For those Canadians anxiously waiting for lower interest rates, good news. Rate relief may be coming this summer – perhaps as early as June or July.
The latest Consumer Price Index report suggests inflation is cooling and has boosted expectations the Bank of Canada will lower rates by a quarter of a percentage point within the next two months, and perhaps by three-quarters of a percentage point by the end of the year.
Markets are pricing in a 50-per-cent chance that the BoC will cut at the next rate announcement on June 5 – when it will set the cost of borrowing for variable-rate loan products, including variable-rate mortgages – with an 83-per-cent probability of a decrease by July.
This will usher in a third phase to the Bank of Canada’s plan to rein in inflation. The first was its historic series of rate hikes, in which it hiked Canada’s benchmark borrowing rate by a total of 10 times between March, 2022, and July, 2023. Next came the long, elevated rate-hold plateau that has lasted to the present day, where borrowers have had to adapt to a higher interest-rate environment.
During these first two phases, Canadians with variable-rate mortgages have seen their rates rise from below 1 per cent to roughly 6 per cent. To illustrate, someone who took out a $500,000 mortgage at 0.89 per cent back in 2021 has since seen their monthly payment balloon by over $1,300, from $1,859 to $3,184 a month.
So it’s safe to say that borrowers are keen to see the central bank enter this third, rate-cutting mode – but once it does, a few things will likely happen.
After the first quarter of a percentage point cut, the prime rate in Canada – which is based on the BoC’s benchmark rate – will fall from its current 7.2 per cent to 6.95 per cent. That in turn will lead to decreases in variable-rate borrowing products, which are priced based on prime plus or minus a percentage.
Those Canadians who’ve stuck it out in their variable mortgage rates, as well as those with home equity lines of credit, will get some long-awaited, if slight, relief. The mortgage holder with the $3,184 payments would start paying $3,110, based on a rate of 5.7 per cent.
This is good news for existing borrowers, but could actually make it tougher for those shopping for a new mortgage, or looking to buy a home. That’s because any small drop in mortgage rates can have a big impact on the housing market.
Despite a sleepy start to the spring selling season (national sales were down 1.7 per cent between March and April, according to the Canadian Real Estate Association), real estate boards predict buyers will reappear once rates start to fall. That would in turn push home prices higher, a correlation we’ve seen play out through past rate drops.
The most recent example was in March, 2020, when the BoC slashed its rate to 0.25 per cent as an emergency pandemic measure. While Canadians were initially shy to buy homes amid lockdowns, that didn’t last for long. By May, the market was rapidly heating, with monthly sales up 56.9 per cent.
By December, home prices in Canada hit a record high, up 17 per cent annually. House prices kept rising until February, 2022 – the last month before the start of rate hikes – when the national average price in Canada hit a peak of $816,720.
This was largely driven by the psychological shift that occurs in a lower-rate environment; borrowers see the upward pressure on home prices and feel urgency to jump in, in turn driving up prices and competition. It’s a self-fulfilling prophecy.
But today’s real estate and mortgage markets feel exhausting. High mortgage rates have been putting pressure on household budgets for many months. Property inventory is building and savings have dwindled.
Approximately half of today’s borrowers have already dealt with higher rates at renewal time, with the next half set to over the coming year. This poses the question: Once rates do start to trend lower, will the same psychological FOMO (fear of missing out) return to the housing market?
Keep in mind, a quarter-point decrease is a drop in the bucket, considering rates will still be 4.75 percentage points higher than they were just two years ago. Even after multiple cuts, Canadians will still face high borrowing costs – in fact, it would take 19 quarter-point cuts to reduce today’s rates back to their pandemic lows.
Given this “higher for longer” stand is a relatively new reality for Canadian borrowers, we’ll have to wait and see whether these anticipated cuts will light a fire under the housing market and push buyers off the sidelines.
James Laird is the co-founder of Ratehub.ca and president of CanWise Financial mortgage lender. Penelope Graham is the director of content at Ratehub.ca.