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Interest rate cuts: impact still expected on the real estate market

Economists expect the Bank of Canada to continue cutting interest rates, following the slowdown in inflation to 1.6% in September 2024. However, it is important to note that the first rate cuts in June and July 2024 did not have the hoped-for effect on the real estate market. Instead of triggering a significant recovery, these cuts have left many potential buyers on hold, with the real estate market remaining relatively stagnant. While we have seen an increase in the number of sales, the decrease in the number of listings remains a serious issue.

Why haven’t these rate cuts revived the market?


The rate cuts were supposed to make home ownership more affordable by reducing borrowing costs, but several factors have limited their impact. Firstly, the rapid rise in property prices during the pandemic left many potential buyers hesitant. Despite the reduction in mortgage costs, house prices and rents continue to make the market unaffordable for many potential buyers.

Secondly, the amount of rate reductions, notably the 25 basis point cut in June, was deemed insufficient to encourage a significant number of first-time buyers to take the plunge. Industry experts noted that more substantial cuts, perhaps totalling 100 basis points, may be needed before we see a real revival in the property market. A 1% cut in the Bank of Canada’s key lending rate seems conceivable in light of the low inflation rate.

Finally, it should be noted that inflation in recent years on essential goods such as food has considerably reduced household disposable income. This significantly limits the ability of many buyers to take the plunge.

The risks of an overheated market


Paradoxically, the Bank of Canada has also expressed fears that excessive rate cuts could cause the real estate market to overheat. If rate cuts are too aggressive, they could prompt an influx of buyers who have been putting off their decision to buy, pushing prices even higher in a market where housing supply is already limited. Such a situation could push up inflation in the housing sector, a phenomenon that the Bank is trying to bring under control.

Conclusion: A situation to watch closely


Recent rate cuts have not yet had the expected stimulating effect on the Canadian real estate market, and future adjustments will have to be carefully calibrated to avoid overheating the market while making home ownership more accessible. In the meantime, the market remains under pressure, with prices remaining high and housing supply insufficient to meet growing demand. Economists anticipate that several more rate cuts may be needed to see significant changes in real estate activity.