After 11 months saddled with an overnight interest rate of 5%, the tide has finally turned for Canadian homebuyers.
This morning, Tiff Macklem, the governor of the Bank of Canada (BoC), announced a 25-basis-point cut, bringing down the policy rate to 4.75%.
This comes as the Canadian economy continues to grow, and inflation continues its downward trajectory towards the 2% target.
“Since our monetary policy report in April, underlying inflation has continued to ease and economic growth has resumed,” said Macklem at this morning’s announcement.” With the economy in excess supply, there is room for growth even as inflation continues to ease"
However, there are still a lot of reasons for the Bank to remain cautious.
“Further progress in bringing inflation down is likely to be uneven, and risks remain,” said Macklem. “Inflation could be higher if global tensions escalate, if house prices in Canada rise faster than expected, or if wage growth remains high relative to productivity,”
This cautious scale back is a sharp contrast from the aggressive hikes that began in March 2022, when the interest rate was 0.25 (and had been at that rate since over the course of the pandemic). They quickly ramped up the rate, 50 to 100 basis points at a time throughout the rest of the year to combat soaring inflation.
To that end, maintaining a 5% interest rate seems to have worked: Inflation is currently at 2.7%, a far cry from the highs of 8.1% in June 2022.
However, prices creeping down at the grocery store may have come as cold comfort to homeowners whose salaries have been stretched by high mortgage rates or those who are struggling to even qualify for a mortgage at all.
Also impacted are the hundreds of home sellers with properties sitting dormant in a spring market that’s slouchier than usual.
So, what difference does a 0.25% rate hike actually make in a persistent high-interest environment? Perhaps more than it seems.
Have we conquered inflation for good? Maybe not.
The good news is, the national inflation rate has been below 3% since the beginning of the year. Mortgage debt played a significant role in getting us here.
“Canadian households are carrying near-record-high levels of debt, especially from mortgages, which has made them particularly vulnerable to higher rates,” says Shelly Kaushik, an economist with BMO. “Canadians are much more reluctant to spend, so we’ve seen a broad slowdown in demand for goods and services.”
Meanwhile, she adds, many of the supply chain issues that came out of the pandemic have largely cleared up.
“That combination of higher supply and lower demand has been the major reason why inflation has come down so quickly in Canada,” she says.
However, just because inflation is lower than it has been since April 2021, a few factors could bring it back up.
The first is the U.S. Federal Reserve, which is still waiting for inflation to come down. If interest rates remain high in the States and diverge too much from Canada, the strengthened U.S. dollar may impact imports in Canada – thereby inching inflation upwards here.
The second is that if rates come down too quickly, the cost of housing may ramp back up, triggering even more inflation.
“Policymakers must weigh the risks of cutting too soon and reigniting inflation and cutting too late and creating a deeper economic slowdown because of restrictive policy,” says Kaushik.
The impact on the real estate market likely to be psychological, not financial
Both sellers and buyers are stuck between a rock and a hard place. Transaction volume in key markets across the country have slipped slightly below the ten-year national average, even as new listings have reached post-pandemic highs, according to the latest April data from the Canadian Real Estate Association (CREA).
At the same time, home prices haven’t yet declined to a price that would justify most homebuyers taking on today’s mortgage rates.
With the median single-detached home price in the GTA still hovering around $1,275,000, a rate cut of 0.25% is unlikely to move the needle for most homeowners in either direction.
The policy rate only really impacts variable rates most immediately, and fixed rate mortgages have been falling in anticipation of future rate cuts anyway, says Benjy Katchen, CEO and founder of real estate platform Wahi.
“You can get a five-year mortgage now under 5%,” he says. (Currently the best five-year-fixed rate available on RATEDOTCA is 4.79%). “Nine months ago, it was about 5%, maybe closer to 5.5% or even in some cases closer to 6%.”
Furthermore, depending on the size of your mortgage, a 0.25% rate reduction may not yield the kind of savings most homeowners are looking for.
According to data from Scotiabank chief risk officer Phil Thomas, a cut in 25-basis-points would lead to an average monthly mortgage payment reduction of $100 for homeowners in Toronto and Vancouver.
“I don’t think that will make a difference to many people,” says Katchen.
Nor will it make much of a difference to people hoping to qualify for a mortgage.
“Though buyers may want to enter the market ahead of a rate cut, or just after one, they may not be able to,” says RATESDOTCA mortgage and real estate expert Victor Tran. “Rates would have to decrease significantly for many to afford a home at today’s prices.”
However, psychology figures into most of our financial decisions and the fact of a cut itself may be enough to get at least some people off the sidelines, says Katchen.
“I think the psychology is saying OK, when the Bank of Canada says inflation's over, that means things are going to be cheaper,” says Katchen. “And then I think what happens is, people think other people are going to bid. So, I better bid before they bid. I better get off my butt and bid.”
Will the bank cut the rate again next month?
Currently, the widespread assumption is that the BoC has stopped hiking rates and will continue cutting. However, when the next cut will take place is yet to be seen.
“If the economy continues to evolve broadly, as we had expected, if we continue to see inflation pressures easing, it is reasonable to expect that there will be further cuts in interest rates,” said Macklem, stressing that every policy decision is made “one meeting at a time”.
“But the timing of those cuts or of any further cuts are going to depend on incoming data,” he added.
The next policy announcement is scheduled for July 24.
