Real estate professionals welcomed the second cut in interest rates by Canada's central bank in two months, but some hope there will be even more to come for the rest of 2024.
After announcing its first cut in four years last month, the Bank of Canada lowered its overnight lending rate another 25 basis points to 4.5% Wednesday. The trend-setting rate had hit a 22-year high of 5% in June 2023.
"With broad price pressures continuing to ease and inflation expected to move closer to 2%, Governing Council decided to reduce the policy interest rate by a further 25 basis points. Ongoing excess supply is lowering inflationary pressures," the central bank said in a statement. "Price pressures in some important parts of the economy — notably shelter and some other services — are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation."
The move is getting watched closely by other countries, where the question of interest rate cuts is among the biggest financial concerns. In the United States, the world's biggest economy, the central bank is expected by economists surveyed to cut interest rates later this year. Expectations are growing for a similar move in the United Kingdom as soon as this summer.
In Canada, the next rate announcement is not until Sept. 4, but the central bank did make reference to the housing market in its statement, a move that could buoy hopes for further reductions.
"Household spending, including both consumer purchases and housing, has been weak," said the bank.
Karen Yolevski, chief operating officer of Royal LePage Real Estate Services Ltd., one of the country's largest residential brokerages, expressed optimism at the latest move.
Positive Sign
"Our research shows that many buyer hopefuls have been waiting for a concrete signal from the Bank of Canada that the economy is moving in the right direction. A second cut to the overnight lending rate indicates just that, and with mortgage qualification thresholds continuing to come down, sidelined buyers may have the confidence they need to make their return to the housing market," said Yolevsk in an emailed statement to CoStar News.
She added that "we expect this will prompt a slight boost in activity in the short-term, followed by more robust buyer demand in the fall. In the meantime, some much-needed inventory has been building in major markets over the last few months, giving buyers more options to choose from. In addition to lower rates, this may also encourage more buyers to re-enter the market in the near future."
Marcus & Millichap has said it expects additional cuts to stimulate home buyer demand throughout the rest of 2024 and pointed to a consensus among economists that they could reach 3% by year-end 2025.
"This will coincide with falling residential mortgage rates, alleviating some barriers to homeownership. Potential buyers who currently reside in the rental market could seek ownership opportunities as housing costs ease," said the real estate company. "This is likely to mitigate some pressure on Canada's apartment rental market. Combined with the expected slowdown in population growth and healthy levels of new supply, Canada's multifamily vacancy rate is forecast to stabilize around 1.5%."
With Canada at about half of the 500,000 annual pace needed to restore affordability by 2030, the real estate company said action is needed beyond interest rates to help with the feasibility of housing development and boost supply and affordability across the country.
Central Bank Governor Tiff Macklem would not provide exact guidance on when the next rate would be coming; despite repeated questions from media during a press conference, he made it clear Wednesday's reduction will not be the last for 2024.
"We lowered today. Why did we lower today? Our indicators are that broad-based price pressures are easing," Macklem told reporters. "Looking ahead, if inflation continues to evolve broadly aligned with our forecast, it is reasonable to expect further cuts. But we are not on a predetermined path, we will be taking it one decision at a time."
More Cuts Anticipated
Canada Imperial Bank of Commerce economists noted Macklem's statement, particularly downside economic risks. "Weaker growth and continued easing in inflation will likely bring two further interest rate cuts in September and October to end the year at 4%," the bank's economists predicted.
Doug Porter, chief economist with the Bank of Montreal, said another interest cut in September is on the table now.
"The door is still open for additional cuts," he said, in a published note. "We continue to look for two more rate cuts before the end of 2024, taking the overnight rate down to 4%, with the precise timing over the next three meetings driven by the incoming data, with the consumer price index on centre stage, but the unemployment rate now dancing close to the limelight as well."
Carolyn Rogers, senior deputy governor of the Bank of Canada, said it's clear housing is sensitive to interest rates as it is to population growth and many other variables.
"We have had a long-standing housing imbalance in Canada," she told reporters. "It was there before interest rates went to emergency low level and it is still with us now that interest rates have gone up. It is a structural imbalance. It would be a mistake to think we are going to fix that miraculously with a single solution of interest rate changes."
Marcus & Millichap said argued that the central bank could have cut rates more deeply.
"We have been arguing that record high population growth has masked the weakness in per capita output, and with the change in Canada's immigration policy limiting the temporary resident population — the largest source of population growth over the past two years — this weakness will likely be more visible in the near term driving down GDP and price growth," said the real estate company, in a statement to CoStar News.
Marcus & Millichap said the central bank noted that rate decisions in the United States could affect actions in Canada.
"As Canada's economy is closely integrated with the U.S., a rate cut by the Federal Reserve, which now looks highly likely in September, will be another piece of confidence for the BoC to stay on its easing path," the real estate company said.
For the impact on commercial real estate, the company said lower interest rates will boost consumer spending, which will probably be more visible near the end of this year and well into 2025, and "will support leasing activity in the retail sector."
It added that "lower interest rates will likely also lead to a recovery in the single-family market, facilitating the transition from renting to homeownership. Coupled with lower population growth, this should provide some relief for renters in the multifamily market. However, with completions running below our expectations so far this year, the apartment vacancy rate will likely remain at a low level across Canada in 2024."
The Canadian head of Avison Young said the latest rate reduction would positively affect investor sentiment.
"Commercial real estate return metrics are improving compared to other asset classes, and we expect this will further fuel investor appetite and capital allocation into" property, said Mark Fieder, principal and president, Canada, Avison Young, in an emailed statement to CoStar. "We have been in a very uncertain interest rate environment over the last two years. This second rate drop certainly shows the BoC's confidence in the inflation data and reinforces the fact that we are finally shifting into a different interest rate regime."