The Canadian housing market is a constant source of discussion, and interest rates are often front and center. After a period of aggressive rate hikes, we're now seeing a downward trend. But the big question remains: Are declining interest rates truly the key to unlocking a full-blown real estate renaissance in Canada?

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The Recent Rate Rollercoaster

Let's recap the recent interest rate journey, as it's crucial to understanding the current market dynamics. During the pandemic's real estate boom, borrowing costs were incredibly low. Then, the climb began. The Bank of Canada's (BoC) benchmark rate, a minuscule 0.25% in March 2022, embarked on a steep upward trajectory. It didn't stop until it hit a 22-year high of 5% in July 2023. This rapid increase had far-reaching consequences:

• Cancelled Condo Launches: Many developers, particularly in the pre-construction sector, put projects on hold or cancelled them altogether.
• Softening Home Prices: Existing home prices, especially in major urban centers, began to moderate.
• Reduced Transaction Volume: The number of real estate transactions across the country declined significantly.

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Finally, in June 2024, the BoC delivered its first rate cut in four years, reducing the benchmark by 25 basis points to 4.75%. As of January 29, 2025, the borrowing rate has fallen further to 3% – the lowest it's been since early September 2022. The BoC's January cut was the first of 2025, and with seven more rate announcements scheduled for the year, many economists and industry professionals predicted further reductions. However, recent discussions surrounding potential tariffs have injected a significant dose of uncertainty into these predictions.

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The Prevailing Wisdom (and a Necessary Dose of Reality)

The general consensus, often echoed by economists and real estate experts, has been that consecutive interest rate cuts would be the catalyst for a strong rebound in Canada's housing market. However, in today's volatile socioeconomic climate – marked by global uncertainties and inflationary pressures – it's crucial to ask: Are we placing too much weight on the impact of interest rates alone?

As Kevin Hughes, Deputy Chief Economist at the Canadian Mortgage and Housing Corporation (CMHC), emphasizes, the cost of borrowing is always a critical factor in analyzing and forecasting housing markets. However, he stresses that it's not just the rate itself, but also the "other conditions that surround the rate" that are equally important.

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Signs of a Thaw

Despite the lingering uncertainties, there are definite signs of a revival in various segments of the Canadian real estate market. The CMHC's latest housing market report, while acknowledging the macroeconomic uncertainty, outlines three plausible scenarios for the market's trajectory. These scenarios consider various economic factors, including the potential impact of a 25% tariff on goods. Interest rates, however, remain the primary variable, according to Hughes.

The CMHC forecasts a general rebound in home sales and prices across Canada in the coming year. While provinces like Alberta and Quebec are projected to potentially reach historic sales highs, pricier markets such as British Columbia and Ontario are expected to experience slower growth, with sales remaining below their 10-year averages. This is largely attributed to ongoing affordability challenges and the impact of immigration targets.

Hughes highlights that lower interest rates are particularly likely to unleash "pent-up demand." This includes individuals who were prepared to buy before the pandemic but had their plans disrupted, as well as first-time homebuyers, move-up buyers, and downsizers. The resale market is expected to be particularly appealing to this group due to its relatively lower price points and greater variety of housing options.

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The Greater Toronto Area (GTA)

The notoriously expensive Greater Toronto Area (GTA) provides a compelling case study of the relationship between interest rates and market activity. There appears to be a correlation between the recent rate drops and an uptick in sales. A brokerage reported a 2.6% year-over-year increase in sales in 2024 compared to 2023, indicating a return of "cautious optimism" among buyers.

Industry sentiment suggests that further rate cuts will continue to stimulate buyer activity, particularly among first-time homebuyers who are highly sensitive to affordability. Polling data from Ipsos, released as part of a market update, revealed that a significant percentage of renters (over 80%) believed that a 2% or 3% drop in interest rates would make homeownership a viable option for them. Since September 4, 2024, the rate has already decreased by 1.25%.

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The Greater Vancouver Area (GVR)

The Greater Vancouver Realtors (GVR) also reports that lower rates are beginning to stimulate sales in Vancouver, as expected. However, Andrew Lis, GVR's Director of Economics and Data Analytics, notes that this followed a somewhat lengthy lag period after the start of the rate-cutting cycle.

Lis points out that the final three months of 2024 showed sales up over 30% year-over-year consecutively, signaling increased buyer eagerness. While January 2025 sales remained up about 10% year-over-year (a strong showing for a typically slow month), it was a slight dip from the preceding months' trend.

Overall, Lis sees "increasingly compelling evidence" that lower rates are stimulating demand. He anticipates this trend will continue in 2025, barring any major economic disruptions. The GVR's forecast, while optimistic, takes a conservative view, projecting sales to be up about 14% relative to 2024 totals by year-end.

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The Pre-Construction Market

The pre-construction market has faced significant headwinds in recent years. A confluence of factors, including high interest rates, escalating construction costs, labor shortages, and hefty development fees, has resulted in numerous project cancellations and postponements, particularly in areas like the GTA.

While lower interest rates are undoubtedly beneficial, they may not be the primary driver of recovery in this segment. In the GTA, for instance, sky-high development fees are arguably a more significant impediment to building activity and affordability. The Building Industry and Land Development Association (BILD) highlighted a substantial increase in municipal fees per unit on both low-rise and high-rise developments since 2022. These costs, ultimately passed on to the homebuyer, exacerbate affordability challenges.

Richard Lyall, President of the Residential Construction Council of Ontario (RESCON), points out that development charges are often misrepresented as being paid by developers. In reality, developers front these costs initially, but they are ultimately recouped from the homebuyer upon closing. This disproportionately impacts those who can least afford housing.

Data shows that a significant portion (36%) of the purchase price of a new Canadian home is comprised of government taxes and fees. On an average-priced new home, this can amount to over $380,000 in taxes and fees.

Despite these challenges, some industry experts report a slight uptick in activity at certain GTA sites following the rate drops. However, the overall impact remains modest. While lower rates have restored some purchaser confidence, it's not yet sufficient to trigger a significant market shift.

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Beyond Interest Rates

It's crucial to recognize that numerous factors beyond interest rate fluctuations influence the real estate market:

• Broader Economic Conditions: Employment rates, wage growth, and overall consumer confidence directly impact purchasing power and buyer behavior.
• Government Policies: Policies aimed at improving housing affordability and accessibility, such as easing the mortgage stress test, extending amortization periods, or introducing targeted tax incentives, could provide much-needed relief for buyers.
• Potential Tariffs: The ongoing discussion about potential tariffs imposed by the US on Canada introduces significant economic uncertainty, which could undoubtedly impact the real estate market.
• Mortgage Renewals: Approximately 1.2 million Canadian households are expected to renew their mortgages in 2025, with a large majority (85%) having contracted their mortgages at lower rates. They will face higher rates upon renewal. This could pose a challenge, particularly if economic conditions deteriorate due to factors like tariffs, leading to job losses.
• Political Factors: While difficult to predict with certainty, political events, such as elections, can influence market sentiment and policy decisions that affect the housing sector.

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The Bottom Line: A Multifaceted Equation

While declining interest rates are undeniably a positive development for the Canadian real estate market, they represent just one component of a complex equation. A true and sustainable "renaissance" will depend on a confluence of factors, including broader economic stability, supportive government policies, addressing affordability challenges, and navigating potential economic headwinds.

Even in periods of high interest rates or economic uncertainty, people continue to buy and sell homes. The key is to understand the full picture, consider all relevant factors, and make informed decisions based on individual circumstances and long-term goals.