BoC cuts policy rate to 4.5%: What does this mean for the housing market?

Last month’s rate cut on June 5th was the first time it had dropped below 5% since last July, and the first time in more than four years it had made any cut at all.

Today, the central bank cut the overnight rate again by another quarter percentage point to 4.5%, following a softening labor market report and slowing consumer price index (CPI). In June, the CPI increased by 2.7% compared to the previous year. Analysts had been expecting a higher inflation rate of 2.8%.

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June’s rate cut didn’t revive the housing market, will July change things? 

The BoC’s recent interest rate cut in June failed to ignite a buying frenzy among potential homebuyers. Despite the quarter-point reduction, many remain on the sidelines during an unusually sluggish spring housing market.

“One rate cut isn’t going to be a magic bullet for the housing market, and even after a further quarter point reduction, mortgage rates will still be much higher than they were in the prior business cycle,” notes Avery Shenfeld, managing director and chief economist at CIBC Capital Markets. While he expects interest rate cuts to ultimately revive both home sales and residential construction, he says that will be more of a story for 2025, after a sequence of further interest rate reductions.

Consider this scenario: A potential homeowner with a household income of $178,000 could afford a purchase price of approximately $700,000. With a 25-basis point decrease, the maximum purchase price rises to just $715,000.*

*This example assumes no monthly liabilities, with a minimum downpayment, 25-year amortization and a five-year closed variable rate mortgage at 5.75% and 5.5%, respectively, at prime minus 1.2%.

For every 25-basis point drop, variable rate mortgage holders can expect to pay approximately $15 less per $100K of mortgage in monthly payments.

Sales data from the Canadian Real Estate Association released last week, reveals that home sales in the previous month barely budged after the BoC’s initial cut on June 5 — the first decrease in four years. Today’s additional quarter-point cut is unlikely to alter this trend.

The Toronto Regional Real Estate Board (TRREB) reported a year-over-year decline in June home sales. Buyers in Ontario and British Columbia continue to grapple with high borrowing costs and elevated property prices. Despite the 25-basis-point cut, first-time buyers — many of whom are still shut out of the ownership market — haven’t seen a significant shift in affordability.

Meaningful housing market momentum hinges on overcoming these challenges. Ipsos polling commissioned by TRREB suggests that cumulative rate cuts of at least 100 basis points would be necessary to significantly boost home sales.

“The June 5th decline in the BoC policy rate — and communications by its officials­ — likely helped reduce uncertainty on the future direction of interest rates and brighten the outlook for economic and income conditions,” says Patrick Perrier, director of forecasting at Scotiabank.

“Additional declines will also have similar impact, if not larger, as they will make the signal about future conditions clearer as they pile on.”

Read more: Should you buy a house right now, or wait until interest rates come back down?

Sellers eager, buyers hesitant

The impact of lower borrowing costs is becoming evident specifically among existing homeowners who have taken the initiative to list their properties. For instance, across the Greater Toronto Area (GTA), inventories rose as sellers anticipated a housing rush after the first rate cut that never materialized.

Last month, there were 23,613 active listings on the market—a substantial 67.4% increase compared to June 2023. In the City of Toronto, sales declined by 20.6% year-over-year, with 2,236 transactions. Throughout the GTA, home sales fell by 13.8% to 3,977.

Homeowners are now adopting a sell-first-buy-second approach in Toronto. They want clarity on their property prices before venturing into the purchase market.

Once the initial cohort of sellers completes their transactions, they’re likely to transition into buyers - potentially aiming to take advantage of declining mortgage rates throughout the year with more rate cuts. However, buyers on the sidelines remain cautious about stepping into the market.

Phil Soper, chief executive officer of Royal LePage told Global News that while some have secured fixed-rate mortgages below the 5% threshold, others await further rate adjustments (ideally in the 4- 4.5% range) before fully engaging in the market.

Sellers’ increased activity has led to double-digit sales declines in several cities in the GTA, resulting in higher inventories. This shift favors buyers when they are eventually ready to move off the sidelines throughout the year.

The market in the GTA currently resembles a ‘holding pattern’, with sellers and buyers on opposite sides.

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Housing prices up and not down: Up 1.9% this quarter

According to the Royal LePage House Price Survey released last week, the aggregate price of a home in Canada increased by 1.9% year-over-year, reaching $824,300 in the second quarter of this year. Despite a slowdown in activity in the country’s most expensive markets, such as Toronto and Vancouver, the national aggregate home price still rose by 1.5% on a quarter-over-quarter basis.

In Quebec, the aggregate home price increased the most year-over-year, up by 10.4%.

While sluggish housing markets typically force sellers to lower prices, Canada’s longstanding inventory shortages in housing have prompted sellers to defy this trend. Even in the current cooler market, home values remain high. Prices saw the first gain in the past eleven months.

“Other than in the condo market, home listings are still relatively contained, and many sellers are in a position to wait for a better offer, or for further interest rate cuts ahead to generate such offers, rather than chopping their asking prices,” says Shenfeld.

“Canada faces a significant structural shortage of dwellings, leading to expectations of house prices trending upward in the foreseeable future. These expectations impact demand, driving resale prices higher. They played a role in limiting price declines during the cooling housing market and will continue to do so during the recovery,” notes Perrier.

Read next: Mortgage temperature check: Canadians watching for a turning point in the housing market