Bank of Canada rate cut – On December 11, 2024, the Bank of Canada announced a significant change to its monetary policy: a 50 basis point cut in its key overnight rate, bringing it down to 3.25 percent. This marks the fifth consecutive interest rate cut and the second “jumbo” cut in a row, underscoring the central bank’s attempt to address the economic challenges facing the country. For the real estate sector, this news has been met with optimism, as it is expected to ease borrowing costs, stimulate demand, and potentially lead to increased market activity. However, while the interest rate cut offers relief, analysts and industry experts offer mixed views on whether this will lead to a sustained housing market rebound.
Economic Context Behind the Rate Cut
The Bank of Canada’s decision to reduce rates comes amidst a complex economic landscape. Inflation, which had been running high for much of the previous year, is now under control, with the consumer price index (CPI) hovering around the central bank’s target of 2 percent. However, despite this positive development, broader economic challenges remain, including rising unemployment and global uncertainties that could affect Canada’s trade relationships, especially with the United States.
Bank of Canada Governor Tiff Macklem acknowledged that the central bank’s easing measures were necessary not only to address inflation but also to ensure economic stability in the face of slowing GDP growth. The decision also reflects growing concerns about global trade tensions, which have weighed on investor confidence and contributed to slower growth in Canada’s economy. With the U.S. Federal Reserve also engaging in policy adjustments of its own, the Bank of Canada has taken steps to ensure that its economic targets are met, albeit with caution.
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What Analysts Are Saying About the Bank of Canada rate cut Impact on the Housing Market
Penelope Graham, Mortgage Analyst at Ratehub.ca
Penelope Graham, a mortgage analyst at Ratehub.ca, explains that the Bank of Canada’s decision aligns with the movements in bond yields, which had already been trending downward. Prior to the announcement, bond yields had dropped to around 2.8 percent, a signal that mortgage rates could soon follow suit. This is important because the majority of Canadian mortgages are based on bond yields, particularly fixed-rate mortgages. As bond yields decrease, we may see downward pressure on fixed mortgage rates, making it cheaper for homebuyers to borrow.
However, Graham also warns that there are still uncertainties, particularly concerning the U.S. Federal Reserve’s stance on interest rates and the inflation outlook in the U.S. If U.S. inflation remains persistent, it could complicate the downward trend in bond yields. This introduces an element of risk that could limit the full impact of the rate cut in stimulating demand.
Peter Norman, Vice President at Altus Group
Peter Norman, vice-president at Altus Group, attributes the Bank of Canada’s decision to weak third-quarter GDP figures, which highlighted the broader struggles of the Canadian economy. While inflation data showed only a modest increase in October, Norman believes that the central bank’s decision to implement a larger cut than anticipated indicates a desire to support economic activity, particularly in sectors like real estate. He suggests that trade tensions, especially with the United States, could further impact business investment decisions, and the Bank of Canada may need to continue easing to keep the economy moving.
Norman expects that the Bank of Canada’s rate will eventually stabilize around 2.5 percent, which he believes would create favorable conditions for the real estate market. He forecasts that this will help to increase transactions and development activity, as a more predictable and stable interest rate environment could spur confidence among homebuyers and developers alike.
Ray Wong, Altus Group
Ray Wong, another expert at Altus Group, notes that the real estate market is slowly becoming more balanced, with the “bid-ask” gap—meaning the difference between what buyers are willing to pay and what sellers are asking for—beginning to close. He suggests that the market is on the cusp of increased activity, particularly in 2025, as rate cuts from the Bank of Canada gain traction.
Wong believes that future interest rate decisions will be heavily influenced by actions taken by the U.S. Federal Reserve. If the U.S. continues to tighten its monetary policy, the Bank of Canada may find itself in a delicate balancing act, trying to keep Canadian rates low enough to encourage borrowing, while avoiding excessive risk in the broader economy. Nevertheless, Wong is optimistic about the housing market’s prospects, as he sees signs of gradual improvement in market conditions.
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Leah Zlatkin, Mortgage Broker at LowestRates.ca
Leah Zlatkin, a mortgage broker and analyst with LowestRates.ca, provides a more cautious outlook on the impact of the rate cut on the Greater Toronto Area (GTA) housing market. Zlatkin describes the current market as “dynamic but challenging,” highlighting the dual pressures that buyers in the GTA face: strong sales and rising prices on the one hand, and economic uncertainty and affordability concerns on the other.
She warns that the rate cut could create more competition among potential buyers, particularly those who have been sitting on the sidelines waiting for the market to cool down. “This could lead to price escalation, pricing out many would-be buyers who were hoping for a more affordable market,” she adds. This increased competition may accelerate price growth, which could make it even more difficult for first-time buyers to enter the market.
Phil Soper, CEO of Royal LePage
Phil Soper, CEO of Royal LePage, has a more optimistic take on the Bank of Canada’s actions. He notes that the rate cuts are driving increased demand from buyers who are becoming more aware that property prices are on the rise again. Many buyers are feeling an urgency to act now before prices become even more unaffordable, especially given the impending changes to lending policies, which will go into effect on December 15, 2024. These policy changes are expected to expand borrowing power, allowing more buyers to secure mortgages at favorable rates.
Soper predicts that this sense of urgency will lead to a “pull-ahead” in activity, effectively kicking off the spring housing market earlier than usual. He believes that the confluence of low interest rates, changes in lending policies, and increased buyer demand will create a window of opportunity for those looking to purchase homes before prices rise further.
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Clay Jarvis, Mortgage Analyst at NerdWallet
Clay Jarvis, a mortgage analyst at NerdWallet, emphasizes the significant impact the rate cut will have on demand. He notes that Canada’s housing market rebounded strongly after the October rate cut, and he anticipates that the December cut will boost activity even further, especially in Ontario and British Columbia, where lower down payment requirements are set to take effect. This could encourage first-time buyers and other prospective homeowners to act sooner, further driving demand in the short term.
The rate reduction could also spark increased demand in the rental market, as potential buyers, especially those who have been priced out of the housing market, may choose to rent for the time being. The combination of lower borrowing costs and shifting mortgage rules could have far-reaching effects across various segments of the real estate market.
Will This Drive a Housing Price Surge?
With these diverse perspectives, one key question remains: will the Bank of Canada’s rate cut lead to a significant surge in housing prices? The short-term outlook appears to suggest that the answer could be yes, especially in markets like the GTA and parts of British Columbia, where demand has been historically strong. However, the extent of the price increases will depend on several factors:
- The Availability of Inventory: In markets where supply is limited, increased demand could result in bidding wars, driving prices up further. This is particularly true in urban areas where housing stock is not keeping up with population growth and demand.
- The Strength of the Economy: While the rate cut aims to stimulate demand, economic uncertainties—especially global trade tensions and potential changes in U.S. policies—could dampen buyer sentiment if they perceive the economic outlook to be unstable.
- Changes to Lending Policies: The changes to lending rules, such as lower downpayment requirements, will likely increase the pool of eligible buyers. However, these changes could also exacerbate affordability issues in an already expensive market, especially for first-time buyers.
- Long-Term Rate Trajectory: While the Bank of Canada’s rate cut is a positive sign for short-term market activity, the long-term trajectory of interest rates will have a more lasting impact on market trends. If rates remain low or continue to fall, the real estate market could experience sustained growth, though some experts caution that too many rate cuts could eventually lead to concerns over household debt levels.
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Conclusion
The latest Bank of Canada rate cut is undoubtedly a pivotal moment for the Canadian housing market. It brings much-needed relief to homebuyers by reducing borrowing costs and enhancing affordability, especially in the short term. The outlook for the housing market in 2025 looks promising, with increased demand, a potentially more balanced market, and a sense of urgency among buyers.
However, the impact of this rate cut will depend on several variables, including the global economic climate, domestic economic conditions, and the pace of rate changes by the U.S. Federal Reserve. For many homebuyers, the key will be to act decisively before rising prices and competition further erode affordability. Ultimately, while a housing market rebound seems likely, the long-term sustainability of that recovery will require a delicate balance of policy measures and market forces.
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As always, potential buyers should stay informed, seek expert advice, and carefully consider their personal financial situation before making any real estate decisions. With the right strategies, those entering the market in 2025 could find themselves in a favorable position.
