Overview: a look at the Bank of Canada’s 2nd rate cut on July 24, 2024, its impact on the GTA housing market, predictions for future rate cuts, and advice for buyers and sellers.
As of July 24th, it’s also the first G7 country to cut them a second time.
Reuters reports:
The Bank of Canada on Wednesday trimmed its key interest rate by 25 basis points for the second month in a row, bringing it to 4.5%…
But will a 2nd rate cut be enough to revive the housing market?
And what impact will it have on buyers, sellers and homeowners with mortgages?
Finally, can we expect more rate cuts in the future?
Let’s find out…
The Mortgage Crisis & Reasons For A 2nd Rate Cut
Wednesday’s 25 basis point cut takes interest rates from 4.75% to 4.50%.
While 25 basis points may not seem like much, interest rates have fallen a total of 50 basis points (or half a percent) since June.
The Bank of Canada (BoC) gives several reasons for this 2nd rate cut, including:
- Falling inflation
- Weak retail sales
- Slow economic growth
- Increasing jobless claims
- Impending mortgage renewals
This last item doesn’t just impact homeowners, but the entire country.
The Financial Post explains:
As we’ve been saying for some time, the Bank of Canada needs to materially lower rates ahead of the mortgage renewal wall which hits in early 2025 to have any chance of avoiding a recession…
So another rate cut was needed to avoid a potential surge in mortgage defaults next year.
But as the quote above shows, two rate cuts may not be enough to avoid a recession.
Instead, the BoC needs to “materially lower rates” by 2025 to help current homeowners (over half of whom have a mortgage renewal coming up next year)…which could mean more rate cuts are on the way.
Impact Of 2nd Rate Cut On GTA Real Estate
The effects of a 2nd rate cut on homeowners with variable-rate mortgages were immediate.
According to BNN Bloomberg:
All of the big six banks including RBC, TD, BMO, Scotiabank, CIBC and National Bank moved their prime rates to 6.70 per cent from 6.95 per cent…
Together with June’s rate cut, July’s will help the average homeowner save $200 per month—or $2400 a year.
But will two interest rate cuts be enough to bring back buyers?
In Nerd Wallet’s opinion, not likely:
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%.
Besides meeting such a difficulty, a higher qualifying rate significantly reduces the loan amount buyers can be approved for.
But what about sellers?
As July’s numbers show, sellers are already out in full force, with new listings jumping 12.3% and active listings soaring 67.4%.
The problem is that not many people are buying…
However, CTV News believes this latest rate cut may change things:
While Wednesday’s change alone may not have a significant impact on the housing market, real estate experts say that it will give buyers and sellers confidence that the economy is moving in the right direction.
As interest rates and stress test requirements come down, sidelined buyers may find the confidence they need to return to the market.
Interest Rate Predictions For 2024
The good news: the BoC could cut rates in September.
According to Yahoo Finance, the chances of that happening are pretty good:
[There’s] a strong sense that policymakers feel an urgency to continue the rate cutting cycle in September…
In fact, money markets put the chances of a September 4th rate cut at 53%.
What about the rest of the year?
CIBC predicts more rate cuts to come:
Weaker growth and continued easing in inflation will likely bring two further interest rate cuts in September and October, to end the year at 4.00%.
Manulife goes even further:
…we now expect the BoC to cut at every remaining meeting this year, leaving the overnight rate at 3.75% in December 2024.
So in addition to this 2nd rate cut, 2024 could see 3 more for a total of 5—or 1.25%.
But there are some obstacles to more rate cuts, including the US Federal Reserve.
If the Fed is slow to cut rates, Canada can’t just keep cutting or we risk devaluing the loonie.
Here’s what happened when the BoC cut rates on July 25th:
The Canadian Dollar depreciate[d] further and [dropped] to three-month lows vs. the US Dollar, taking USD/CAD beyond the 1.3800 barrier on Wednesday.
A weaker loonie may force investors to look elsewhere for higher returns.
For that reason, the BoC has decided to take a meeting-by-meeting approach to further interest rate decisions.
Advice For Homeowners, Buyers & Sellers
GTA homeowners who have a mortgage renewal coming up should explore different lenders and get a rate hold for 120 days.
That way, they’re locked in, and if rates fall even more, they can still take advantage of them.
Buyers should consider getting a fixed-rate mortgage, which are much lower compared to variable rates.
In fact, many banks are offering 3-5 year fixed rate mortgages for less than 5%.
Another bit of buyer advice comes courtesy of RBC:
It’s still a buyer’s market, which means as a buyer, you have more choice, time and leverage. Take the time to get your financing in order…find the right home for you at the right price, and be sure to do your due diligence…
For example, perform a home inspection to protect yourself from unexpected repairs.
As for sellers, all they have to do is wait.
The fact is interest rates are going down, which means buyers will return, if not now, then over the next few months as rates drop further.
One thing sellers have on their side is buyer psychology.
Money Sense agrees:
As we’ve seen in past rate cut cycles, the “fear of missing out” can lead to a boom in demand, and drive prices higher.
So if history is any indicator, this newest rate cut cycle will compel more buyers into the market, causing prices to rise and giving sellers a bigger payday.
2nd Rate Cut Conclusion
However, it will have a cumulative effect.
As the BoC slashes rates again over the coming months, more and more buyers will return to the market.
As that happens, sellers will also come back, hoping to take advantage of increased competition and prices.
Homeowners who need to refinance are an exception: they stand to benefit immediately from lower variable-rate and fixed-rate mortgages.
While there’s no rate cut announcement in August, there is one on September 4th—setting the stage for a possible 3rd rate cut.
Lastly here is the schedule for Bank of Canada Interest Rate Announcements for 2025:
January 29th
March 12th
April 16th
June 4th
July 30th
September 17th
October 29th
December 10th
Have questions about interest rates or the housing market? Contact me below for answers.
Wins Lai
Real Estate Broker
Living Realty Inc., Brokerage
m: 416.903.7032 p: 416.975.9889
f: 416.975.0220
a: 7 Hayden Street Toronto, M4Y 2P2
w: www.winslai.com e: [email protected]
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