Canadian Real Estate Markets Won’t See A Big Boost From Rate Cut: BMO

Canadian real estate markets hit pause, with the theory being rate cuts would revive the market. That theory is playing out for sellers, but one of Canada’s banks doesn’t see it driving many new buyers. A new analysis from BMO argues the Bank of Canada (BoC) rate cut may boost sentiment, but won’t provide much affordability relief. In the near-term, they see the market being contained by surging inventory and a lack of affordability. 

Canadian Real Estate May Get A Sentiment Boost From Cuts, But Not Much More

Canadian real estate markets ground to a halt as interest rates climbed. Even before rates trickled into credit, activity peaked in most markets right around the first hike in March 2022. It’s natural to assume that if rate hikes triggered a sentiment-based slowdown, cuts would do the opposite. At least, that was the logic shared by virtually everyone in the real estate industry. 

“Most market participants have been eagerly awaiting this cut, and there will surely be a psychological boost now that the peak of this rate cycle has most likely been set,” explains Robert Kavcic, senior economist at BMO.  

Adding, “But at the same time, a 25 bp trim to variable rates from 23-year highs is very little actual relief when most borrowers have already moved to lower fixed-rate mortgages.” 

The overnight rate only directly impacts variable-rate mortgage costs. Fixed-rate mortgages move with bonds of similar terms, and they’re already much cheaper. He notes that fixed-rate mortgage interest delivers about 125 basis points (bps) of value. Buyers are already making use of the cheaper credit.  

BMO points to regulatory data showing that the majority of new lending is fixed-rate loans, especially 5-year terms. In contrast, they found just 10% of new loans over the past 12 months have been variable-rate loans. 

“… if the market is mostly operating on fixed rates right now, this week’s move doesn’t alter the calculus much even if it does provide a psychological boost,” explains Kavcic. 

Lack of Affordability And Soaring Inventory To Hold Real Estate Back

Low rates help to stimulate purchasing by lowering financing costs faster than prices can adjust. Traditionally, a rate cut should help to boost demand—or at least remove some of the friction. That might not be the case this time around, since affordability is stretched to the point that the rate cut will have little impact. 

“Even with the correction in home prices and the recent decline in fixed mortgage rates, affordability is still strained,” says the bank. 

According to their calculations, a return to pre-pandemic affordability requires mortgage rates falling below 4%, prices down another 12%, incomes need to rise enough to make up the difference of those two, or a combination of all of the above need to occur.

Last month, home sales in Toronto and Vancouver fell roughly 20% each, while inventory surged higher. A flood of sellers had been waiting for rates to pull back before listing, helping to prop up prices. However, if buyers don’t return soon, it can apply downward pressure on the market. 

“Our view has been that growing inventory and little actual mortgage-rate relief will keep the market from really taking off at this stage,” Kavcic explains.