Pause from the Bank of Canada - how will the real estate market react?
Mortgage alphabet
Most current and prospective property owners in Canada are asking the same question today: has the rise in mortgage rates finally stopped, and when will the right moment come to buy or sell real estate?
Over the past several months, the real estate market has been frozen in a state of expectation. Buyers are hoping for prices to fall further, while sellers are waiting for activity, demand, and price growth to return.
Life, however, does not stand still, and so-called pent-up demand continues to build in the market. New families are being formed, people are changing jobs and places of residence, and Canada continues to see a significant inflow of immigrants.
In mid-October, we attended Canada’s largest conference for mortgage industry professionals. Representatives of the country’s largest banks were present, and leading economists from the financial sector addressed the audience. One of the most interesting moments was the presentation by Benjamin Tal, Deputy Chief Economist at CIBC World Markets. In his view, the Bank of Canada has most likely already completed its rate-hiking cycle, and the next move will be a rate cut in the second half of 2024. Tal expects the key interest rate to gradually decline from the current five percent to three percent in 2025. He also notes that insufficient construction, rapid population growth driven largely by immigration, and pent-up demand, combined with lower interest rates, are likely to trigger another cycle of sharp price growth in Canadian real estate within the next 6 to 12 months.
The mortgage conference took place in Toronto from October 14 to 16, while the Bank of Canada held its next scheduled meeting on October 25 and left its policy rate unchanged at 5%.
Before analyzing that decision, it is worth recalling how dramatically the Bank of Canada’s rate changed over the previous year and a half.
March 2, 2022: After keeping the overnight lending rate at 0.25 percent for two years during the COVID-19 pandemic, the Bank of Canada raised interest rates by 25 basis points to 0.50 percent. The decision came amid rising inflation, driven in part by higher oil and commodity prices following Russia’s sudden invasion of Ukraine.
April 13, 2022: A 50-basis-point increase brought the overnight rate to one percent.
June 1, 2022: Another 50-basis-point increase lifted the overnight rate to 1.50 percent. The Bank of Canada stated that the decision followed inflation in Canada reaching 6.8% in April, significantly above the bank’s target.
July 13, 2022: The Bank of Canada raised rates by 100 basis points to 2.50 percent — the largest single rate increase in more than two decades. Inflation had exceeded 8%.
September 7, 2022: The Bank of Canada raised its key rate by 75 basis points, bringing the overnight rate to 3.25 percent. The central bank noted that geopolitical tensions, weaker demand from China, and a tight Canadian labour market would continue contributing to inflation, which stood at 7.6 percent at the time.
October 26, 2022: The Bank of Canada raised rates by another 50 basis points, bringing the overnight rate to 3.75 percent. Inflation remained persistent, although the central bank also said that the recent series of increases was beginning to show in lower housing activity across the country and softer household and business spending.
December 7, 2022: The central bank raised rates by another 50 basis points, bringing the overnight rate to 4.25 percent — the highest level since January 2008. The Bank of Canada pointed to stronger-than-expected Canadian GDP in the third quarter and an unemployment rate near historic lows as two factors likely to keep inflation elevated in 2023.
January 25, 2023: The Bank of Canada raised rates again, this time by 25 basis points, bringing the overnight rate to 4.50 percent. The increase was smaller than the previous moves, as the central bank noted that inflation was easing globally.
March 8, 2023: At last, Canada’s interest-rate cycle reached a pause. The Bank of Canada decided to leave rates unchanged, keeping the overnight rate at 4.50 percent. The central bank said that Canada’s economic growth had stalled in the fourth quarter of the previous year and projected that growth would continue to slow in the coming quarters, helping to ease inflationary pressure.
April 12, 2023: The Bank of Canada adopted a wait-and-see approach and again held the rate at 4.50 percent. The pause in central bank decisions led to a sharp rebound in activity and price growth in the real estate market, which had been stagnant throughout the second half of 2022 and the first months of 2023.
June 7, 2023: After two consecutive pauses, the Bank of Canada raised the overnight rate by 25 basis points to 4.75 percent. The move was driven mainly by inflation rising to 4.4 percent — its first increase in 10 months — as well as stronger-than-expected economic growth in the first quarter of the year. The Bank also expressed caution over renewed activity in the housing market.
July 12, 2023: Another 25-basis-point increase brought the overnight rate to five percent. The Bank of Canada pointed to a tight labour market and increased housing activity as risks that could fuel further inflation.
September 6, 2023: The Bank of Canada kept the overnight rate at five percent. The central bank pointed to an overall decline in inflation, despite its renewed acceleration to 3.3 percent in July.
October 25, 2023: The Bank of Canada kept its key interest rate steady at five percent, but did not rule out future rate increases, as its latest forecasts showed inflation remaining elevated in the short term.
Despite the Bank’s statements that it remains prepared to raise rates again if needed to control inflation, many macroeconomic experts are leaning toward the view that the next move will be a rate cut.
Moreover, two prominent experts predict that the coming economic weakness will lead to more aggressive rate cuts than the market currently expects. Although the central bank has not indicated when it may begin lowering rates, many continue to forecast that cuts will not begin until late 2024. Ed Devlin, founder of Devlin Capital, told Bloomberg that he is betting against that consensus. “The market is not always right. I think the market is wrong,” he said. Devlin noted that, in his view, the Bank of Canada will cut rates in the not-too-distant future because monetary policy in both Canada and the United States is already too restrictive.
Well-known economist David Rosenberg, founder and president of Rosenberg Research, also said he agrees with Devlin’s assessment. “They have already put the inflation genie back in the bottle,” he noted. Rosenberg pointed to partly negative Canadian GDP data in the second quarter and signs of weak momentum in the third quarter as evidence that “the recession has already started.” “If you remove mortgage interest costs from the consumer price index, inflation in Canada is approaching the target,” he explained. “The Bank of Canada should really be thinking about cutting rates, but arrogance is preventing them from doing so,” he added. Rosenberg believes that, in the current economic situation, the Bank of Canada will have to act quickly. “Rates will be cut much faster and much more deeply than markets are currently pricing in,” he warned.
Here we would like to return once again to Benjamin Tal’s point: once a prolonged pause takes hold — and especially once the Bank of Canada begins cutting rates — the situation in the real estate market could change dramatically, and prices may begin to rise again.
For those who are currently considering buying real estate and have the financial ability to do so, this may be a favourable moment to purchase at a substantial discount before the next cycle of price growth begins. At the same time, some of our clients who have a financial safety cushion are once again leaning toward variable-rate mortgages, hoping that rates will begin to fall next year.