As the Bank of Canada (BoC) prepares for its upcoming interest rate decision, economists predict a quarter-point cut, which would bring the policy rate down to 2.75%. This move comes amidst growing uncertainty surrounding trade tensions with the United States. While the BoC’s primary goal is to help manage the risks of a potential economic slowdown, the ripple effects of this decision are far-reaching—especially in the Canadian real estate market.

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What You Need to Know About the Rate Cut

The Bank of Canada has been reducing interest rates since mid-2024 in response to economic challenges, with six consecutive cuts bringing the rate to 3% by January 2025. Now, as tariffs from the U.S. continue to disrupt trade, further cuts are expected to help shield the Canadian economy from the negative impacts. The most recent data suggests the economy is on shaky ground: inflation is trending upward, and sectors reliant on exports are feeling the strain of heightened tariffs. With inflation hovering around the BoC’s 2% target, but core inflation running closer to the top of the 1% to 3% range, the Bank faces a delicate balancing act.

Economists anticipate that another quarter-point cut could bring the BoC’s rate to 2.75%, potentially leading to an even lower environment for borrowing costs. For perspective, Canada’s rate currently sits at its lowest since 2020, a result of both domestic and international uncertainties.

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How Rate Cuts Affect House Prices

The real estate market has been particularly sensitive to the BoC's decisions on interest rates. In recent years, Canada’s housing market has seen a boom, fueled in part by lower borrowing costs. With mortgage rates expected to decline further, many prospective buyers may find themselves with more purchasing power.

Home prices in cities like Vancouver and Toronto have seen a steady increase, despite challenges in the broader economy. According to the Canadian Real Estate Association (CREA), the average price for a home in Canada was approximately $718,000 at the close of 2024—up by 5.5% from the previous year. A further rate cut could push prices higher, especially in markets with already limited housing inventory. However, regions with less demand could see more modest price increases or even slight declines as higher mortgage rates still weigh on affordability for some buyers.

For potential homebuyers, lower rates will mean more favorable monthly payments and greater loan accessibility. For sellers, it could represent a window of opportunity to list their properties at a time when interest rates make real estate more attractive to buyers. This dynamic could lead to heightened competition in certain markets, further driving up demand for homes.

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Mortgage Rates and Borrowing Costs

Mortgage rates are directly tied to the Bank of Canada’s policy rate, so a reduction in the BoC rate usually results in a decrease in borrowing costs. As mortgage lenders adjust their rates, prospective homeowners and investors may find it easier to secure financing at lower rates.

As of early 2025, the average rate on a 5-year fixed mortgage in Canada stands at 5.2%. With the BoC expected to cut rates, we may see those numbers drop, which would benefit both first-time buyers and seasoned investors. A typical 5-year fixed-rate mortgage of $500,000 at 5.2% would cost roughly $2,750 per month. A rate cut of 0.25% would lower that monthly payment to approximately $2,700, resulting in savings of $50 per month. While this may seem like a modest decrease, over the life of the mortgage, it can add up to significant savings.

For homebuyers, lower borrowing costs can translate to greater affordability. This could especially benefit those who were previously on the fence about buying due to higher mortgage payments. The knock-on effect could lead to more market activity, especially in the spring and summer months when the real estate market traditionally sees more listings and sales.

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Commercial Real Estate

Commercial real estate, particularly in urban centers, may also feel the effects of a rate cut. Lower borrowing costs can make financing commercial properties more affordable, leading to increased demand from investors looking to capitalize on favorable financing conditions. However, the uncertainty surrounding trade tariffs and potential economic slowdowns may cause some caution in the commercial sector. For instance, businesses may hesitate to take on new leases or purchase properties if they are unsure about future economic stability.

In contrast, industries that rely on consumer spending, such as retail or mixed-use developments, could see a boost. With lower rates helping to stimulate household spending, commercial landlords may benefit from an increase in demand for retail and office space. However, demand for office spaces might remain lower in some areas due to the ongoing trend of remote work. Real estate investors should remain mindful of these shifts when considering their commercial portfolios.

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Rental Market

The rental market is another area that could experience changes following the rate cut. In major metropolitan areas like Vancouver and Toronto, the rental market has remained tight, with vacancy rates staying low despite economic uncertainty. The drop in mortgage rates could lead more buyers to enter the housing market, potentially alleviating some pressure on rental demand in the long term.

However, as property prices rise due to greater affordability, more renters may find it difficult to transition to homeownership. This could lead to increased demand for rental properties, particularly in lower-priced segments or in suburban areas where housing inventory is more accessible. Rental rates could rise as a result, providing a potential opportunity for landlords, particularly those with properties in sought-after locations or with access to transit options.

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The Bottom Line

As the Bank of Canada prepares to cut interest rates for the seventh time in as many months, the effects on the real estate market are likely to be far-reaching. Buyers and sellers should expect to see continued market movement, as lower rates create more affordable options for borrowers and increase demand in certain segments.

For those in the market for a home or considering real estate investments, this could represent an opportune time to make moves before further rate cuts push prices higher. Sellers may find themselves in a favorable position as low rates continue to drive demand. On the other hand, buyers should stay vigilant, ensuring that they are prepared for any shifts in the market.

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At Coldwell Banker Horizon Realty, we are committed to keeping you informed about the latest developments in the real estate market, including how monetary policy changes can impact your buying or selling decisions. Whether you’re a first-time homebuyer or an experienced investor, we’re here to provide expert advice on how to navigate this dynamic market.