The Bank of Canada (BoC) has made its third consecutive rate cut in 2024, lowering the overnight lending rate by 25 basis points to 4.25%. This decision, aimed at combating inflation and stabilizing the economy, will have notable effects on the Canadian real estate market. Let’s break down how this cut could impact buyers, sellers, and investors in the months ahead.
For Buyers
The most immediate benefit of the rate cut is for homebuyers, particularly those holding variable-rate mortgages. A lower overnight lending rate means prime rates at banks drop, which will reduce monthly payments for variable mortgage holders. For instance, on a $667,000 home with a 10% down payment, homeowners could see their mortgage payments decrease by around $90 per month due to this cut.
Those looking at fixed-rate mortgages may also benefit indirectly as bond yields tend to decrease with rate cuts, leading to better fixed mortgage rates. However, the affordability issues many Canadians face persist, as mortgage rates are still significantly higher than during the pandemic’s 0.25% benchmark rate.
For Sellers
Sellers might see renewed interest in their properties as borrowing becomes cheaper. However, the impact on the housing market may be slow, as many buyers are still waiting for further cuts, which are expected in October and December, bringing the rate down to 3.75%. This could encourage more first-time buyers back into the market, especially since surveys show that over 50% of Canadians have postponed purchasing homes due to high borrowing costs.
The increased affordability could spur activity in markets that have seen declining prices. For example, home prices in cities like Toronto and Ottawa have dropped by 3% to 6% since the peak earlier this year, and inventory levels are improving, offering buyers more choice and negotiation power.
For Investors
Real estate investors, particularly in the commercial sector, may face mixed outcomes. Lower interest rates provide cheaper borrowing costs, but broader economic concerns, such as weak labor market performance and slowing GDP growth, could keep large-scale investments on hold. The commercial real estate market is likely to remain cautious until 2025, when more stable economic conditions are expected to emerge.
Investors should also be aware of the potential for pent-up demand in the residential sector. As more buyers return to the market, this could drive up prices once again, potentially benefiting those who enter early during this period of lower rates.
What’s Next?
Economists predict that the BoC may lower the overnight lending rate by another 50 basis points by the end of 2024, bringing it to 3.75%. This could provide further relief for buyers and investors, but inflation and the performance of the labor market will be key factors in determining how these rate cuts influence the broader economy.
For now, the real estate market is expected to experience a gradual increase in activity, but the full effects of these rate cuts may not be realized until next year.
In conclusion, while the Bank of Canada’s third rate cut provides significant relief for buyers and investors, it is not a quick fix. The market is poised for more activity, but patience will be key as further rate cuts are expected and economic conditions stabilize.
