The Bank of Canada’s latest move to cut interest rates could spur increased buying activity in the real estate market, experts say, but some buyers may wait for the last rate decision of the year.
On Wednesday, the Bank of Canada moved to lower its key policy rate by 50 basis points to 3.75 per cent. The outsized rate cut was done in response to recent inflation data and the central bank says its focus has changed from lowering inflation to maintaining its inflation target. The move marked the central banks fourth consecutive cut since June.
Phil Soper, president and CEO of Royal LePage, said in a statement to BNNBloomberg.ca Wednesday that activity in Canada’s housing market has been “sluggish” across many regions due to elevated borrowing costs, “but today’s more aggressive cut to lending rates could cause the tide to turn quickly.”
“With every cut to the overnight lending rate, more homebuyers are expected to come off of the sidelines. In turn, rising demand will cause home prices to increase more rapidly, eliminating the advantages of lower borrowing costs,” he said.
Soper added that following the rate cut an “early spring market is on the cards.”
Victor Tran, RATESDOTCA mortgage and real estate expert, said in a statement to BNNBloomberg.ca Wednesday that following the rate cut, the question becomes whether it will be enough to “shift the holding pattern in the housing market.”
“While this will likely encourage some buyers to enter the market and may encourage more sellers to list in anticipation of these buyers, it’s likely that many will wait for the final rate announcement of the year before making a move. Buyers are worried about moving ahead before the market bottoms out,” he said.
Tran added that the issue is no one can predict what will happen in the market with any degree of accuracy, noting buyers aren’t able to time their purchase.
Leah Zlatkin, licensed mortgage broker and LowestRates.ca expert, said in a statement to BNNBloomberg.ca Wednesday that the recent rate cut could bring buyers off the sidelines.
“The combination of a 50-basis point rate reduction and the impending mortgage rule changes in December creates an opportune moment for buyers to make their move. With an abundance of properties available, the current market conditions are exceptionally favourable for potential homebuyers,” she said.
According to Zlatkin, buyers waiting for further rate cuts may be entering a hotter housing market.
“Once rates decrease to a point that the majority of buyers are comfortable with, the housing market will heat up quickly and prices will rise at the same time. Potential buyers should consider buying now if they can and take a higher rate for a shorter-term length to get into the market,” she said.
Three previous rate cuts from the Bank of Canada were not sufficient to bring homebuyers off the sidelines, however Wednesday’s more aggressive move will provide an affordability boost to some, Clay Jarvis, a spokesperson for NerdWallet Canada, said in a statement to BNN Bloomberg Wednesday.
“We probably won’t see the market roar back to life. Thanks to the stress test, buyers with their hearts set on a variable (mortgage) might not be able to qualify until after another cut or two,” he said.
If buyers in larger markets elect to delay purchases until the new insured mortgages rules take effect, Jarvis said we may not see an uptick in home sales until December or January.
Rate path
Going forward Alana Riley, the head of mortgage, insurance and banking at IG Wealth Management, said in a statement BNNBloomberg.ca that more cuts are expected in 2024 and 2025.
“These rate decreases are anticipated to help mitigate the sticker shock for homeowners facing higher rates upon renewal,” she said.
“Shelter price inflation has remained high, driven by rent and mortgage interest costs, and continues to be the largest contributor to overall inflation in personal budgets.”
‘Psychological shift’
Tran added that any significant uptick in sales activity or home prices would likely signal to buyers that they should act fast. He said the market may see a “psychological shift in the coming weeks.”
“But once the market begins to move, it’s likely to heat up quickly, pushing home prices higher. This may lead to an unseasonably busy winter season, and a busy spring season in 2025,” Tran said.
Mortgages
Tran added that the reduction in borrowing costs Wednesday is “good news” for homeowners with an upcoming mortgage renewal in next the 12 to 24 months.
“Though the renewal rates are still likely to be higher than the mortgage rates they currently hold, the increase will likely be more manageable than it would have been at the beginning of the easing cycle,” he said.
Penelope Graham, mortgage expert at Ratehub.ca, said in a statement to BNNBloomberg.ca that following Wednesday’s rate cut, prime rates will likely fall to 5.95 per cent at most lenders.
“Those with variable mortgage rates will see either their monthly payments, or the portion of their payment that services interest, fall in kind,” she said.
“Bond markets had largely priced in today’s half-point cut, with five-year yields hovering around the 2.9 per cent range in recent weeks. However, we may see downward pressure for fixed mortgage rates should yields drop in response to today’s announcement.”
Riley also noted that the rate cut is positive news for households in Canada with high amounts of debt.
“With lower prime rates, homeowners with variable-rate mortgages and fixed payments will see a higher portion of their payments going towards the principal amount of their mortgage. Those with variable mortgage payments or HELOCs (Home Equity Lines of Credit) will experience a decrease in their total payments,” she said.
“However, for fixed-rate mortgages, the October rate cut is unlikely to result in a significant change in fixed mortgage rates, as they are priced based on government bond yields.”
With files from the Canadian Press