BoC lowers rate to 4.25%: What homeowners and buyers need to know

For the third consecutive time, the Bank of Canada is lowering its key interest rate by 25 basis points, bringing the rate to 4.25%.

At the last rate announcement in July, the rate was lowered from 4.75% to 4.5%, following earlier cuts from a high of 5.0%.

These reductions have been made in response to a weakening job market and easing inflation, which, at 2.5%, is moving closer to the Bank of Canada’s 2% target.

“As inflation gets closer to the target, we want to see economic growth pick up to absorb the slack in the economy,” Governor Tiff Macklem said during the announcement on September 4th. “If inflation continues to ease...it is reasonable to expect further cuts in our policy interest rate.”

How will the rate cut effect mortgage rates?

Benjy Katchen, who leads an Ontario real estate agency called Wahi, says the rate cut will not change current fixed mortgages mortgage rates, but it does set the stage for potential future reductions.

According to Katchen, the expectation of a rate cut has already been factored into current five-year mortgage rates. "We’re seeing the lowest five-year rates since before this tightening cycle began," he says.

However, if the Bank of Canada signals more aggressive cuts, Canadians could see further reductions in five-year mortgage rates.

"If it falls to a number with a three in it, then I think the market is going to get really busy again," Katchen predicts.

For those considering variable mortgage rates, the immediate impact may be less significant.

"The variable rate is still too high for most people," Katchen explains. With the five-year-variable rate currently posted at 5.55%, even a 25-basis point cut won't make variable rates more attractive than the current five-year fixed rates, which currently is hovering around 4.6%.

Read more: Inflation is impacting your mortgage rate. Here's what you can do about it

What impact will the rate cut have on the real estate market?

When it comes to whether the Bank of Canada's recent rate cut will affect the real estate market, some economists believe it won't make much of a difference right away. However, others see opportunities for buyers.

Benjamin Reitzes, managing director and Canadian rates and macro strategist at BMO Capital Markets, says the previous rate cuts haven’t made much of an impact on activity in the real estate market.

"We're waiting for buyers to really get a bit more aggressive,” he says. “Things have improved to some extent, but we're nowhere near the levels of activity we've seen in the past number of years before rates moved up to these levels.”

The RBC Economics report from August 2024 shows a brief increase in activity between May and June, but then home resales declined again in major markets such as Vancouver, Calgary, and Toronto. This suggests that Canadians are still cautious about their financial stability and concerned about whether now the right time is to make such a big investment.

“And so (buying) activity should improve on the margin, but it's hard to see a big pickup in activity generally,” says Reitzes.

However, buyers may be waiting for further rate cuts before making a move, according to Katchen.

"It's actually a pretty good time [to buy], but consumer sentiment's not there," Katchen notes.

Katchen thinks many buyers don't realize they can afford more now, adding that while house prices are staying about the same, there are more homes to choose from. As a result, buyers may have a better chance to find good deals.

In short, while the rate cut might not cause big changes immediately, it's a promising time for buyers who are ready to look for homes.

As of July 2024, the Canadian Real Estate Association states that the average home price in Canada was $667,317, which is almost unchanged from the same time last year.

What cities are seeing the most demand?

While many major cities are experiencing a slowdown and declining home sales, Katchen says that Calgary ‘s housing market is booming due to its affordable housing and high-paying jobs.

This sets Calgary apart from the broader national trend of a cooling real estate market.

Prices for a single detached home in Calgary have gone up 9.4% year-over-year to $710,000, indicating a strong market rebound and increased buyer activity.

Housing markets with lower prices also continue to experience strong demand. "We’re seeing continued demand in secondary markets or on the outskirts of major cities," Katchen says. This includes areas like Kitchener-Waterloo, London, and Guelph.

For example, the average detached-home sale price in the Waterloo region was  $914,469 in July 2024, marking a 0.6% decrease year-over-year and an increase of 1.6% monthly decrease.

On the other hand, luxury properties and vacation homes are seeing more price fluctuations. "In the short term, the prices are a little bit more volatile," Katchen says.

Although owning second homes is still popular in the long run, the current market is less predictable.

Related: How much mortgage can the median household income afford in these cities?

Current job market making it harder for Canadians to invest in a home

In his announcement, Macklem highlighted that shelter price inflation is still currently the biggest contributor to overall inflation — at 25% of the average consumer spending basket — despite some signs that the cost of housing is easing.

“[Shelter] is a big part of what Canadians are spending on and is running over 8%, so it is going to be hard getting to 2% inflation when a quarter of your basket, a necessity, is running that high,” he said. “So, we’ll have to see further easing.”

But Reitzes points out that while cutting interest rates to stimulate the economy can help, it doesn’t fix the bigger problems in the economy.

“A rate cut is designed to stimulate demand, but we must remember that underlying economic challenges remain,” Reitzes warns.

These challenges include Canada’s weakening job market, which is causing financial struggles for many Canadians and making homeownership increasingly unaffordable.

As of July 2024, Statistics Canada reported that unemployment rate was at a 30-month high of 6.4%, indicating an upward trend. This increase in the unemployment rate is partly due to rapid population growth, which the labor market has struggled to absorb.

Read more: Mortgage rates are creeping closer to 4% after the latest inflation news

More rate cuts are expected

Reitzes says more rate cuts are expected in the future, which “will be constructive not for housing, but for the economy in general.”

“It is going to take some time for the lower rates to pass through the economy and to really help households. But that's the direction we're headed in, and I think it's clear that rates are coming down,” says Reitzes.

“The only question is, is how far and how fast,” he adds.