Bank of Canada Rate Cut: Will It Wake The Housing Market?

The Bank of Canada dropped its overnight rate again today, bringing it 50 basis points lower than it was a mere seven weeks ago.

After the Bank lowered its overnight rate in June — its first cut in four years — many wondered if it would be enough to light a fire under Canada’s cooling housing market. According to recent data from the Canadian Real Estate Association, which found home sales to be down more than 9% year-over-year, the answer is a fairly resounding ‘no.’ 

Will an overnight rate of 4.5% unleash some of that pent-up home buyer demand we hear so much about?

Short answer: probably not. Here are a few reasons why.

Deeper cuts needed

The overnight rate only impacts variable mortgage rates, which should decline by 25 basis points in the next 24 hours. 

Even with the reduction, variable rates at Canada’s biggest banks will still be north of 6%. Getting approved for a 6% variable-rate mortgage would involve passing a stress test at 8%. A qualifying rate that high could significantly reduce the amount a borrower is approved for.

Fixed mortgage rates remain much lower than variables. Many lenders and brokerages are offering three- and five-year fixed rates for well below 5%, which means lower mortgage payments and an easier road to qualification. But even these rates haven’t been low enough to get the market moving. 

Until variable rates fall by at least another 1%, they won’t provide a more affordable option than what’s already available. That might require another four or five BoC rate cuts. 

Uncooperative home prices

Rates aren’t the only thing falling too slowly to kickstart housing demand. Home prices, despite rapidly rising supply in many markets, remain stubbornly high.

June’s average home price was down 1.6% compared to a year before, but it was still almost $700,000. Buyers have already stepped back from Toronto and Vancouver’s exhausted markets. They may be set to do so in Alberta and Saskatchewan, where surging prices appear to be testing affordability limits. 

A modest cut to the overnight rate will do nothing for home prices in the short term. If slightly lower variable rates do give the market an unexpected jolt, the increased competition among active buyers would firm up prices, not soften them. 

Temporary intangibles

There are two other reasons the market isn’t likely to pick up in the wake of today’s rate cut. Neither has much to do with the Bank of Canada. 

First, many Canadians are too worried about their finances, and the economy as a whole, to make a life-altering home purchase. 

Sixty-seven percent of Canadians feel the economy is on the wrong track, according to July’s Household Outlook Index by Maru Public Opinion Canada. A Leger survey from June found that 39% of employed Canadians are concerned about losing their job in the next 12 months. 

A lower overnight rate isn’t going to soothe these anxieties.

Second, it’s summer, which is typically one of the slowest home buying periods. Knocking the Canadian real estate market out of its seasonal ebb and flow isn’t unheard of, but the last time it happened required a raging pandemic and miraculously low mortgage rates. Neither is in the cards for summer 2024.

And really, how much more appealing does a cottage sound right now than an open house?

Final thought

The housing market is essentially roped off from the average Canadian home buyer. Mortgage rates, home prices, household debt and shaky consumer confidence are all doing their part to block the way. 

Modestly lower variable mortgage rates don’t remove even one of those obstacles. Until fixed rates drop by at least 50 basis points, and variables by another 100, most buyers will stay where they are today: on the outside looking in. 

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