Can a single rate cut impact Canada’s housing market? Here’s what you need to know.

June 19, 2024
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Can a single rate cut impact Canada’s housing market? Here’s what you need to know.

The rate cut comes as housing markets across Canada have sleepwalked through the historically busy spring season. The Canadian Real Estate Association says a flood of sellers hitting the market this spring has been so far met by few buyers, slowing overall sales activity.

The Bank of Canada’s first interest rate cut in over four years is expected to have a psychological impact on the Canadian housing market but is unlikely to significantly improve affordability, according to experts. The central bank reduced its key policy rate by 25 basis points to 4.75 per cent, influencing the rates Canadians pay on loans, including mortgages.

Impact on Variable and Fixed Mortgage Rates

The higher the Bank of Canada’s benchmark rate, the more Canadians pay on mortgages. Canadian banks base their loan rates on prime rates, which move with the central bank’s rate. Following the rate cut, major Canadian banks reduced their prime rates by a quarter- percentage point. For prospective buyers, the impact of a 25-basis-point rate cut is marginal, not dramatically improving affordability.

Homeowners with variable-rate mortgages will see immediate relief as more of their payments will go towards principal rather than interest. Those with fixed-rate mortgages will experience changes upon renewal, as these rates are linked to bond markets. Fixed mortgage rates are tied to government bond yields, which had already priced in the rate cut.

Consequently, the decision won’t have an immediate impact, but consumers can expect lower fixed rates in the future. The central bank would need to cut rates by about 200 basis points within two years to make higher variable-rate mortgages worthwhile over fixed-rate options. The variable mortgage holder would see their monthly payments drop by nearly $100 per month after the cut, the homeowners with bigger outstanding mortgage balances will see the largest relative relief.

Psychological Impact on Housing Markets

The shift towards a declining rate environment offers psychological relief to would-be buyers, providing certainty and confidence that rates are more likely to decrease rather than increase. This shift comes as Canada’s housing markets have seen slow activity during the traditionally busy spring season. While the rate cut alone may not spur a significant increase in buyers, the shift in monetary policy and expectations of further cuts could have a psychological impact, encouraging more buyers to enter the market.

Future Economic Outlook

Economists are divided on the central bank’s next steps, with some predicting additional cuts and others suggesting a pause. The next decision will depend on upcoming economic data. The central bank has also flagged the potential for rising home prices as a risk to inflation, highlighting the need to balance economic growth with inflation control. Overall, the rate cut’s impact on the housing market is expected to be more psychological than substantial, potentially easing some buyers’ concerns but not significantly altering affordability in the short term.

Written by:

Tanya Fernandes
Broker | Owner

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