While the Bank of Canada’s latest increase in its overnight interest rate is a move marked with characteristic caution, a combination of existing factors means that the hike will still make significant waves in the nation’s economic engine, according to Dr. Sherry Cooper of the Dominion Lending Centres.

The BoC’s decision to increase the rate to 1.25%, which marked the third hike since July 2017, pushed the figure to its highest level since the global financial crisis, Cooper said.

“The move comes in the wake of unexpected labour market tightening and strong business confidence and investment. The Canadian economy is bumping up against capacity constraints as the jobless rate has fallen to its lowest level in more than 40 years,” Cooper explained in her latest posting.

Read more: Rate-hike cycle already the most severe in two decades

“Inflation is just shy of the 2.0% target level and wage rates are rising, albeit at a relatively moderate pace,” she added. “Exports have been weaker than expected. NAFTA uncertainty is ‘weighing increasingly’ on Canada’s economic outlook as cross-border shifts in auto production are already beginning.”

Cooper cautioned that consumption and housing will slow as a result of the combination of higher interest rates and new mortgage guidelines.

“Growth of household credit has slowed somewhat since the first half of 2017, even though some households may have pulled forward borrowing in anticipation of the new B-20 guidelines related to mortgage underwriting from the Office of the Superintendent of Financial Institutions (OSFI). This slowing is consistent with higher borrowing costs due to the two policy rate increases in 2017,” Cooper quoted last week’s Monetary Policy Report (MPR) as saying.

Cooper warned that with higher interest rates, the costs of debt servicing will rise, which in turn will put a damper on consumption growth, “particularly of durable goods, which have been a significant driver of spending in recent quarters.”

“Elevated levels of household debt are likely to amplify the impact of higher interest rates on consumption, since increased debt-service costs are more likely to constrain some borrowers, forcing them to moderate their expenditures,” the MPR went on to say.

 James Loewen believes the government has catalyzed the very thing it is trying to prevent with the recent B-20 changes, and the irony isn’t lost on him.

Loewen says that most borrowers will be stuck in the private channel, and will have to walk away from their homes. The resulting supply surge in tandem with diminished demand—the result of a reduction in buying power, estimated to be around 20%—will bring the housing market crashing down.

“It’s ironic because the government purports that they’re trying to prevent an economic crash, people walking away from their houses, but if you can’t qualify under these guidelines, which, definitively more people can’t, there will be more people walking away and selling their house,” said Loewen, broker and owner of Loewen Group Mortgages.

He added that B lenders got hit particularly hard because borrowers now have to qualify 2% above the prime rate. However, most won’t and will be forced into the private channel—a traditionally temporal solution that could have no end in sight for many borrowers.

“They will be inciting the very thing they’re trying to avoid, which is a collapse,” said Loewen. “If I couldn’t qualify at TD or Scotia, I’d go to Home Trust or Equitable for a slightly higher rate than the best rate, but now I probably won’t qualify for that mortgage, so I‘ll have to go private. The risk private lenders are taking is much lower than even six months ago, and we can’t bundle up to 85% loan-to-value inside these government guidelines, so there might not be a solution at all for the client and they might be forced to sell.”

Regarding increased regulation, Loewen doesn’t think that the industry will be subjected to any more in 2018—but, he added, that could change depending on Q1 real estate numbers. For that reason, he hasn’t ruled out an interest rate hike, either.

“The next logical step is for the government to impose or impede on private lending, but they’ve already indirectly affected private lending guidelines,” said Loewen. “The B market lit up over the last two or three years, but that’s hard now, so the private market is lighting up. There is more demand for private lending but there will come a period of time when people realize they can’t afford private money anymore.”