Canada Housing Market

Canadian real estate markets are pausing despite hopes that rate cuts would boost activity. BMO’s new analysis suggests that while the Bank of Canada’s (BoC) rate cut may lift spirits, it won’t significantly improve affordability or drive many new buyers. The market is expected to remain constrained by rising inventory and affordability issues.

Small Sentiment Boost, Limited Impact

The real estate market slowed as interest rates climbed, with activity peaking around the first rate hike in March 2022. Many thought rate cuts would reignite the market.

“Most people in the market were eagerly awaiting this cut, and it will provide a psychological boost now that the peak of this rate cycle has likely been set,” says Robert Kavcic, senior economist at BMO.

However, he adds, “A 25 basis point cut to variable rates from 23-year highs offers little relief since most borrowers have already switched to lower fixed-rate mortgages.”

Fixed-rate mortgages are already cheaper, offering about 125 basis points of value. Most new loans over the past year have been fixed-rate, especially 5-year terms, with only 10% being variable-rate.

Affordability and Inventory Challenges

Low rates usually stimulate buying by reducing financing costs. However, current affordability issues mean the rate cut will have minimal impact.

“Even with falling home prices and lower fixed mortgage rates, affordability is still strained,” BMO notes.

To return to pre-pandemic affordability, mortgage rates would need to fall below 4%, home prices would need to drop another 12%, or incomes would need to rise significantly.

Last month, home sales in Toronto and Vancouver fell by about 20%, while inventory surged. Many sellers waited for lower rates before listing, supporting prices. If buyers don’t return soon, prices could drop further.

“Our view is that growing inventory and limited mortgage-rate relief will keep the market from taking off,” Kavcic explains.

Conclusion

In summary, while the BoC’s rate cut may boost sentiment, it won’t significantly drive new buyers due to ongoing affordability challenges and rising inventory. A substantial market revival requires greater affordability and economic changes.