Canada’s central bank has slashed interest rates four consecutive times, including last week’s oversized half-a-percentage-point cut, and signalled that it’s prepared to cut again. Lower borrowing costs are good news for aspiring homeowners, so why are so many still on the sidelines?
If the inquiries fielded by Ratehub’s mortgage brokers are any indication, would-be homebuyers are worried about timing. Interest rates are widely expected to keep falling, with the Bank of Canada’s benchmark rate seen by markets as dropping to near 2.5 per cent by the end of next year. But with lower interest rates comes the spectre of rising home prices.
After a sluggish 2024, home sales and buyer demand are expected to heat up in the second half of the new year, as lower borrowing costs coax buyers back into the fray, according to the latest forecast by the Canadian Real Estate Association (CREA). As well, new mortgage rules that ease qualification criteria for first-time buyers and insured mortgage borrowers will kick in on Dec. 15, enabling more buyers to enter the market.
All of that could set the stage for a robust January market, and likely a sizzling spring. And it has left Canadian home buyers wondering: Is this the affordability sweet spot, before home prices start to surge?
The answer is likely yes – conditions haven’t been this buyer-friendly in a long time. According to the CREA report, sellers remained motivated in September, adding plenty of market supply. The national average home price, at $669,630, remains 18 per cent below the all-time peak of $816,720, reached in February, 2022.
For those on the hunt, there are still deals to be had, but they might not last long. There’s plenty of precedent to suggest that home prices are poised to skyrocket. While we can’t predict the future, we can look back to the previous times the BoC cut rates by half a percentage point, and how that affected the real estate market.
The last time we saw a decrease this hefty was back in the early days of the COVID-19 pandemic. To counter the effects of lockdowns, the central bank delivered extraordinary economic stimulus in the form of three half-point cuts in March, 2020. We all know what happened next: buyers clamoured for properties, and the national average home price surged by 51 per cent – more than $270,000 – over the next two years.
Now, the pandemic real estate market was hardly the norm. There were extraordinary factors at play, such as the desire for larger living space, and moving out of city cores, that added fuel to the demand for housing. But it certainly offers an example of how quickly prices can heat up in Canada when rates inch lower.
The last non-pandemic-era half-point cut we received was back in March, 2009 – and there are greater similarities here to today’s economic picture. This harks back to when Canada was recovering from the global recession and the BoC was just finishing up a similar cutting cycle in which it had doled out four percentage points in rate cuts since December, 2007. Like today, the central bank was fretting about weak inflation and a widening output gap.
That final half-point cut – which had brought the benchmark rate down to 0.5 per cent – resuscitated the Canadian housing market after a record low year in 2008. According to CREA, sales rose by 40.8 per cent, with prices jumping 17.6 per cent between March, 2009, and March, 2010. By that December, residential sales had surged by 72 per cent – capping off the strongest fourth period on record.
Of course, no two economic eras are the same. A key difference between the current rate cycle and the previous two is that the final resting point for the BoC’s overnight rate may be well above the rock-bottom rates on tap during the pandemic and global recession, and perhaps the market won’t heat o quite the same degree.
But, higher home prices are still a certainty – and yet another consideration for today’s mortgage borrower.
Penelope Graham is the director of content at Ratehub.ca.