How will the Bank of Canada's rate cut impact homebuyer sentiment?

Variable mortgage rates have finally ticked lower

How will the Bank of Canada's rate cut impact homebuyer sentiment?

The Bank of Canada finally lowered its benchmark rate last week, a long-awaited move that saw variable rates creep lower for the first time in over four years and raised speculation about the prospect of further cuts.

The central bank’s 25-basis-point reduction, which brought that trendsetting interest rate down to 4.75%, was the first time it had cut rates since the onset of the COVID-19 pandemic – providing at least small relief to scores of homeowners who had seen their rates and monthly payments surge in recent years.

Policymakers’ determination to get ballooning inflation under control had seen the Bank increase its policy rate from a rock-bottom 0.25% at the beginning of 2022 to a 23-year high of 5% by the middle of last year, with that rate then remaining unchanged until last week’s drop.

Surprisingly dovish language in its accompanying statement, meanwhile, has raised hopes that another cut could be on the way in the Bank’s next decision on rates, scheduled to take place on July 24.

Further rate cuts likely to be steady rather than spectacular

Canada’s mortgage industry has long wondered what impact one or more cuts could have on the country’s housing and mortgage markets, which have faced a protracted cooldown since the beginning of the central bank’s rate-hiking journey.

Speaking to Canadian Mortgage Professional prior to the Bank’s June announcement, Jessica Kuan (pictured top), senior partner and residential mortgage broker with Signature Mortgages (a division of Clear Trust Mortgages), said the onset of rate cuts could see demand increase and buyers step off the sidelines.

Still, she emphasized that with the Bank likely to take a measured approach to rate cuts, there seemed little prospect of a big imminent decline in rates.

“I don’t think that the Bank of Canada is going to cut rates substantially,” she said. “A rate cut from the Bank of Canada will have a direct effect on the variable rate, [and] it’s not going to bring that variable rate down substantially… I think it will heat up the market. But I do think that borrowers should expect to be in a high-rate environment for a longer period of time.”

That’s a view that’s long been echoed by top economists – particularly with the US Federal Reserve currently in no mood to slash its own key rate.

CIBC deputy chief economist Benjamin Tal told CMP after last week’s Canadian rate cut that the Fed’s outlook would prove a key factor in judging how much the Canadian central bank can afford to bring rates down without damaging the Canadian dollar.

The Fed held rates steady yet again on Wednesday (June 12), citing lingering concerns on the inflation outlook and an economy that’s remained resilient in the face of a high-rate environment.

The Bank of Canada, too, will be wary of bringing rates down too quickly and potentially reigniting the inflationary pressures of recent times – although it faces a tricky balancing act in its approach, Kuan said.

“I think if they cut rates too quickly, inflation might just be uncontrollable again. But if they don’t cut rates, the problem is that inflation will probably also stay high for a longer period of time, because the higher cost of borrowing will also see rising rents – which of course contributes to a higher cost of living overall,” she said.

Why Canadians could see now as the right time to accelerate homebuying plans

The likelihood of a higher-rate environment for the foreseeable future may convince some buyers to stay on the sidelines for now – but on the flipside, Kuan also said many will probably accept the new reality and push ahead with their homebuying plans.

That’s partly because of shifting buyer psychology when the Bank is more likely to cut than hike, and the realization that lower rates down the line could well see a corresponding jump in competition and prices.

“With every rate cut, I think we’re going to see more buyers jump into the market – which means more competition, and that is of course going to increase the prices of homes,” Kuan said.

Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.