How will interest rate reductions impact the housing market?

The Bank of Canada did what we all hoped on July 24 – instituting its second consecutive interest rate cut, reducing the policy rate by 25 basis points to 4.25 per cent.

From all accounts – or at least those of many economists and financial experts – it was a merely a formality that BoC would again reduce the influential overnight rate.

The hope now is that the move kicks off a notable pick-up in homebuying – and building – activity. Moreover, the thinking now is that the reduction on July 24 might just be the beginning.

“There could be three more drops this year,” says Jesse Abrams, co-founder at Homewise, a mortgage advisory and brokerage firm. “Meaning that rates could be down one per cent from the beginning of the year, and potentially more.”

Debbie Cosic, CEO and founder of In2ition Realty, agrees, saying she’s hoping for at least another half to one full point reduction.
“We need significant cuts, bringing us in the four- to five-per-cent lending range,” she told NextHome. “Keep in mind it’s not only the high rates, but it’s also the stress test that is deterring people; they simply are not qualifying for mortgages, as they have to qualify for two per cent above the going rate.”

“Our research shows that many buyer hopefuls have been waiting for a concrete signal from the Bank of Canada that the economy is moving in the right direction," says Karen Yolevski, COO of Royal LePage Real Estate Services Ltd. "A second cut to the overnight lending rate indicates just that, and with mortgage qualification thresholds continuing to come down, sidelined buyers may have the confidence they need to make their return to the housing market. We expect this will prompt a slight boost in activity in the short-term, followed by more robust buyer demand in the fall. In the meantime, some much-needed inventory has been building in major markets over the last few months, giving buyers more options to choose from. In addition to lower rates, this may also encourage more buyers to re-enter the market in the near future.”

Following this latest rate reduction, Cosic has some direct advice for would-be homebuyers. “Jump in ASAP and grab the incredible deals that are available in pre-construction. We have not seen this in decades. There are developers offering 1.99 per cent for three years. For example, The Grand at Universal City in Pickering. This gives you not only mortgage assurance, but the low price that is currently being offered in the marketplace.”

But, Abrams adds, do so cautiously. “You date your rate and marry your home. Don’t make a home purchase based on current rates. Many buyers are saving a lot more money based on the higher rates, but with lower home prices. So, if you are someone considering buying a home within the next two years, get a pre-approval and find a great realtor, then start looking at homes. You may find the perfect home at a price you didn’t expect.”

And, as Cosic says, the potential bargains apply not just to resale, but to pre-construction as well.

“We know rates are heading downwards over the next six to 12 months," she says. "And as rates drop, there will be fewer promotions by developers. Always buy low and wait for the market to come back. This is the perfect opportunity to jump on these amazing incentives and low prices. They will not last.”

Another expert, Ben Myers, president of Bullpen Consulting, a boutique residential real estate advisory firm based in Toronto, sums it up well: “The market is significantly challenged today, but population growth is near record highs. Future supply will be constrained, and interest rates are expected to decline over the next couple of years. There are signs of a future recovery, and buyers that understand the market and its direction in specific pockets of the Ontario new housing market will be handsomely rewarded.”

How can you better understand and navigate the GTA housing market? Let’s look at some of the other factors:

Inflation and interest rates

Despite the caution that interest rates and inflation have imparted on the housing market, home prices still found a way to increase in the second quarter this year. The aggregate price of a home in Canada increased 1.9 per cent year-over-year to $824,300, according to the Royal LePage House Price Survey. On a quarter-over-quarter basis, the national aggregate price increased 1.5 per cent.

For the last two years, the national housing market has seen home prices fluctuate between modest declines and increases – with some regional exceptions – as a result of the impacts of higher interest rates. As the Bank of Canada navigates the balance between lowering the key lending rate and keeping inflation in check, some segments of Canada’s housing market have stalled.

“Canada’s housing market faces pent-up demand after two stifling years of high borrowing costs,” says Phil Soper, president and CEO, Royal LePage. “While inflation control is crucial, persistently high rates are increasing the risk of a surge in demand when buyers inevitably return. New household formation and immigration keep fuelling the need for housing, and a sudden release could create much market instability. This highlights the need for a more nuanced approach that balances inflation control with economic vitality.”

According to Statistics Canada, Canada’s inflation rate fell to 2.7 per cent in June, after rising to 2.9 per cent in May, which was up from 2.7 per cent in April. When shelter costs are removed, that figure dips to 1.5 per cent.

Increased borrowing costs slow new home construction

Elevated borrowing rates not only dampen housing market activity, but also the construction of new homes, Royal LePage points out. Builders, which rely heavily on lending, were finding it difficult to finance new projects, exacerbating the shortage of housing at a time when our population continues to grow.

“Gradual interest rate reductions could unlock a housing supply logjam,” says Soper. “Lower rates would not only empower buyers but also incentivize builders, who rely on borrowing for development. This is crucial to meet the diverse needs of our growing population. We need affordable options for first-time buyers, growing families and downsizing retirees. Incremental rate adjustments are key to achieving a balanced and inclusive housing market.”

GTA will lead the way

After all the uncertainty and challenges in the market, Royal LePage is still forecasting significant home price growth for Canada in 2024, with the GTA leading the way.

The realty firm is forecasting that the aggregate price of a home in Canada will increase 9.0 per cent in the fourth quarter of 2024, compared to the same quarter last year. Nationally, home prices are forecast to see continued moderate price appreciation throughout the second half of the year.

For the GTA, Royal LePage is forecasting that the aggregate price of a home will increase 10 per cent in the fourth quarter of 2024, compared to the same quarter last year. This is the highest price appreciation of all major markets.

Source: Royal LePage

Economic mettle

The International Monetary Fund recently upgraded its forecast for the Canadian economy, projecting it will grow by 1.3 per cent this year and by 2.4 per cent in 2025.

For 2025, Canada is projected to be the fastest growing economy among the G7 and other advanced economies. The U.S. economy will rank second at 1.9 per cent and the U.K. third at 1.5 per cent growth next year.

Moreover, IMF says, as global inflation continues to decline this year and in 2025, Canada’s monetary policy has positioned it to exceed the performance of the U.S. and other countries in this regard.

Why all this matters

Dave Wilkes, president of the Building Industry and Land Development Association (BILD), writes that GTA residents are growing increasingly concerned about housing affordability. A recent public opinion survey showed that 90 per cent of people in the GTA agree there is an affordability issue, and 72 per cent of agree that there is not enough being done to address it.

Another report, this one from the Centre for Urban Research and Land Development, examining Statistics Canada’s latest estimates of net intraprovincial migration flows, shows a quest for more affordable housing plays a significant role in the movement of Ontario residents between municipalities.

Three municipalities in the GTA accounted for all the net outflow of residents within the province in the 12 months ending July 1, 2023: The city of Toronto (51,508); Peel region (40,934); and York region (6,249) for a total net outflow of 98,600 persons.

In contrast, the net inflow of residents within the province was much more dispersed – the three top recipients were Greater Golden Horseshoe (GGH) municipalities: Simcoe County (12,782), Durham Region (10,416) and Niagara Region (8,213). They accounted for just 32 per cent of the province’s intraprovincial migration in 2023.

It is anticipated that the continued dispersal of GTA residents will occur as they search for the type and price of housing they can afford elsewhere in the GGH and other parts of the province, the report says.

Homeownership a priority, still and always

A recent survey by TD Bank Group underlines that despite an ever-evolving homebuying market, Canadians’ desire to own a home remains steadfast. Seventy-four per cent of prospective homeowners surveyed still feel hopeful that they will be able to purchase a home in the next five years. More than half (58 per cent) of these prospective buyers, though, admit it will likely take them at least two years to be in a financial position to do so.

To achieve homeownership, 56 per cent of prospective buyers surveyed said they are reducing their non-essential expenses, 52 per cent are planning to invest more of their money, 32 per cent are planning to work with a financial professional to develop a plan for homeownership, and 23 per cent are taking out loans. Eight per cent of prospective homebuyers appear to be tapping into the rising trend of the “modern homeowner” by looking to purchase property with someone who is not their partner, such as a friend or family member.

Bank of Grandma and Grandpa

You’ve heard of the Bank of Mom and Dad? Well, the team of familial assistants may now also include grandparents. A new poll from RBC shows that Canadian grandparents are finding themselves caught in a money squeeze, as the high cost of living is having a large impact on both their own finances and the financial support they’re providing to two generations – their adult children and their grandchildren.

The 2024 RBC Family Finances Poll – Grandparents Edition, says 21 per cent are currently supporting at least one adult child aged 25 plus, and 30 per cent have provided money to their grandchildren.

Poll findings indicate that many grandparents support their grandchildren with everyday living costs (30 per cent), second only to education expenses (39 per cent).

“While it’s not unusual for grandparents to provide financial assistance to younger generations, the dramatic difference today is this support has become a necessity, rather than simply a desire to help,” says Craig Bannon, director, Financial Planning Centre of Expertise, RBC.