Real Estate News – Second reduction in the Bank of Canada’s key interest rate

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July 25, 2024

Real Estate News – Second reduction in the Bank of Canada’s key interest rate

Top information

The Bank of Canada reduced its key interest rate, directly influencing lending conditions.
Lower interest rates should boost confidence and continue market growth
Economists are debating the long-term impact on the economy and the market.
Further rate announcements are expected, raising expectations.

In an ever-changing economic context, the Bank of Canada recently announced a cut in its key interest rate.

This decision, aimed at stimulating the economy and taking a step forward in the fight against inflation, has immediate and future repercussions for the real estate market. This article explores in depth what the key rate is, why it was cut, and how it affects buyers, sellers and investors.

Time needed: 5 minutes

What is the key rate
Impact and outlook for the real estate market
Upcoming announcements and forecasts

What is the key rate?

Definition et roles

The policy rate, also known as the target overnight rate, is an interest rate set by the Bank of Canada.

It serves as a benchmark for loan interest rates between financial institutions, thus influencing overall loan and mortgage interest rates for consumers.

By changing the key interest rate, the Bank seeks to control inflation, maintain economic stability and influence overall economic activity (Bank of Canada).

Historic context

The Bank of Canada’s key interest rate has undergone several adjustments in recent years, notably in response to global economic crises and fluctuations in inflation.

For example, in March 2020, the rate was quickly lowered to 0.25% to support the economy during the COVID-19 pandemic. Since then, the Bank has gradually increased the rate to curb rising inflation, reaching 5% in July 2023.

The recent reduction to 4.5% in July 2024 marks an attempt to stimulate the economy again by making credit more affordable (WOWA) (Bank of Canada).

Financial market reactions

Following the announcement of the key rate cut, financial markets showed positive signs, with a rise in real estate equities and a slight increase in lending activity.

However, this policy also entails risks, not least the possibility of overheating in the real estate market, which has already seen price growth since the start of the year. Some experts fear that lower rates will encourage excessive risk-taking, leading to higher asset prices and increased household indebtedness (Bank of Canada).

These enhancements provide a more complete framework for understanding the context and implications of the Bank of Canada’s recent decision.

The impact on buyers’ financing

The Bank of Canada’s key interest rate plays a key role in market players’ financing conditions.

This applies in particular to variable-rate borrowers, whose conditions will become more flexible with this new rate cut. On the other hand, for fixed-rate borrowers, whose conditions are fixed and agreed when the rate is introduced, their monthly payments and mortgages should not be affected.

Kyle’s video analysis :

Impact and outlook for the real estate market

Bank of Canada announces rate cut

On July 24, 2024, the Bank of Canada announced a cut in its key rate to 4.5%. This decision was taken in response to a series of economic data showing a slowdown in growth. The announcement was widely covered by the media, including Les Affaires and La Presse.

Recent statistics

Since the announcement of the Bank of Canada’s previous rate cut, the Canadian real estate market has shown signs of increased activity. Indeed, home sales are up 14.5% month-on-month and 10.1% year-on-year in key regions such as Toronto and Vancouver. In Montreal, there was a 13% increase in sales and a 20% rise in inventory in June 2024. This renewed interest is partly attributable to improved financing conditions, although interest rates remain relatively high (BNN Bloomberg) (Zoocasa.com).

The recent 25-basis-point reduction has also prompted the major Canadian banks to lower their prime rates, making it easier for potential buyers to access mortgages. However, some experts point out that this cut may not be enough to significantly revive the real estate market, especially for fixed-rate buyers who negotiated their rates before the cut, still constrained by high borrowing costs (BNN Bloomberg) (CMHC).

Discover our monthly real estate statistics, at the heart of the Montreal market:

Perspectives and potential impact

In the short term, lower rates could encourage more real estate transactions by making mortgages more accessible. However, this increase in demand is also likely to push up prices, exacerbating affordability challenges for certain segments of the population.

In particular, markets like Toronto, which have already seen significant price declines, could see a recovery in prices as demand picks up (Global News) (Zoocasa.com).

The medium-term outlook points to a possible stabilization of the market with moderate price growth as economic conditions improve and further rate cuts are considered (BNN Bloomberg) (CMHC).

In summary, while the recent rate cut is a positive development for the Canadian real estate market, its full impact will depend on a number of factors, including the evolution of interest rates and the responses of consumers and investors.

On the other hand, as Kyle points out in his analysis, although the mortgages of a proportion of buyers are unlikely to change, variable-rate borrowers will directly appreciate this rate cut. Also, this new announcement could definitely spur hesitant buyers into action, or boost market confidence and buyer sentiment, which we should see more active in the coming weeks.

Diverging economist analyses

Economists’ opinions on the Bank of Canada’s recent rate cut are varied and reflect the current complexities of the economic landscape:

Penelope Graham of Ratehub.ca, believe that this reduction could breathe new optimism into the real estate market, although borrowing costs remain high for many potential buyers (BNN Bloomberg).
Philippe Simard of Ratehub.ca observes that this drop could also encourage renewed optimism in the real estate market, although rates remain restrictive.
Randall Bartlett of Mouvement Desjardins anticipates further rate cuts, seeing an urgent need to stimulate the economy to avoid a recession.
BMO’s Douglas Porter and RBC’s Claire Fan share this view, with forecasts for further declines if economic conditions warrant (BNN Bloomberg) (Yahoo Finance) (Yahoo News – Latest News Headlines).
Leah Zlatkin of LowestRates.ca points out that despite a 50 basis point drop since June, rates are still comparatively high, and many potential buyers are waiting for further reductions to increase their purchasing capacity (BNN Bloomberg).
Stephen Brown of Capital Economics, point out that despite a rate cut, the Bank of Canada remains concerned about the inflation outlook. He notes that further cuts may be necessary if the economy continues to show signs of weakness (ca.finance.yahoo).
Finally, Scotiabank, represented by Derek Holt, is expressing a degree of caution, believing that the Bank must navigate carefully to avoid a recession while keeping inflation under control (ca.finance.yahoo).

Upcoming announcements and forecasts

Key dates to watch

The next Bank of Canada meetings, particularly the one in September 2024, are crucial. Economists and analysts, such as Philippe Simard of Ratehub.ca and Douglas Porter of BMO, are keeping a close eye on these dates, speculating on possible further rate cuts.

This could influence buying and selling decisions in the real estate market, with expectations of rate stabilization or reduction to further stimulate the economy (Yahoo News – Latest News Headlines).

Preparing for the changes ahead

It is essential for buyers, sellers and investors to stay informed and consult experts to adapt to market developments. Keeping abreast of updates on monetary policies and economic analyses can help to make informed decisions. For further information and in-depth analysis, visit our properties page and our blog.

Conclusion

The Bank of Canada’s recent rate cut marks a significant turning point for the Canadian real estate market. Buyers, sellers and investors need to understand and prepare for these changes to navigate this new economic environment. The implications of these monetary adjustments are wide-ranging and require ongoing attention to optimize opportunities in the real estate market.

For advice, guidance or consultation on your real estate project, contact our team of Montreal real estate brokers.

Kyle Shapcott

kyle@equipels.com

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Kyle has been an expert on the real estate market for over 10 years. He is passionate about Montreal and the city’s real estate sector, and regularly shares his analysis and advice in his articles.

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