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

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 unpack—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 doesn’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.

Bank of Canada Interest Rate Trends Since 2020

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, there’s renewed hope for positive developments in interest rates in Canada’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. “We’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,” 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.

Let’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, there’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 let’s talk about the commercial real estate sector. Here’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 don’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!