The Bank of Canada made a significant rate cut on Wednesday, reducing key borrowing rates by half a percentage point, bringing the central bank’s policy rate to 3.75 per cent. This marks the fourth consecutive interest rate cut since June and is the largest rate cut since the 2009 global financial crisis, outside of the COVID-19 pandemic. Bank of Canada governor Tiff Macklem stated that the decision was made to keep inflation close to the two per cent target. Experts believe that this rate cut could help stimulate Canada’s sluggish housing market, particularly benefiting those with variable rate mortgages.
The immediate impact of the rate cut will be felt by those with variable rate mortgages as well as those approaching loan renewals. Phil Soper, the president and CEO of Royal LePage, mentioned that the reduction in lending rates could prompt many homebuyers to enter the market. As a result, rising demand may lead to faster increases in home prices, potentially negating the advantages of lower borrowing costs. Soper predicts an early spring market as a result of this more aggressive rate cut, a trend seen in previous market turnarounds. James Orlando, the director of economics at TD Bank, expressed concerns about housing affordability if rates continue to drop too quickly, as this could lead to a “fear of missing out” mindset in the market.
Davelle Morrison, a broker at Bosley Real Estate in Toronto, sees the rate cut as a positive opportunity for first-time homebuyers and individuals with debt, such as credit card debt or pending mortgage payments. She believes that the market could see some movement as a result of the rate cut, though it is unlikely to lead to a runaway situation. Morrison also mentioned the impact of the stress test on potential homebuyers in Canada, which requires borrowers to qualify for a mortgage at a higher rate than the actual mortgage contract rate. This could impact buying power and the ability of some individuals to enter the housing market.
Morrison advised prospective homebuyers to consider taking advantage of the current lower rates, despite the stress test requirements. While some may decide to wait for the next rate announcement in December, Morrison suggested that purchasing now and closing after the next rate cut could be a strategic move. This would allow buyers to secure a lower price while also benefiting from future rate reductions. Additionally, she highlighted the importance of understanding the impact of the stress test on buying power in the current market environment. The stress test currently requires borrowers to qualify at a rate of 5.25 per cent or two per cent above the contract rate, potentially limiting the buying power of many Canadians.
Overall, the rate cut by the Bank of Canada is seen as a potentially positive development for Canada’s housing market, with the potential to stimulate activity and increase demand. However, concerns about housing affordability and the impact of continued rate cuts on prices remain. While the rate cut could benefit some buyers, particularly those with variable rate mortgages, it is important for potential homebuyers to consider the implications of the stress test on their ability to qualify for a mortgage. As the market reacts to the latest rate cut, it will be important to monitor the overall impact on housing prices and affordability in the coming months.
