Is the double rate cut announced by the Bank of Canada enough to revive the housing market?

The Bank of Canada lowered its key interest rate for the fourth consecutive time by 50-basis points, marking the first jumbo rate cut since June and bringing the rate to 3.75%.

“We took a bigger step today because inflation is now back to 2% and we wanted to remain close to the target," Governor Tiff Macklem said during the morning announcement on October 23rd.

At the last rate announcement in September, the rate was lowered from 4.5% to 4.25%, and previous announcements also saw 25-basis-point cuts.

But the real estate market saw little activity following these cuts, indicating a ‘wait and see’ approach from homebuyers on the sidelines.

Is today's double rate cut enough to incentivize buyers to re-enter the housing market? Let’s see what it means for the Canadian housing market.

What influenced today’s jumbo rate cut?

The Bank of Canada (BoC) has implemented a notable 50 basis-point rate cut in response to easing inflation. Canada's annual inflation rate was 1.6% in September. This decision comes amid a slowdown in Canada’s economic growth, also highlighted by a 5.1% drop in gas prices in August.

However, shelter costs continue to drive inflation, with mortgage interest and rent prices still rising. Mortgage interest costs increased by 18.8% in August, though this was a slowdown from 21% in July. Meanwhile, rents grew by 8.9%, a slight rise from 8.5% the previous month.

The unemployment rate has also ticked up, sitting at 6.5% in September, intensifying the call for policy easing measures. The labor force has grown due to population increases, although hiring has remained relatively modest.

As Randall Bartlett, senior director of Canadian economics at Desjardins, pointed out in a report, "the gradual rise in the unemployment rate and slowing pace of economic growth ... suggest high interest rates are working to cool the economy. "

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

Buyer and seller motivations in the housing market

While the previous, more modest, rate cuts didn’t spur much activity in the housing market, each rate reduction poses new potential for hopeful buyers who were previously priced out due to high borrowing costs.

According to RATESDOTCA quoter data, the overall rise in mortgage quotes saw a 49.9% month-over-month increase from August to September.

“A 50-basis point cut attracts more public attention than a 25-basis point cut, making it a significant factor,” says Ron Butler, founder of Butler Mortgage.

According to recent data from the Canadian Real Estate Association (CREA), national home sales rose 1.9% month-over-month in September 2024. This increase, driven by previous rate cuts, has brought sales to their highest level since July 2023. The CREA also reported a 4.9% increase in new listings in September.

According to Butler, buyers have other factors to weigh.

“In provinces like British Columbia and Ontario, house prices remain extremely high,” he says. “Although they've decreased slightly, there's speculation that prices might drop further. The same goes for interest rates. With a 50-basis point cut today, there might be another 100-basis point cut next year, potentially leading to much lower rates.”

He explains that with more buyers expected to enter the market, it might end up turning into a seller’s market – unless the competition heats up too much, too quickly.

Lower interest rates can make buying a home more affordable initially because monthly payments are reduced. In addition, recent government initiatives to increase housing affordability, such as increasing the insured mortgage cap to $1.5 million and allowing 30-year amortizations for first-time homebuyers, may help more buyers enter the market.

“If rates eventually drop far enough, people might see it as an opportunity. This shift is likely to happen sometime next year, leading to a potential pickup in the market,” Butler concludes.

However, as more people can afford to buy homes, demand increases and so do home prices. This higher demand can push up property prices, which might cancel out the initial affordability benefits.

When buyer activity increases slowly, it contributes to a more balanced market. This balance helps stabilize home prices and results in homes spending more time on the market, ensuring that the limited inventory lasts longer.

Looking to buy a new home? Should you go variable or fixed?

Those with variable-rate mortgages, which are directly influenced by the central bank's rate decisions, will see immediate financial relief.

However, despite the potential future savings, the variable-rate mortgage interest rates remain above five per cent and currently sit higher than fixed-rate mortgage interests. This creates uncertainty for borrowers who are considering whether a variable or fixed rate will be more cost-effective over time.

By comparison, fixed-rate mortgages offer stability, with consistent monthly payments that are appealing to risk-averse homeowners. Recent trends indicate a gradual decrease in fixed-rate mortgage interest rates, now nearing the four per cent mark.

“Fixed mortgage rates have somewhat accounted for the anticipated rate cuts, but there's still potential for them to decrease further,” says Butler.

Traditionally, while fixed-rate mortgages are the more preferred mortgage type, recently interest in variable-rate mortgages has been rising steadily. Since the overnight rate easing cycle began in June, according to RATESDOTCA quoter data, variable-rate mortgage quotes have increased from 10% of total mortgage quotes in June to 18% in September.

Are we nearing the terminal point?

The "terminal rate" or "neutral rate" is the point at which the Governing Council decides no further cuts are necessary, indicating a stable economic environment.

“We don't yet know what this terminal rate will be—whether it's 3%, 2.75%, 2.5%, or even 2%. This uncertainty depends on the state of the economy,” recognizes Butler.

If the terminal rate ends up being around 2.25%, there will be more room for variable rates to decrease. However, if it settles at 3%, there would be less room for reduction, potentially leaving five-year rates in the high 3% range.

Just like buyers, mortgage holders approaching renewal are grappling with the uncertainty of how low rate cuts will go, though predicting the exact timing of the bottom of the market remains difficult.

According to Butler, for both potential buyers and those considering mortgage renewals, if you can manage the current higher rates and it's within your budget, opting for a variable rate might offer more flexibility as rates potentially decrease in the future.

Related: Do fixed mortgage rates provide a better value than variable?

Interest rate cuts will help, but they’re not going to restore affordability for a great many

There are a lot of issues related to housing affordability, and the markets vary significantly across Canada. In some areas, houses remain relatively affordable, but in cities like Toronto, affordability is a major concern.

“If you're young and living in Toronto, you likely find the housing market unaffordable. This is a common sentiment among younger age groups, and it's a persistent problem that doesn't have an easy solution,” says Ron Butler.

For this cohort to consider buying, he says, there would need to be a significant reduction in home prices—around 40%—or a substantial increase in income and wages—about 50%.

These changes are unlikely to happen quickly, which means many people are unable to enter the market. If interest rates drop, some might find it more feasible to buy.

“At 5.5%, mortgages are largely unaffordable, but at 4%, they could become more manageable. The impact of lower rates might be more pronounced in provinces like Quebec and Alberta, where housing is generally more affordable, compared to expensive markets like Ontario and British Columbia,” concludes Butler.

But at the end of the day, some people still need homes, no matter the cost.

“Some potential buyers might decide to wait for lower prices and rates, thinking, ‘if they're coming, why not wait?’” Butler says. “However, people have needs that prompt them to buy, such as divorce, the passing of elderly homeowners, or job changes.”

Related: For many Canadian families, the great wealth transfer can’t come soon enough