Bank of Canada rate cuts will barely affect real estate

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On Wednesday, the Bank of Canada cut its benchmark interest rate by 25 basis points for the third consecutive time, bringing it down to 4.25 per cent. Economists are predicting further interest rate cuts by the central bank for the remainder of the year and into 2025. Here’s what experts have to say about the impact of the cuts on Canada’s real estate markets:

‘It will take several more decreases’: Rates.ca

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While it is good news that the Bank of Canada is continuing to lower its overnight rate, the effect on the housing market will not likely be seen for some time, said Victor Tran, Rates.ca’s mortgage and real estate expert.

For every 25-basis point drop, a homeowner with a variable-rate mortgage can expect a reduction of approximately $15 in monthly payments per $100,000 of mortgage, according to insurance comparison website Rates.ca.

Tran said fixed-rate mortgage holders will not see the effects of any mortgage rate decreases until they renew.

He noted that housing market activity in major urban centres like Toronto and Vancouver has not picked up nearly as much as expected in recent months. Despite the previous rate decreases, mortgage rates remain quite high, he added.

Even a drop of a full percentage point from current mortgage rates would not result in a significant increase in buying power given persistently high home prices, he explained.

“Mortgage rates have not come down nearly fast enough to stimulate much activity in the housing market. It’s just not affordable for people,” Tran said. “It will take a significant decrease in mortgage rates before we see a return of housing market activity.”

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Considering the national average price of a home is approximately $700,000, a single percentage point decrease would likely not make a significant difference in a potential homeowner’s ability to purchase the property, he said.

According to Rates.ca’s mortgage quoter, the lowest insured five-year fixed rate mortgage sits at 4.34 per cent, and the lowest insured five-year variable rate mortgage sits at 5.4 per cent.

‘Not going to resuscitate the housing market’: Nerdwallet Canada

This latest rate cut from the Bank of Canada will make things a little easier for mortgage shoppers committed to variable rates, but it’s not going to resuscitate the housing market, says Clay Jarvis, Nerdwallet Canada’s mortgage and real estate expert.

There have been significantly lower fixed rates available to buyers all year. If they’re not succeeding, it’s probably due to other factors, such as high home prices, increased debt loads, diminished savings and worries about the economy, he said. A slight dip in variable rates doesn’t lower any of these barriers to the market, he noted.

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‘The key question is whether to buy now or wait’: Royal LePage

With this recent rate cut, the key question for first-time homebuyers is whether to buy now or wait, said Phil Soper, chief executive at Royal LePage Real Estate Services Ltd.

The Bank of Canada continues its delicate balancing act, gradually easing the economic drag of high interest rates as the economy cools. With inflation now at its lowest point in three years, policy makers are shifting their focus to jobs and housing, noted Soper.

On one hand, home values have largely plateaued this year and affordability has improved due to lower borrowing costs, he said. However, once the backlog of sidelined buyers is released into the market, pent-up demand will drive prices higher.

“This fall, we can expect more cautious Canadians to take the plunge, while those willing to take on the risk might hold out for further rate cuts,” Soper said.

Housing remains challenged: Macquarie

Despite rate cuts, housing in Canada remains challenged with existing home sales subdued and renovation spending slowing, noted David Doyle, head of economics at Macquarie Group Ltd.

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Doyle said the share of consumers expecting real estate prices to rise has slid in recent weeks and rests below levels seen when the rate hike cycle commenced.

This acts as embedded tightening that is set to worsen in 2025 and 2026 and will be a drag on housing resales, renovations, and discretionary consumer spending, he said.

He added that the Bank of Canada likely needs to reduce rates to a lower level than the United States Federal Reserve over the coming 12 months.

Anticipate further rate relief: Bank of Montreal

Canadian mortgage holders should anticipate further rate relief after borrowing costs peaked late last year, said Bank of Montreal senior economist Sal Guatieri.

Douglas Porter, chief economist at BMO, said the Bank of Canada has hinted at more aggressive rate cuts if inflation slows faster than anticipated — although they have not been surprised by recent trends.

Porter said the bank is expected to continue grinding down rates in coming meetings. “While we anticipate a series of 25-basis point steps into early next year, we certainly will not rule out a possible 50-basis point step at some point,” he added.

• Email: dpaglinawan@postmedia.com

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