Analysts say the Bank of Canada’s interest rate cut could encourage many homebuyers to re-enter the market
Real estate market analysts say the Bank of Canada’s decision to lower its key interest rate could prompt many potential homebuyers to act, as reported by BNN Bloomberg.
The central bank announced a quarter-percentage-point cut on Wednesday, bringing the key interest rate to 4.75 percent, its first reduction in over four years.
Canada's largest cities have seen an increase in home listings recently, despite a lag in buyer demand. In the Greater Toronto Area, new listings surged by 21.1 percent year-over-year, with 18,612 properties entering the market.
However, home sales dropped by 21.7 percent in May, according to the Toronto Regional Real Estate Board (TRREB). The board reported 7,013 homes sold in May compared to 8,960 the previous year, which had seen a brief market resurgence.
TRREB president Jennifer Pearce noted that homebuyers were waiting for “clear signs” of declining mortgage rates before purchasing property. She expects more buyers to enter the market as borrowing costs decrease over the next 18 months, which will ease pressure on the tight rental market.
A Leger survey commissioned by Royal LePage found that 56 percent of Canadian adults active in the housing market had postponed their property search since the Bank of Canada began raising its key lending rate in March 2022.
Among those waiting, just over half said they would resume their search if interest rates dropped, with one-in-10 indicating a 25-basis-point decrease would prompt them to return.
“There certainly is pent-up demand,” said Karen Yolevski, chief operating officer of Royal LePage Real Estate Services. “Typically when rates go down, prices go up. So this would be the time where people come off the sidelines, knowing and anticipating that prices are likely to rise.”
In the Greater Toronto Area, the average selling price of a home decreased by 2.5 percent year-over-year to $1,165,691 last month. Sales in the City of Toronto dropped by 17.3 percent to 2,701, while sales in the rest of the GTA fell by 24.3 percent to 4,312.
All property types saw fewer sales, with townhouses and condominiums leading the decline.
Yolevski cautioned that the market rebound “won’t be an overnight effect,” as Canada is likely to see a gradual return to higher sales levels. The Leger survey indicated that more than two-in-five prospective homebuyers were waiting for a rate cut of at least 50 or 100 basis points before resuming their search.
“People purchase homes less so on the sticker price but more on the monthly carrying cost of the property,” said Yolevski. “So interest rates going down will, over time, lower monthly carrying costs and ease some of the burden homebuyers feel, particularly first-time buyers.”
TD Bank senior economist James Orlando predicted a slow path for further rate cuts, cautioning that the central bank must ensure inflationary pressures do not rebound. “It will proceed cautiously. It doesn’t want to reignite the housing market,” he noted.
Orlando expects the next rate cut to occur in September.
For homeowners with variable-rate mortgages, the June rate cut is welcome news. Victor Tran, a mortgage, and real estate specialist for Ratesdotca, estimated that a 25-basis-point decrease could save floating variable-rate mortgage holders $15 per $100,000 of mortgage.
The Bank of Canada’s Financial Stability Report noted that those up for renewal soon could face monthly payment increases of up to 60 percent, making the rate cut a step toward easing these increases.
“We will likely see an uptick in mortgage-holders considering variable rates on renewal to take advantage of the downswing,” Tran said, though he noted the significant spread between fixed and variable rates and the likelihood of the Bank of Canada spreading decreases over several months.
