Canadian real estate professionals said they are expecting their industry to get a boost from the country's central bank cutting its overnight lending rate for the first time in more than four years.
The commercial property industry has been dealing with a slowdown driven by the 22-year high in the Bank of Canada's rate. Now, with the cut made on Wednesday, the policy rate stands at 4.75% and the country's other banks are expected to lower their prime lending rate in coming days. The move is drawing attention from other countries where central bank decisions are coming up on whether to lower interest rates in those nations.
Real estate professionals have said they expect further interest rate reductions could follow, reducing borrowing costs for developers, owners and buyers. Bank of Canada Governor Tiff Macklem was cautious during a press conference Wednesday about tempering the reaction of property professionals and others regarding more rate cuts, but he acknowledged their likelihood. He also said he is aware higher short-term rates, aimed at curbing inflation, have made things more difficult for buyers and renters: "We have come a long way in fighting inflation."
The decision should make it easier for real estate investors looking to buy, said Luke Simurda, director of research in Canada for commercial property brokerage Marcus & Millichap.
"The BoC indicated that it believes inflation will continue to trend down, suggesting further cuts will likely materialize over the remainder of the year. These factors will benefit not only consumers but commercial real estate investors who are awaiting positive signs regarding the cost of debt," Simurda said in a commentary. "A 25-basis point cut in the overnight rate may not cause a wave of investment activity right away given the fact that most commercial mortgages are priced off longer-term bond yields, which have largely been stabilizing around their expected values. However, it does signal to the market that borrowing costs are coming down, providing some renewed confidence for many" commercial real estate investors.
The head of one of Canada's largest residential brokerages agreed that the interest rate cut is a welcome sign for those considering getting back in the market.
Luring Back Home Buyers
“Our research indicates that half of the sidelined homebuyers in Canada plan to resume their home search plans once the bank rate begins to drop," said Phil Soper, president and CEO of Royal LePage, in an emailed statement to CoStar News. "This will no doubt spark activity and put upward pressure on home prices in the second half of the year."
Housing analysts at the Conference Board of Canada said that the lower rates will help the real estate industry, though housing affordability will probably remain challenging.
"Given the high cost of shelter, housing affordability has been at the top of mind for many Canadians. In addition to rentals, recent data from Statistics Canada showed a 25.4% increase in mortgage interest costs in March compared to a year earlier. Average home purchase prices have also remained high despite some pullback in 2023. As interest rates fall and new measures to address affordability are introduced, housing supply will pick up, but only modestly. In our view, the path to better affordability is still quite rocky," said the Ottawa-based group.
Macklem's comments came as Canada's largest real estate board reported Wednesday that existing home sales continue to be slowed by the overnight lending rate, which is directly tied to variable-rate mortgages. The Toronto Regional Real Estate Board reported Wednesday that existing home sales in May were down 21.7% from a year ago, while listings had climbed 21.1% during the same period. The average selling price was down 2.5% to $1,195,409 during that time.
"As borrowing costs decrease over the next 18 months, more buyers are expected to enter the market, including many first-time buyers," said Jennifer Pearce, president of the board, in a commentary. "This will open up much-needed space in a relatively tight rental market."
Vacancy rates for apartments hit an all-time low in 2023, while rental rates are close to an all-time high.
Next Month's Meeting
The Bank of Canada is scheduled to make its next decision on interest rates on July 24.
"I know this is welcome news to many Canadians, and I also know everybody wants to know where are we headed," said Macklem. "Let's just enjoy the moment for a bit. We are taking our interest decisions one meeting at a time."
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At the recent Land & Development Conference in Toronto, panelists said interest rates were heavily affecting construction and leading to declines in presales of condominiums.
"Construction financing tends to be priced around shorter-term yields such as the one- and three-year bond, which are more heavily influenced by the overnight rate," said Marcus & Millichap's Simurda.
He added that "with the policy rate likely to fall further over the remainder of the year and into 2025, both land sales and development could see the largest uptick in activity as falling interest rates will allow more projects to pencil out."
The central bank hiked its overnight lending rate 10 times starting in March 2022, after it stood at a record low of 0.25% in March 2020 after its last previous cut.
Macklem noted those historic lows of years past and cautioned that any subsequent cuts won't take rates that low: "Don't plan on interest rates getting back to pre-COVID levels," he said.