bank economist Rishi Sondhi.

TD Economics released Sondhi’s paper online on December 8, the same day the Bank of Canada announced that it is holding its interest-setting overnight rate at 0.25 percent.

However, the central bank also indicated that it may move rates higher “sometime in the middle quarters of 2022”.

In his report, Sondhi noted, “Given the rapid increase in home prices we've seen during the pandemic (and the attendant erosion in affordability), it's logical to wonder whether looming rate hikes will have a larger-than-normal impact on housing demand, and thus prices, moving forward.”

The economist stated that TD expects three rate hikes in 2022, followed by three more in 2023.

These increases would bring the overnight rate to 1.75 percent from the current 0.25 percent level, which the Bank of Canada has maintained since March 27, 2020 in response to the COVID-19 pandemic.

“Higher interest rates are likely on the way and our rate forecasts imply that they will exert a moderate drag on housing demand,” Sondhi wrote.

“However,” the bank economist continued, “a supportive macro backdrop, alongside stress tests that offer ample room for rates to rise before buyers are crowded out, should keep activity holding above pre-pandemic levels next year.”

Sondhi explained what a “demand-supportive” economic backdrop means.

“Indeed, we expect strong economic, employment and income growth to take place in 2022,” he wrote.

Moreover, “population growth is likely to improve”.

In addition, Sondhi noted that Canadian households are “holding significant excess savings … some of which could be funneled into down payments”.

Particularly, the economist referenced a November 3, 2021 paper by his colleague, Sri Thanabalasingam, which cited estimates of the record amount of household savings during the pandemic totalling as much as $300 billion.

Also, “a large chunk of the Canadian population has aged into what has historically been prime homebuying years”, which are between 25 to 39, and thus “offering demographic support to demand”.

“Finally, expectations of future price gains may continue to stoke demand, by causing potential buyers to act now rather than later,” Sondhi wrote.

As for the mortgage stress test for borrowers, the TD economist noted that its current level is “affording ample room for rates to rise before they start crowding out potential buyers”.

It can be recalled that starting on June 1, 2021, the new mortgage qualifying rate for mortgage applications is based on the higher of either the benchmark rate of 5.25 percent or the rate offered by a lender plus two percent.

Sondhi recalled that rates for variable-rate mortgages were about 1.5 percent in September, and for fixed-rate five-year housing loans, around 2.2 percent to 2.3 percent.

“This would imply that interest rates on variable and 5-year fixed rate mortgages would have to rise by about 175 bps [basis points, equivalent to 1.75 percent] and 100 bps [one percent], respectively, from their September levels before they replaced the 5.25% stress test rate in the qualification process,” Sondhi explained.

He noted that TD expects that increases in mortgage rates will “still fall below the current stress test qualification threshold”.

Overall, these factors are expected to “help keep sales elevated, offsetting the impact of higher rates”.

“And, this healthy demand environment, coupled with the fact that markets are extremely tight, should help sustain positive Canadian average home price growth next year …,” Sondhi wrote.

So the bottom line is that “another strong year for price growth is in the cards for 2022”.