After the Bank of Canada on Wednesday gave its clearest hints yet that its interest rate cycle might have peaked, some real estate experts are expecting hope for lower borrowing costs will set up a busy spring housing market.
The Bank of Canada held its benchmark interest rate at 5.0 per cent for the fourth consecutive time on Wednesday, with governor Tiff Macklem saying that conversations at the central bank have shifted from whether rates need to rise higher to how long they need to stay at current levels.
Macklem was asked by reporters for a timeline for rate cuts, but he pushed back, arguing he didn’t want to give Canadians a “false sense of precision.” The bank’s rate path is still dependent on inflation, with additional hikes not off the table if price pressures reignite.
Many economists said, however, that the Bank of Canada’s shift in tone away from emphasizing the need for future tightening is in line with calls for interest rate cuts to begin sometime in the spring or summer of this year.
Phil Soper, CEO of Royal LePage, tells Global News that Wednesday’s widely expected hold and the communications from the central bank solidify the national real estate brokerage’s forecast for a modest rebound in the housing market this year.
“We believe this will provide Canadians with more comfort that home prices in their city have stabilized and the next step will be a return to home price appreciation,” he says.
After more than a year of housing correction tied to the Bank of Canada’s rapid rate hike campaign that began in March 2022, there are already signs of life in the Canadian housing market.
December’s home sales figures showed an uptick in activity to end 2023, with market watchers pointing to warmer weather and a pullback in borrowing costs driving deals before the end of the year.
TD Bank chief economist Beata Caranci told Global BC on Wednesday that declining bond yields have fed through to fixed mortgage rates on offer in the market, pulling buyers off the sidelines as they qualify for cheaper mortgages.
“We are already seeing homebuyers jump back into the market,” she said.
If the Bank of Canada delivers on expectations for interest rate cuts – TD Bank expects a decline of 100-150 basis points this year – that will serve to ignite housing activity, particularly in the second half of the year, Caranci said.
Soper, too, reports that clients have been contacting Royal LePage agents in greater numbers since mid-November, which he says sets up more activity for the start of 2024. Coming off a slow 2023, he expects the spring housing market to be “more or less balanced” for buyers and sellers.
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But if lower mortgage rates mean a rising number of homes change hands, expect that prices won’t be far behind, Soper says.
That sets up a conundrum for homebuyers who are debating jumping into the housing market at today’s rates in hopes of timing the bottoming for home prices, he says.
“The decision that consumers need to make is, do I wait for cheaper money or do I get in ahead of rising home prices?”
Soper expects that buyers in some of Canada’s largest housing markets – the greater Toronto and Vancouver areas, Victoria and Ottawa to name a few – will be most keen to jump into the market early, worried that they’ll miss their “window.”
On the year, he expects Calgary will remain the leading housing market for sales activity with a still-strong economy underpinned by interprovincial migration. He expects Toronto and southern Ontario, which saw some of the steepest corrections over the past year and a half, will similarly see a “stronger rebound” in 2024.
Soper expects a “sharp increase” in the number of first-time homebuyers as well this year. This cohort was missing during the housing correction in 2023, he says, but lower borrowing costs could be more favourable to those who have been able to build up savings as interest rates were rising.
Growing entry of first-timers into the housing market will likely put more pressure on home prices, however, because they’re not adding to the supply of resale listings, Soper says.
“When a first-time buyer comes to market, they’re not bringing a property. It’s like someone coming to a party without a bottle of wine,” he says.
“They’re just consuming, they’re not contributing. And it puts pressure on inventory.”
For Canadians on the sidelines of the housing market debating whether now is the time to buy their first home or upsize, some experts urge caution about putting too much stake in rate forecasts.
“People like to gamble on rates. But when it’s your whole life savings at stake, it’s just not worth it,” says Clay Jarvis, financial expert with Nerdwallet Canada.
Expectations for interest rate cuts can also influence the decision between a variable mortgage, which sees payments or the loan’s amortization rate rise and fall directly in line with the Bank of Canada’s policy rate, and a fixed-rate option, which is typically set based on the bond market and steady through the contract term.
Jarvis notes that many Canadians were likely keen to jump into the housing market for the first time during the COVID-19 pandemic, when rock-bottom interest rates made variable mortgages particularly affordable. Those same homeowners have since faced ballooning payments during the Bank of Canada’s interest rate hike cycle, Jarvis notes.
Canadians eyeing variable-rate mortgages today based on expectations that rates are going to fall in the year to come will have some tricky calculations to consider.
Jarvis says that with the spread between variable rates and fixed rates around one percentage point currently, prospective buyers and those with mortgages up for renewal will have to consider how long they’re willing to wait before the central bank’s interest rate falls enough to hit a break-even point on the fixed alternatives.
“You also have to think about the stability offered by a fixed rate. If the risk of a variable rate freaks you out, that might be the best course for you,” he says.
While economists are holding to their forecasts for interest rate cuts now, Jarvis emphasizes that there is no guarantee that rates will drop soon or they won’t rise again.
The annual rate of inflation ticked back up to 3.4 per cent in December, a move that Soper says gave forecasters like him some slight pause that the Bank of Canada could be forced back to rate hikes to reach its two per cent target.
Yields on the five-year government of Canada bond, which informs the popular five-year fixed mortgage, have increased since the start of 2024, though not quite erasing recent easing towards the end of last year.
James Laird, co-CEO of Ratehub.ca, noted in a statement Wednesday that lenders had held off on raising fixed mortgage rates in response to those moves in anticipation of the Bank of Canada’s rate decision.
He said lenders will now consider raising those rates again with no timeline for rate cuts yet offered from the central bank.
If a prospective buyer’s financial plan to enter the housing market hinges on interest rates or home prices heading in a certain direction, Jarvis advises taking a step back.
Speak to a lending or real estate professional to get a better sense of the kind of home you can afford in today’s market and decide where to go from there, he suggests. Focusing on a down payment savings strategy, for example, instead of hoping for interest rate cuts, can help to maximize your buying potential when conditions are right for you to enter the housing market on solid footing.
“You need to focus on the things that you can control,” Jarvis says.