Canada's central bank delivered its fifth rate cut of the year, but some real estate industry veterans said the welcome move needs to be followed with further cuts to truly kickstart the economy, which may be affected by immigration reform and potential tariffs placed on exports to the United States.
The Bank of Canada said Wednesday it was lowering its trend-setting policy rate by 50 basis points to 3.25%, following a similar reduction of 50 basis points in October. The central bank lowered the rate by 25 basis points in June, July and again in September, after the overnight lending rate had risen to 5% in July 2023.
"In Canada, the economy grew by 1% in the third quarter, somewhat below the Bank’s October projection, and the fourth quarter also looks weaker than projected," said the country's central bank in a statement that accompanied the rate-cut decision. "Consumer spending and housing activity both picked up, suggesting lower interest rates are beginning to boost household spending."
The Bank of Canada said the expected reductions in targeted immigration could slow economic growth in 2025 to below the level it had forecast in October. It also suggested political events in the United States could affect the country's economy. The move comes as the United States Federal Reserve considers next week whether to lower rates for the second time since the pandemic, while the Bank of England will look at whether to make a third cut this year.
The possibility that U.S. President-elect Donald Trump's incoming administration, "will impose new tariffs on Canadian exports to the United States has increased uncertainty and clouded the economic outlook," said the central bank in a statement. Last month, Trump said he would impose a 25% tariff on products from Canada immediately upon taking office on Jan. 20.
Tiff Macklem, governor of the Bank of Canada, told a press conference that the number of people looking for work has been increasing faster than the number of job openings.
"We thought elevated shelter price inflation would continue to ease, and it has," said Macklem.
Rentals.ca reported this week that asking rents for all residential property types in Canada declined to a 15-month low in November. The average rental was $2,139 per month, 1.6% lower than a year ago.
More cuts needed
Jane Renwick, executive vice president of Sevoy Developments, a company with a pipeline of about 4,000 proposed housing units in the Toronto area, said the interest rate cut is welcome news for the industry.
"I want interest rates to come down so mortgage rates are digestible. We know that in a low interest rate environment, product sells and that's what we want," Renwick told CoStar News.
She said even more rate cuts will have to happen in 2025 to spur the real estate market. "The market will eventually react. It just so far has not reacted. It all comes down to carrying costs. That is what the consumer cares about," Renwick said.
While the overnight rate directly impacts people with variable-rate mortgages tied to the prime rate, Renwick said lowering it is as much about raising consumer confidence.
Renwick said a true housing crisis does not exist in Canada, but an affordability crisis does. "There is inventory in the market," she said, referring to unsold condos.
A certain percentage of her condo buyers are investors, and they are watching a rental market that is in decline, making them less likely to buy. They're also watching interest rates.
"They haven't had the impact we had hoped they would have when they started coming down," she said, acknowledging presales in the Toronto area are at a 30-year low. "High interest rates have a psychological impact that keeps people on the sidelines. In some ways, when rates continue to go down, people wait until they hit bottom or think they have hit bottom."
Welcome news
Luke Simurda, director of research for Marcus & Millichap in Canada, noted that the central bank has now lowered its overnight lending rate by 175 basis points from the peak.
"Ongoing monetary easing will be welcomed news, especially for those who tend to use shorter-term money such as developers. A falling overnight rate could act as a tailwind for commercial real estate construction over the coming year," Simurda said in an email to CoStar News. "On the transaction side, while a lower overnight rate is likely to fuel positive investor sentiment, bond markets have largely priced in these movements. Longer-term money, such as the five and 10-year bonds, actually increased slightly following the announcement."
Simurda said further monetary easing and slower economic growth could pull down longer-term yields.
"Nevertheless, this stabilization and an expected uptick in economic growth amid lower borrowing costs should fuel investor confidence over the coming year, likely resulting in increased transaction activity," he said.
Robert Colangelo, vice president at Moody's Ratings, said the latest reduction reflected Canada's rising unemployment rate and a highly leveraged consumer sector, forcing the central bank to take a more aggressive rate cut path than the United States Federal Reserve.
"This rate cut will benefit borrowers with variable rate loans, which should slow credit quality deterioration at these banks in 2025, a credit positive," Colangelo said in an emailed statement. "Additionally, should more rate cuts occur, Canadian banks could recover previously taken credit provisions on performing loans earlier than expected in 2025."
Economists with the Royal Bank of Canada had been expecting a cut of 50 basis points, maintaining that interest rates were higher than needed for inflation to be held at the central bank's 2% annual target.
"Interest rates are still high, particularly when compared to that softening economic backdrop," said the bank's economists in a note. 'We continue to expect that additional interest rate cuts will be needed in the year ahead."
Royal LePage, one of the country's largest residential brokerages, said the Bank of Canada's position on lowering interest rates is already affecting the housing market. The firm is now forecasting that Canadian property price appreciation will return to long-term norms in late 2025.
The real estate company expects the aggregate price of a home in Canada to increase 6% year over year to $856,692 in the fourth quarter of 2025, with the median price of a single-family detached property projected to increase by 7% to $900,833. The median condominium price is projected to increase 3.5% to $605,993, according to Royal LePage.
"The Bank of Canada's shift from inflation fighter to economy booster has taken time to influence buyer behaviour," Royal LePage President and CEO Phil Soper said in a commentary accompanying the latest forecast. "We saw a marked increase in market activity at the start of the fourth quarter. Buyers now believe home prices have hit bottom and are eager to act before competition intensifies."
Benjamin Reitzes, an economist with the Bank of Montreal, said the latest 50 basis point cut has risks, including the effect it may have on the housing market.
"Home sales picked up sharply in recent months, though momentum eased a bit in November. Still, with mortgage insurance rules easing later this month, we could see housing heat up further even without mortgage rates moving lower," Reitzes stated in a report. "That's a clear risk for policymakers: they don't want to worsen housing affordability."