The Bank of Canada delivered a big rate cut on Wednesday, slashing key borrowing rates by half a percentage point, and experts said this could help jolt Canada’s “sluggish” housing market.
The central bank’s policy rate now stands at 3.75 per cent. Wednesday’s decision is the fourth consecutive drop in interest rates since June and is the Bank of Canada’s largest rate cut since the global financial crisis in 2009, outside the COVID-19 pandemic.
“We took a bigger step today because inflation is now back to the two per cent target and we want to keep it close to the target,” Bank of Canada governor Tiff Macklem told reporters Wednesday.
Phil Soper, president and CEO of Royal LePage, said the most immediate impact of Wednesday’s rate cut will be felt by those who have variable rate mortgages.
“Activity in Canada’s housing market has been sluggish in many regions due to higher borrowing costs, but today’s more aggressive cut to lending rates could cause the tide to turn quickly. For those with variable rate mortgages – who will benefit from the rate drop immediately – or those with fast-approaching loan renewals, today’s announcement is welcome news indeed,” he said.
Soper added that cuts to the lending rate will mean many homebuyers will “come off of the sidelines.”
“In turn, rising demand will cause home prices to increase more rapidly, eliminating the advantages of lower borrowing costs,” he said, “We expect that an early spring market is on the cards – a pull-ahead trend we’ve seen in previous market turnarounds.”
James Orlando, director of economics at TD Bank, said, “If there’s one thing that a lot of Canadians don’t want is they don’t want housing in Canada to become more unaffordable. It’s already unaffordable right now.”
Get breaking National news
Orlando said if the Bank of Canada cuts rates too fast, it could lead to a “recoil” response from the housing market, with prices shooting up dramatically.
“It causes buyers to have this this FOMO – fear of missing out – in the market that causes prices to start jumping up too high and it makes housing that much more unaffordable.”
Davelle Morrison, a broker at the Toronto-based Bosley Real Estate, said this rate cut could prove a good opportunity for first-time homebuyers and for anyone with debt, such as credit card debt or pending mortgage payments.
“This is a great opportunity for those people who’ve been looking to jump into the market, especially for the first time homebuyers where there are so many condos on the market right now for them,” she said, adding that in the Greater Toronto Area condo sales have lagged behind single-family homes.
Morrison said while Wednesday’s rate cut could spur some movement in the housing market, it is unlikely to be a “runaway field.”
She anticipates some prospective homebuyers would still be cautious.
“Some people might wait for that next rate announcement in December. I would suggest to those people, you could go buy something now and close after the next rate cut. Therefore, you have your cake and eat it too. That way you’re getting in at a lower price, but you’re taking advantage of the next rate cut,” she said.
She said another impediment to homebuying for many in Canada is the “stress test.”
Before someone borrows money from a federally regulated lender, like a bank, they need to prove they can afford payments at a qualifying interest rate. This rate is higher than the actual rate in a mortgage contract.
This is referred to as the “stress test.”
The stress test requires borrowers to qualify for a mortgage at a rate of 5.25 per cent or two per cent above the contract rate, whichever is higher. Borrowers need to prove they could handle higher monthly payments if the central bank rate rose rapidly.
“We’ve got that new rate of 3.75 per cent, but buyers are still being stress tested and approved at a rate that’s two per cent higher,” she said. “That impacts our buying power.”
With files from Global’s Craig Lord and Anne Gaviola