Interest rate reductions expected to boost market

The Bank of Canada instituted its fourth consecutive interest rate reduction on Oct. 23, lowering its target for the overnight rate a full half-point to 3.75 per cent – the first time it has been below four per cent in two years.

“Activity in Canada’s housing market has been sluggish in many regions due to higher borrowing costs, but (this) more aggressive cut to lending rates could cause the tide to turn quickly,” says Phil Soper, president and CEO of Royal LePage. “For those with variable rate mortgages – who will benefit from the rate drop immediately – or those with fast-approaching loan renewals, today’s announcement is welcome news indeed.

Rising demand

“With every cut to the overnight lending rate, more homebuyers are expected to come off the sidelines. In turn, rising demand will cause home prices to increase more rapidly, eliminating the advantages of lower borrowing costs. We expect that an early spring market is on the cards – a pull-ahead trend we’ve seen in previous market turnarounds.”

A key factor, inflation, has declined from 2.7 per cent in June to 1.6 per cent in September, prompting BoC’s decision to reduce the policy rate by 50 basis points to support economic growth and keep inflation close to middle of the one- to three-per-cent range. If the economy evolves in line with latest forecast, BoC says it expects to further reduce the policy rate.

The Canadian economy grew two per cent in the first half of 2024 and is expected to grow 1.75 per cent in the second half, while GDP growth is forecast to strengthen gradually supported by lower interest rates. BoC forecasts GDP growth of 1.2 per cent this year, 2.1 per cent in 2025 and 2.3 per cent in 2026.

Clear signal

“The rate drop (on Oct. 23) was a clear signal,” Jesse Abrams, co-founder and CEO of mortgage comparison service Homewise, told NextHome. “It indicates that inflation is cooling faster than expected, and the Bank of Canada is moving to lower rates more quickly than anticipated. This is great news for prospective buyers and those renewing mortgages, as rates – while still higher than two years ago – are becoming more manageable. This shift is particularly important for the over $350 billion in mortgages set to renew in 2025.”

In addition, Abrams says, many potential buyers who’ve been waiting for a significant rate reduction might now be more inclined to re-enter the market. “However, it’s important to remember that rate cuts often coincide with economic uncertainty. While this is a positive development, there is still market volatility to consider. For example, five-year bond yields have ticked up this week, and the upcoming election could influence future rate decisions.

“Although more rate reductions are likely this year and next, it’s essential for borrowers and buyers to keep the broader economic picture in mind – rate changes aren’t guaranteed with every announcement, especially in a fluctuating environment.”

BoC’s next rate announcement is Dec. 11, 2024.