What will the Bank of Canada’s next decision mean for the housing market?

Central bank is set to reveal its latest play on interest rates tomorrow

What will the Bank of Canada’s next decision mean for the housing market?

The Bank of Canada is set to reveal its penultimate rate decision of the year tomorrow (October 25), with observers increasingly expecting the central bank to leave its policy rate unchanged for the second month in a row.

Amid signs that the growth of Canada’s economy ground to a halt over the summer, the Bank’s grounds for a further hike appears to have weakened. With inflation also coming in lower than expected in September – at 3.8%, compared with an anticipated 4.0% – markets slashed chances of an October central bank hike to just 13%, according to Reuters.

Housing market unlikely to change dramatically after decision: executive

Whether the Bank decides to leave rates unchanged or introduces a fresh 25-basis-point hike, its move tomorrow is unlikely to change the state of play significantly for Canada’s housing market, according to RE/MAX Canada president Christopher Alexander (pictured top).

He told Canadian Mortgage Professional that the central bank’s actions to date on its overnight rate, which has spiked by 4.75% in 10 hikes since March of last year, had already had a profound impact in squeezing affordability for homebuyers.

“I think a pause isn’t going to sway activity one way or another. It’ll give consumers that [bit] more confidence, but the realities of having to qualify at the current rates plus the stress tests have proven to take a toll on a lot of the demand,” he said.

“If we get an increase, I’m not sure it’s going to have dramatic effects. The stress test – at some stage, the government should really take a look at [whether] that’s making sense anymore. But the wind has really come out of the sails on the demand side for a lot of buyers.”

That stress test, which requires buyers to prove they can qualify at the higher rate between 5.25% and two percentage points above their contract rate, is a mechanism that’s unsuited to the current market, according to Alexander, with rates having surged over the past 18 months.

“It was brought in when rates were extremely low, almost rock-bottom, and it made sense to have a check and balance in place,” he said. “But now I think unless the government expects rates to get up to 8%, 9% – which I don’t think they do – it just doesn’t make any sense anymore.”

Could rate cuts by the Bank of Canada heat up the housing market?

Much speculation in recent weeks has focused on when, precisely, the Bank of Canada is likely to begin cutting interest rates. That probably won’t take place until the middle of 2024 at the earliest, according to CIBC deputy chief economist Benjamin Tal, with the central bank’s benchmark rate likely to settle around the 3% mark.

Could that drum up activity in Canada’s housing market? Any increase in overall borrowing power is good for real estate, Alexander said, with RE/MAX’s network anecdotally anticipating a “really busy” spring and summer market in 2024.

“There’s this kind of stalemate between the markets and the Bank of Canada, and so much has been dictated on how banks are behaving. If we get some more stability and then certainly a rate cut happens, it’ll only prove good for real estate,” he said.

While the Bank’s aggressive series of rate increases to date means many prospective buyers may have stepped to the side instead of entering the market, Alexander said for many Canadians, that’s often not a strategy built to last.

“I am really watching to see pent-up demand. People put their plans on hold for a long time – you can only do that for so long in real estate, especially if it’s a primary residence,” he said. “Life happens, people get married, they have babies, they downsize, people die, and you can’t put your life on hold forever.

“And so I expect we get another bump in the spring much like we did this year, but again, the Bank of Canada really holds the key.”

The Bank will reveal its decision on interest rates at 10:00 a.m. ET tomorrow morning (October 25). Be sure to subscribe to Canadian Mortgage Professional to hear the breaking news as soon as it arrives.