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Will the Bank of Canada Interest Rate Cut Revive the Real Estate Market?

Author: Jatin Gill  |   Read Time: N/A
Last updated: September 22, 2024   |  
This blog has been reviewed by Jatin Gill, a seasoned real estate professional with 21 years of experience in the industry, ensuring the information is accurate and relevant for your real estate needs.
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The Bank of Canada recently made waves by announcing a 25-basis interest rate drop, which led to a lot of debates among real estate experts about what this could mean for the housing market. Many saw this move, the Bank of Canada interest rate cut, as a potential lifeline to boost buyer confidence and stimulate activity. However, some experts remain skeptical, pointing to the still-high borrowing costs and economic uncertainties. 

So, will this interest rate cut by the Bank of Canada bring a much-needed revival, or is it just a drop in the bucket? In this article, we’ll explore the mixed opinions on how this latest change might impact everything from condo sales to commercial real estate, especially in the Toronto housing market. Whether you’re a homeowner, investor, or just curious about real estate news in Canada, there’s a lot to unpackโ€”so let’s dive in!

Key Points

  • The Bank of Canada has cut interest rates by 25 basis points.
  • This change may boost buyer confidence, but it doesnโ€™t solve the issue of high borrowing costs and economic uncertainties.
  • While lower mortgage interest rates could ease mortgage payments and stimulate buying, challenges persist in condo sales and the pre-construction sector, with slow recovery expected.

Since 2020, the Bank of Canada (BoC) interest rates have seen significant shifts. In February 2020, rates were at 1.75 percent before dropping sharply to 0.25 percent in March 2020, a rate that remained unchanged for nearly two years. From February 2022 to July 2023, the rates gradually increased from 0.25 percent to 5 percent. With the recent two rate cuts, thereโ€™s renewed hope for positive developments in interest rates in Canadaโ€™s housing market.

Impact on the Housing Market

The recent 25 basis point cut has stirred mixed reactions among Canadian housing market analysts and real estate professionals. On the optimistic side, experts suggest that this rate cut could lower borrowing costs, which may encourage a wave of new homebuyers who were previously priced out of the market. 

With lower interest rates, we can expect monthly mortgage payments to become more manageable -if not more affordable. Over time, it will provide a much-needed boost, especially to the real estate market in Toronto and Vancouver, where housing affordability has been a long-standing issue.

However, others like Leah Zlatkin of LowestRates.ca are not as convinced. She argues that while the rate cut could offer temporary relief, it doesn’t significantly change the landscape for most buyers. โ€œWeโ€™ve seen a 50-basis point drop since June, but rates are still comparatively high and many potential buyers are waiting for further rate decreases to increase their buying power before they make a move,โ€ she said.

Many are still grappling with high property prices, and those with variable-rate mortgages have already felt the sting of previous rate hikes. We should also consider the broader economic challenges, such as persistent inflation and the uncertainty of local markets, which can effectively overshadow any benefits the Bank of Canada interest rate cut might bring.

Although interest rates are now slightly lower, the cost of borrowing remains elevated compared to historical norms as evident in the graph above. This could continue to dampen enthusiasm among potential first-time homebuyers who are facing both high prices and stringent lending criteria. 

Effect on Different Market Segments

The BoC rate cut can also be viewed from another perspective; how it impacts different segments of the Canadian housing market.

Letโ€™s start with the condo market. Over the past few decades, the condo market has slowed down, partly due to a decrease in interest from investors. With fewer buyers looking for investment properties, new condo unit sales in Toronto have hit a historic low, marking the slowest pace in 27 years

This decline suggests that even with the Bank of Canada interest rate cut, the condo market might continue to face challenges as it adapts to changing buyer preferences and economic conditions.

On the other hand, the pre-construction sector is also feeling the pressure. Richard Mariani, a real estate analyst, points out that the pre-construction market has been struggling due to higher construction costs and shifting market dynamics. It has been getting harder and harder for developers to sell new units, and changing the outlook for recovery appears to be a long game. 

Mariani suggests that it could take several years for the pre-construction market to fully bounce back, as buyers remain cautious and developers adjust their strategies to meet the new demand levels.

Variable vs. Fixed Mortgages: What’s the Impact?

The next question is how the recent interest rate cut by the Bank of Canada affects mortgage payments. Here, thereโ€™s a visible distinction between different types of mortgages.

For those with variable mortgages, this move could be a welcome relief. With lower interest rates, variable mortgage holders might see a reduction in their monthly payments, potentially saving hundreds of dollars over the year. 

However, fixed-rate mortgage holders might not see much change. Fixed-rate mortgages, which follow the bond market, were already significantly lower than variable rates before the Bank of Canada’s recent rate drops and these cuts are already reflected in fixed rates.

However, with the bond market becoming more cautious due to concerns about slower economic growth, three- and five-year fixed mortgage rates could gradually decrease further. This trend might make homeownership more accessible to new buyers, encouraging them to consider entering the market despite economic uncertainties.

Commercial Real Estate Market Reaction

Now letโ€™s talk about the commercial real estate sector. Hereโ€™s how we expect the changes in interest rates to unfold:

  • New Developments and Financial Viability: Lower interest rates make borrowing more affordable, encouraging developers to finance new projects and expand rental property offerings.
  • Shift from Rentals to Purchases: Reduced borrowing costs may increase home affordability, potentially leading to a gradual shift from renting to buying.
  • Enhanced Investment Appeal: Lower rates boost the attractiveness of commercial real estate (CRE) investments, offering better returns compared to other asset classes in a low-interest environment.

However, realistically, the impact will remain limited if we donโ€™t see more substantial Bank of Canada interest rate cuts in the future. Many potential buyers and investors remain cautious, and the market is likely to see only gradual changes in the coming months.

Bottom Line

Whether you’re looking to buy your first home, invest in a rental property, or explore commercial real estate opportunities, it’s clear that the landscape is shifting. Staying informed and prepared for these changes will be key to making the most of any market movements.If you’re ready to take advantage of the evolving market conditions, Platinum Condo Deals is here to help. With a team of experienced agents and strong relationships with top developers across the GTA, we offer exclusive access to the latest pre-construction condos. As a VIP client, you’ll be among the first to receive special promotional packages, detailed floor plans, and pricing information. Contact us today to secure your spot at the forefront of Toronto’s real estate market!

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Jatin Gill

Jatin Gill, an esteemed authority in real estate writing, is celebrated globally for his unparalleled expertise. With over 20 years in the industry, he has authored more than 1,000 SEO-friendly articles covering every facet of real estate. Specializing in pre-construction projects, Jatin's extensive knowledge spans all real estate topics. His content is a go-to resource for anyone seeking comprehensive, insightful, and up-to-date information in the real estate market.

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Frequently Asked Questions (FAQs)

How might the Bank of Canada's rate cut affect the real estate market?

The rate cut may boost buyer confidence but could have a limited impact due to high borrowing costs.

Will the interest rate cut lower mortgage payments?

Yes, it could reduce monthly payments, especially for variable-rate mortgage holders.

Is the rate cut enough to revive the condo market in Toronto?

Not likely, as new condo unit sales are at historic lows and face several challenges.

How could the rate cut impact commercial real estate?

Lower rates might make borrowing more affordable, encouraging new developments and investments.

What are the broader economic challenges affecting the real estate market?

Persistent inflation, high borrowing costs, and global market uncertainties continue to impact the market.

Does the Bank of Canada interest rate cut benefit first-time homebuyers?

It provides temporary relief, but high prices and stringent lending criteria remain barriers.

How might the pre-construction market respond to the rate cut?

The sector may struggle due to high construction costs and cautious buyer sentiment.

Will fixed-rate mortgages see any benefit from the rate cut?

They may see gradual decreases as the bond market adjusts to economic conditions.

Could lower interest rates attract more investors to commercial real estate?

Yes, as commercial real estate may offer better returns compared to other assets in a low-interest environment.

What is the current sentiment among potential buyers and investors?

Many remain cautious, waiting for further rate decreases and market stabilization.

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