Will the Bank of Canada’s latest jumbo cut add fuel to the warming housing market?

This morning, the Bank of Canada lowered the overnight interest rate by 50 basis points, bringing it to 3.25%. This marks the second consecutive cut of this size and the fifth consecutive rate cut overall – the last rate announcement in late October crossed the 4% threshold, going from 4.25% to 3.75%.

This decision comes amidst broad economic uncertainty. Inflation remains at the Bank’s target of 2% as of October and is predicted to remain so over the coming years, other factors have signaled a weakening of the economy. However, this double-cut indicates a slightly more aggressive tactic than some economists were hoping for.

Job numbers and a weak loonie are stretching the economy thin

Last week, a new Labour Force Survey found that the unemployment rate in Canada grew 0.3 percentage points MoM to 6.8% in November, the highest rate reported since January 2017 (excluding the years of the COVID-19 pandemic) – the cause of which was attributed to a growing working-age population, rather than a decrease of jobs.

For many economists and market-watchers, the results of this jobs report had cemented their predictions of a larger rate cut.

“The rise in the unemployment rate (alongside a slowing in wage growth) should reinforce that interest rates are higher than they need to be to keep inflation at the BoC’s inflation target,” wrote Nathan Janzen of RBC Economics in a letter to clients prior to the announcement.

However, there was no shortage of voices calling for a more cautious approach, particularly amidst a weakening Canadian dollar. As of Monday, the loonie stood at $0.71 to the US$1, having slipped four cents since August and continuing its downward trend.

This latest cut may run the risk of widening the gap between our two currencies, thereby increasing the cost of imported goods and raising the cost of living for Canadians.

“If it were to weaken off materially further from here – which it could, if the Bank of Canada is too aggressive — you're going to see that show up in prices,” says Benjamin Reitzes managing director of Canadian rates and macro strategist with the Bank of Montreal. “Maybe not in the broader basket, but maybe in the ones that people see the most and then maybe feel the most, which would be food. In the wintertime, I’m pretty sure my lettuce does not come from Ontario,” he adds.

However, the Bank dispelled some of these concerns by citing recent policy measures to decrease immigration to Canada, which may bolster the GDP. Meanwhile, new stimulus incentives like the GST holiday and upcoming $250 Working Canadians Rebate could help to ease any potential short-term impacts to the cost of living.

“As always, we will look through effects that are temporary and focus on underlying trends to guide its policy decisions,” said Bank of Canada Governor Tiff Macklem. “A lower Canadian dollar makes Canadian exports more competitive in the U.S., so that will add demand to the Canadian economy. It also makes imported goods more expensive, and that can also have some impact on inflation. Those are both things that we’ll need to take into account in the conduct of monetary policy.”

The housing market is approaching an inflection period

For real estate watchers, the rate cut could accelerate competition in the housing market. The BoC began its series of rate cuts in June during a time of high mortgage rates and with the market at a standstill. However, as rates have fallen, activity has steadily picked up.

In Toronto, the Toronto Regional Real Estate Board reported 5,875 home sales November 2024, an increase of 40.1 percent from this time last year, with 11,592 new listings entered into the MLS. The average detached home price also increased 2.6% compared to November 2023, to $1,106,050.

Nationwide, 174,458 property sales were reported in October – up 30% from the same period last year, and nearly 8% up from the previous month.

Meanwhile. the average Canadian home price clocked in at $696,166, a 6% increase from the same time last year.

“We’ve seen a steady increase in interest in the housing market, but it still hasn’t picked up as much as expected after the first few overnight rate decreases,” says Victor Tran, RATESDOTCA mortgage and real estate expert. “Many buyers are still waiting for the bottom of the market. We’re seeing a number of buyers take out pre-approvals in preparation for purchase, but they are still taking their time.”

Fixed rates remain above the 4% mark for a five-year term, while variable rates are likely to dip below the 5% mark. Tran predicts an uptick in homebuyers opting for variable-rate mortgages to capitalize on falling rates.

Homeowners with variable rates will real significant savings from this cut: a 50-basis point decrease translates to roughly $28 less per month per $100K of mortgage.

However, there’s room for things to heat up, at least on the housing price front.

“Currently, many markets are tipped slightly in favor of buyers, allowing them to take their time, make conditional offers and avoid bidding wars,” says Tran. However, this rate cut could present a turning point in the market. “Once the market reaches the tipping point, it’s likely to heat up quickly.”

Another factor that some say could lead to increased competition are new housing reforms set to take into effect on December 15.

In September, the Government of Canada announced changes to the mortgage rules to ease first-time buyers into the market — with the most significant being increasing the insured mortgage cap for new homes from $1 million to $1.5 million, allowing more people to purchase a home with a down payment of less than 20%.

“The change in the down payment is enormous,” says Reitzes. “On a $1.5 million house, you're going from [a minimum down payment of] $300,000 down to $125,000. That's a big change and you're going to bring a lot of people potentially into the market where they couldn't be before.”

The next Bank of Canada announcement is scheduled for January 29, 2025.

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