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With national home prices treading water, real estate inventory growing and housing affordability still atrocious, last month’s quarter-point rate cut from the Bank of Canada, while helpful, was the economic equivalent of bringing a butter knife to a gunfight.

Canadian real estate and overleveraged borrowers need a bigger saviour. A measly 25-basis-point drop in average mortgage rates only translates into a little more than two per cent improvement in payment affordability (home buying power). Hence, the psychological boost from the bank’s initial cut of the cycle can only take the market so far.

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What real estate really needs is to wake up the sleeping giants — sidelined buyers. And, make no mistake, they’re there. On top of domestic housing demand, Canada has seen its population rise by a record 1.27 million in the 12 months through June 30, 1.06 million in the period before that, and 0.54 million in the 12 months before that.

All told, we’ve added 2.87 million new housing seekers in three years. That’s more than the entire population of Manitoba and Saskatchewan combined, according to official estimates from Statistics Canada.

So, when will rates drop enough to save borrowers’ wallets and keep home prices buoyant?

For all economists know, average mortgage rates might need to drop 100-plus basis points (bps) to counterbalance economic headwinds like rising unemployment.

Since the dawn of inflation targeting, there have been five rate-cut cycles of at least 100 bps (in 2015, the Bank of Canada dropped only 50 bps). It’s an admittedly small sample, but in those instances, it took the central bank 3.2 months, on average, to ease 100 bps.

Typically, when the bank sees reason to cut, there’s ample cause for follow-through. But this time around, our central bankers are more wary due to sticky inflation.

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It’s worth noting that a widening gap between Canadian and U.S. rates, while harmful for our loonie, is not enough reason to stop easing. History has shown that the Bank of Canada’s policy rate can veer off on its own path for several months. Our overnight rate was 250 bps below the Federal Reserve’s in 1997, for example, albeit under different circumstances.

Now, by no means should anyone rely on history repeating and Canadians getting 100 bps of cuts by September. It can’t be totally ruled out, but inflation is still too unpredictable, as evidenced by last week’s disappointing uptick in consumer price index growth. Forward rate data from CanDeal DNA show markets expecting that it could take until April of next year for the next 75 bps of cuts. That’s like waiting for spring in a Winnipeg winter — it’s going to come, but not as soon as you’d like.

What’s the holdup on cuts?

Unfortunately, the economy needs to slow further to get the rate relief that so many people are praying for. That takes time. In fact, with all the hangover from fiscal stimulus, lingering wage pressures, global trade frictions, sticky services inflation, and so on, it could take longer this cycle.

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That makes Friday’s Canadian and U.S. unemployment reports all the more pivotal. The Bank of Canada and the Fed want to see a looser labour market for reassurance that consumption and price pressures will ease. And so far, that seems to be happening. On our side of the border, total full-time employment appears to be peaking for the key 25 and over demographic. That’s despite Canada’s immigration levels being higher than Snoop Dogg at a house party.

In the meantime, borrowers should batten down the hatches in case we need to ride out this rate storm longer than expected. Each month that goes by, however, heavily leveraged Canadians feel more squeeze from a policy rate that’s still 300 bps above its 20-year average. Barring another inflation shock — which is unanticipated but not impossible — slowing growth will ultimately force the Bank of Canada’s hand. Once the economy screams “uncle” they’ll have no choice but to provide more rate stimulus — whether that happens at the July 24 meeting, the Sept. 4 meeting or otherwise.

Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.

Mortgage rates

The rates displayed below are updated by the end of each day and are sourced from the Canadian Mortgage Rate Survey produced by MortgageLogic.news. Postmedia and Imaginative. Online Inc., parent of MortgageLogic.news, are compensated by certain mortgage providers when you click on their links in the charts.

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