The first cut in the Bank of Canada’s key rate in four years could have a direct effect on the real estate market and the economy in general. Homeowners who need to renew their mortgages will find some relief, while first-time buyers and renters may face rising prices.
What effect will this announcement have on mortgage lending?
By lowering its key rate from 5% to 4.75%, the Bank of Canada is setting an example for large institutional lenders, who use it as a measuring stick to establish their own interest rates. Interest on mortgages and consumer loans is therefore likely to fall.
This is a small “breath of fresh air” for buyers who took out a mortgage a few years ago, when interest rates were very low, and who must renew it soon. The “payment shock” will thus be a little easier to absorb, explains Matthieu Arseneau, deputy chief economist at the National Bank of Canada.
It is estimated, for example, that those who had to renew a fixed-rate mortgage loan of 5 years or more in 2023 saw a median increase in their payments of 15.3%.
“It’s not a quarter of a point that will give a big break to those renewing their mortgage. The gains are minimal, says Marc Lefrançois, real estate broker at Royal LePage. But if this is followed by other reductions and we subtract 0.5%, 0.75% or even 1% by the end of the year, the savings will begin to materialize. »
What about the housing market in general?
Those who, frightened by the high interest rates of recent months, had put aside their plans to buy a property, could see this drop as a signal to start house hunting again.
After skyrocketing during the pandemic to curb inflation, the Bank of Canada’s key rate remained fixed at 5% for a year. “For a long time, the market’s fear was that things would start to rise again. This possibility, this ghost which held back many buyers, is now behind us,” believes Marc Lefrançois, who foresees further reductions in interest rates in the months to come.
This new cohort of buyers could lead to upward pressure on apartment prices, and, consequently, on housing in general.
In Canada as in Quebec, the exceptional demographic growth of recent years has only increased the need for housing and caused rental prices to skyrocket. The Parliamentary Budget Officer, Yves Giroux, estimated last April that Canada would have to build 1.3 million additional housing units by 2030 to meet demand.
The Governor of the Bank of Canada, Tiff Macklem, had also warned during the publication of his Financial Stability Report in early May that it was tenants, and not owners, who were currently facing the most severe financial stress.
Matthieu Arseneau, from the National Bank, considers that the drop in interest rates could facilitate the financing and therefore the realization of certain real estate projects.
“We anticipate a moderate increase in residential construction within 12 months, which is sorely needed. But it remains difficult, given the lack of labor in the sector. You can’t train people in construction overnight. »
Are further declines expected?
Most economic indicators show that the Bank of Canada’s anti-inflationary policy has borne fruit and that inflation is heading towards the 2% target in all major consumer sectors. Everything, except housing and real estate…
This is perhaps why, at a press conference on Wednesday, Tiff Macklem and the first deputy governor, Carolyn Rogers, were careful not to announce any further reduction in the key rate in the coming months, in order to avoid any further overheating.
“It is reasonable to expect further policy rate cuts, but we are taking our decisions one at a time. We don’t want to cut more than necessary. A decline too rapid could jeopardize our progress in the fight against inflation,” Mr. Macklem said.
“The mortgage market is part of our thinking, especially since many Canadians will have to renew their loans in the coming months. People with mortgages are feeling the pressure, but so are renters. What we can do for them is control inflation,” added M.me Rogers.
Matthieu Arseneau therefore believes in a very controlled drop in the key rate, which could be spread over several quarters.
“It often takes several quarters before we actually see the effects of the Bank of Canada’s monetary policy. “It’s better to be careful,” says the economist.