Will rate cut move sideline buyers?
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Activity could pick up in the new year: mortgage expert
It’s been dubbed “oversized,” “supersized” and “jumbo.” Regardless of how you describe the Bank of Canada’s recent benchmark interest rate cut of 50 basis points to 3.75 per cent, it’s welcome news to homeowners with variable rate mortgages and those with mortgages coming up for renewal.
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Prime rates will likely fall to 5.95 per cent at most lenders, according to Penelope Graham, mortgage expert at Ratehub.ca. “Those with variable mortgage rates will see either their monthly payments or the portion of their payment that services interest fall in kind.”
The Bank of Canada’s latest monetary policy report projects a recovery in home sales and a boost in prices tied to lower interest rates. And while the rate cut may spur some prospective home buyers into the market, others may continue to wait in anticipation of further cuts.
“Recent national and regional real estate reports have shown early signs that home buyers are starting to respond to lower interest rates, but many prospective buyers remain on the sidelines,” Graham says. “Now, as an additional 50-basis-point cut is anticipated in December, buyers may continue the wait for lower borrowing costs before making a move. However, new mortgage policy reforms that go into effect on December 15 could prompt activity to pick up in the new year.”
The Bank of Canada hiked rates to a 20-year high to fight inflation. The overnight rate has dropped 1.25 per cent since the beginning of the easing cycle in June and is now the lowest it has been since December 2022. For every 25-basis point decrease, variable-rate mortgage holders can expect to pay about $15 less per $100,000 of mortgage, Ratesdotca reports.
“The question on everyone’s mind is whether this will be enough to shift the holding pattern of the housing market,” says Victor Tran, Ratesdotca mortgage and real estate expert. “While this will likely encourage some buyers to enter the market and may encourage more sellers to list in anticipation of these buyers, it’s likely that many will wait for the final rate announcement of the year before making a move.
“Buyers are worried about moving ahead before the market bottoms out. The problem is that no one can accurately predict when that will happen. You can’t time the market.”
He believes there will be an increase in pre-approvals as buyers prepare to move quickly once they sense the tide is turning. Once the market begins to move, it’s likely to “heat up quickly,” pushing home prices higher. “This may lead to an unseasonably busy winter season and a busy spring season in 2025,” he says.
The Bank of Canada’s final interest rate decision of the year is set for December 11.
Market to remain in ‘holding pattern’
The Canadian Real Estate Association (CREA) once again downgraded its housing market forecast for the remainder of the year, saying the Bank of Canada’s interest rate cuts haven’t spurred the gradual improvement it previously anticipated.
“CREA’s previous forecast assumed a gradual return of buyers into the market starting with the first interest rate cuts this summer, but the market has seen little movement,” it said in the quarterly forecast, released in mid-October.
It now predicts the national housing market will remain in “more of a holding pattern” until next spring “when a sharper rebound is expected.” It forecasts some 468,900 residential properties will trade hands this year, a 5.2 per cent increase from 2023 and down from its July outlook of 6.1 per cent and its April prediction of 10.5 per cent.
National home sales are forecast to climb a further 6.6 per cent to 499,800 units in 2025 as interest rates continue to decline and demand flows back off the sidelines.
The revised forecast followed national home sales and pricing data for September. The average price of a home sold that month for $669,630, up 2.1 per cent year over year. The national average home price is forecast to edge up 0.9 per cent on an annual basis to $683,200 this year and by 4.4 per cent to $713,375 next year.
Housing starts rise
The six-month trend in housing starts decreased 1.3 per cent from 246,972 units in August to 243,759 units in September, the Canada Mortgage and Housing Corporation (CMHC) reports. The trend measure is a six-month moving average of the seasonally adjusted annual rate (SAAR) of total housing starts for all areas in Canada.
The total monthly SAAR of housing starts for all areas in Canada increased five per cent in September at 223,808 units compared to August at 213,012 units, according to the national housing agency.
In Canada’s urban centres with a population of 10,000 or greater, there were 168,897 actual housing starts between January and September. That compares to 165,559 for the same period in 2023, meaning actual housing starts are currently two per cent higher this year.
“Growth in actual year-to-date housing starts has been driven by both higher multi-unit and single-detached units in Alberta, Quebec and the Atlantic provinces,” says CMHC deputy chief economist Kevin Hughes. “By contrast, year-to-date starts in Ontario and B.C. have decreased across all housing types. Despite the increase in housing starts in September, we remain well below what is required to restore affordability in Canada’s urban centres.”
CMHC highlighted Montreal, where actual housing starts between January and September are up 15 per cent year over year, showing some recovery from historically low new home construction in 2023. In Vancouver, actual starts were down 19 per cent in that same period compared to 2023 but that was a record high year. In Toronto, housing starts in that period were down 20 per cent from 2023, which was also a high year for housing starts by historical standards.
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