How will the Bank of Canada’s rate cut impact real estate?

While experts say the Bank of Canada’s previous two rate cuts did little to stimulate the housing market, opinions differ on whether the latest cut will increase activity.

The Bank of Canada cut its key policy rate by 25 basis points to 4.25 per cent on Wednesday, marking the third consecutive cut after two previous quarter-percentage-point cuts in both June and July.

• Text of the Bank of Canada’s decision to cut its key interest rate target

In a statement to BNNBloomberg.ca Wednesday, RATESDOTCA mortgage and real estate expert Victor Tran said the reduction in borrowing costs is “good news” for the housing market, but it may take some time for the impact to be felt.

“Housing market activity in major urban centers like Toronto and Vancouver has not picked up nearly as much as we had expected in recent months. The reality is the math just doesn’t make sense for many people who want to purchase a home,” Tran said.

“Mortgage rates have not come down nearly fast enough to stimulate much activity in the housing market. It’s just not affordable for people.”

Going forward, he added that it will “likely take several more decreases in the overnight rate” to spur activity in Canada’s housing market.

Penelope Graham, a mortgage expert at Ratehub.ca, said in a statement to BNNBloomberg.ca that a cumulative 75 basis point reduction in the Bank of Canada’s policy rate could “start to incentivize” buyers to re-enter the housing market.

“Given there’s strong anticipation of further cuts to come, many buyers may stick it out a little longer, especially as many of Canada’s housing markets remain very well supplied, and favourable towards buyers,” Graham said.

However, she noted that the previous two rate cuts in June and July did “very little to move the dial on real estate demand” and said potential buyers were waiting for mortgage rates to decrease further.

Paul Shelestowsky, a senior investment advisor at Meridian, said in a statement to BNNBloomberg.ca that mortgages are becoming more affordable, but remain about double what they were compared to 2022.

He said that has been a “huge stressor” for Canadians planning to refinance in 2024.

“As interest rates fall, and mortgages are easier to obtain than they were six months ago, housing markets are expected to re-energize – especially as lower interest rates are also providing relief with loans and lines of credit,” Shelestowsky said.

“This is important since Canadians borrow almost twice as much as a ratio of income compared to Americans.”

Phil Soper, president and CEO at Royal LePage, said in a statement to BNNBloomberg.ca that home values have mostly plateaued this year and lower borrowing costs have improved affordability. He added that first-time buyers will have to assess whether to buy now or wait in the current market.

“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.

Commercial real estate

Adam Jacobs, the head of research at Colliers Canada, said in a statement to BNNBloomberg.ca Wednesday that the Bank of Canada’s move to lower borrowing costs was widely anticipated by economists and forecasters.

“This continues to be a positive sign for many people, especially borrowers, real estate professionals, developers and investors,” he said.

“However, the commercial investment and development market remains slow due to high interest rates and other factors such as land prices and elevating construction costs.”

Mortgages

Alana Riley, head of mortgage, insurance and banking at IG Wealth Management, said in a statement to BNNBloomberg.ca Wednesday that the Canadian bank prime rate is expected to fall from 6.7 per cent to 6.45 per cent following the Bank of Canada’s rate cut.

“This rate cut is expected to provide further relief to Canadian households with variable-rate mortgages, Home Equity Lines of Credit (HELOCs), and unsecured lines of credit, as it will reduce borrowing costs,” she said.

Riley added that the rate cut is expected to “help somewhat mitigate the sticker shock for homeowners facing higher rates upon renewal.”

Clay Jarvis, a spokesperson and real estate expert at NerdWallet Canada, said in a statement to BNNBloomberg.ca that while the rate cut may spur interest in variable-rate mortgage products, affordability issues persist.

“Today’s cut might get home buyers more excited about variable-rate mortgages, but will they be able to qualify for them?” he said.

“Variables are still well above five per cent, so getting past the stress test and nailing down an affordable mortgage payment could require a larger down payment than most buyers have access to.”

According to Jarvis, fixed rates have been moving toward four per cent over the past few weeks and if buyers were not able to qualify for a cheaper fixed-rate mortgage before Wednesday’s rate announcement, “they’re not in any better shape today.”