Canada's central bank delivered its fourth rate cut of 2024, a move welcomed by the real estate industry, as it doubled the size of the reduction in the overnight lending rate it has made in each of three prior moves this year.
The Bank of Canada said it was lowering its trend-setting policy rate by 50 basis points to 3.75%, following a cut of 25 basis points each in June, July and September that came after the overnight lending rate had risen to 5% in July 2023.
"We took a bigger step today because inflation is now back to the 2% target and we want to keep it close to the target," governor Tiff Macklem said, in a prepared remark. "Price pressures are no longer broad-based, and both our measures of core inflation are now under 2½%. Our surveys also find that business and consumer expectations of inflation have shifted down and are nearing normal. All this suggests we are back to low inflation. This is good news for Canadians."
The move comes as nations look to cut rates after they imposed higher borrowing costs to quell inflation that emerged as economies recovered from the slowdowns of the pandemic. The United States cut rates this year, while the Bank of England and the European Central Bank have also moved to lower borrowing costs.
Macklem also said the upward pressure from shelter and other services is expected to gradually diminish. The bank expects growth in residential investment to rise as strong demand for housing lifts sales and spending on renovations. The next rate decision is Dec. 11 but Macklem was not tipping his hand.
"On the upside, lower interest rates could fuel a stronger rebound in housing activity or wage growth could remain high relative to productivity," said Macklem.
"The timing and pace of further interest rate cuts will depend on incoming information and our assessment of its implications for the inflation outlook. We will take our monetary policy decisions one at a time," he said.
Property industry relief
The Ottawa-based Canadian Real Estate Association, representing real estate boards across the country, has said that while existing home sales were up in September, some consumers have been waiting on the sidelines, hoping for even further reductions.
Dominic St-Pierre, senior vice president of business development at Royal LePage, one of the country's largest brokerages, said the fourth lending rate cut this year will probably speed up the real estate market and give rise to an early spring market, but he cautioned that it could accelerate pricing.
"However, buyers will face a stronger return of demand and therefore tighter competition as further interest rate cuts are made, which may offset the effects of improved access to home ownership," said St-Pierre, in a commentary to CoStar News.
Mark Fieder, principal and president of Avison Young Canada, said the announcement was welcome news for the commercial real estate industry and will have a positive impact on investor sentiment, fueling appetite and capital allocation.
"With this move, I expect investments to become more attractive, opening the door for more entry from institutional investors in particular. With commercial real estate return metrics improving compared to other asset classes, we’ll keep a watchful eye on performance now that we are shifting into a new interest rate regime that is better favouring investment opportunities," he said, in an email to CoStar News.
Daniel Ger, chief executive of non-profit Options for Homes, said the decision from the Bank of Canada cuts two ways, impacting purchasers but also builders.
"It's pretty impactful. We don't have a ton of inventory in the market, but we have larger family-sized units. A 50-basis point rate cut with the new federal borrowing rules like 30-year amortizations (instead of 25) for first-time home buyers, it just becomes less expensive to buy than rent," Ger told CoStar News in an interview.
The longer amortizations have been reducing monthly payments and are aimed at helping first-time buyers qualify for loans.
Apartment, construction effects
Apartment rates bottomed out on March 20221, below $1,700 per month average across the country for all units, but are now coming close to plateauing, with rentals.com reporting asking rents reached $2,193 in September, just a 2% jump from a year ago.
"We haven't seen this type of shift in quite a while," said Ger. "We don't chase investors, so this material is because we are always chasing ways to make owning more affordable."
The other side of the equation is the cost of building, which Ger said has decreased considerably for short-term construction loans and is affected by the prime borrowing rate, as opposed to long-term fixed mortgages, which are not directly impacted by Bank of Canada cuts.
"Interest cuts are a huge line item in the pro forma, so shifting another 50 basis points is bound to make a difference," said Ger. "Most new construction launches are on hold in the city because no one is comfortable."
The cut of 50 basis points, double the size of rate cuts made in June, July and September, was largely expected in the market though some had even suggested a reduction of 75 basis points could be in the works.
Avery Shenfeld, chief economist with Canadian Imperial Bank of Commerce, said what was really holding back the central bank from cutting rates even more were developments in the United States of America.
"What might hold the Bank back from that step isn’t anything happening in Canada, but developments south of the border. Stronger-than-expected readings on US employment, core inflation and retail sales, and a major upward revision to the path of household incomes, have the market dialing back forecasts for Fed rate cuts," said Shenfeld, in a note.
Still, Sal Guatieri, senior economist with Bank of Montreal, noted even during the COVID-19 crisis the central bank stuck to a cut of 50 basis points.
"You need to go back to the financial crisis (2008) to find the last time the Bank took out the 75-basis point bazooka. The big guns are usually reserved for crises and recessions, and a sub-target inflation rate and 6.5% jobless rate don’t exactly meet that threshold," said Guatieri, in a note.