Real estate professionals said the move by Canada's central bank to lower interest rates for the third time in as many months could begin to prompt retail spending and benefit that property type while homebuyers may start to consider when to make property purchases.
Following cuts of 25 basis points in June and July, the Bank of Canada lowered its trend-sending rate again by another 25 basis points to 4.25% — moves that came after four years of no cuts and a 22-year high in the overnight lending rate. It came as concerns increase about the rising cost of housing, an economic indicator that has curbed real estate purchases along with higher borrowing costs.
Governor Tiff Macklem left the door open for even more rate cuts: "Price pressure in some other places is holding shelter inflation up," Macklem said at a press conference. The United States Federal Reserve has signaled that it plans its first cut later this month since interest rates were raised from 2022 to 2023, and it follows the Bank of England's interest rate reduction this summer.
Phil Soper, chief executive of Royal LePage, one of Canada's largest residential brokerages, said the country's latest cut could move buyers off the sidelines — but some consumers may want even larger decreases in coming months.
"The Bank of Canada continues its delicate balancing act, gradually easing the economic drag of high interest rates as the economy cools. With inflation now at its lowest point in three years, policy-makers are shifting their focus to jobs and housing," Soper said in a comment to CoStar News. "For first-time homebuyers, the key question is whether to buy now or wait. Home values have largely plateaued this year, and improved affordability due to lower borrowing costs has benefited many. However, once the backlog of sidelined buyers is released into the market, pent-up demand will drive prices higher. This fall, we can expect more cautious Canadian."
Frank Zhao, a research analyst at Marcus & Millichap, said the latest reduction was expected.
"As interest rates are reduced to more stimulative levels, we anticipate a meaningful recovery in Canada’s interest rate-sensitive sectors, including consumer spending, the homeownership market, and business investment. This recovery is expected to drive the next phase of economic growth in 2025," Zhao said in a comment provided to CoStar News.
In terms of the commercial real estate sector, he said the market will probably see an increase in consumer spending, a development that would directly benefit the retail sector.
"As Canada’s population growth slows, lower interest rates are expected to stimulate consumer spending on a per capita basis. Unlike the post-pandemic recovery, where retail space demand was supported by an expanding consumer base due to rapid population growth, the next phase of growth will likely be driven by a recovery in per capita spending as interest rates decline," Zhao said.
Ontario Premier Doug Ford, the leader of Canada's largest province, waded into the discussion online by saying on X, formerly known as Twitter, that the central bank "needs to lower rates today and keep lowering them." That sentiment was reflected by Doug Porter, chief economist of the Bank of Montreal, said he expects more reductions may be on the way.
"We expect the Bank to continue grinding down rates in coming meetings, and, while we anticipate a series of 25" basis point steps into early next year, "we certainly will not rule out a possible 50 basis step at some point," said Porter in a commentary. "For now, we look for the Bank to cut rates to 3.5% by January, and then to 3.0% by next June, but the risks tilt to the Bank going faster than that, and potentially further."