By Ana Pereira | Business Reporter
June 5, 2024
After more than two years of interest-rate pain, at long last some relief.
For the first time since the pandemic, the Bank of Canada lowered its policy interest rate by 25 basis points, or a quarter of a percentage point, to 4.75 per cent from five per cent on Wednesday, in line with what many economists had expected.
Hard hit holders of variable-rate mortgages and home-equity lines-of-credit (HELOCs) will immediately see rates decline by the same amount.
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While it’s a small move for now, it represents the end of a tightening cycle by central bankers in their long bid to wrestle inflation down to their two per cent target and suggests more cuts to come. Inflation fell to 2.7 per cent in April, from 2.9 per cent a month earlier.
It’s uncertain, however, what happens to fixed-rate mortgages, as most are tied to the five-year bond yield — when the rate of return on bonds goes up so does interest on fixed-rate mortgages.
The Canadian bond market had already priced in a rate cut this summer, but expectations around how the Federal Reserve will act in the U.S. could mean variable-rates being lower than fixed-rates.
“If the Fed is staying high and bond yields in the U.S. stay elevated, that might keep yields in Canada (high) a little bit longer and slower to adjust to what the Bank of Canada is doing,” said John Pasalis, president of Toronto-based Realosophy Realty.
In the U.S., traders are pricing in rate cuts beginning in November, according to Bloomberg.
Historically, variable-rates have outperformed fixed-rates, but are riskier should the Bank of Canada hike rates again.
Summer market ‘a little busier’ than expected
Wednesday’s announcement gives the green light to many rate-focused Canadians who have been eagerly waiting to jump back into the housing market.
An online survey in January by Royal LePage found that 10 per cent of 1,500 Canadians polled said they would be ready to begin hunting for a home after a 25 basis point cut by the central bank. Eighteen per cent of respondents said they would wait for a cut of 50 to 100 basis points, and 23 per cent said they needed to see a cut of more than 100 basis points.
“That’s going to increase the overall sales volume that we see month-to-month. We’ll see more people out there transacting,” said Karen Yolevski, chief operating officer of Royal LePage, “And it could start to put some upward pressure on pricing, because the more people that are in the market looking to buy, the more competition we have for the homes that are available.”
Investors in the housing market, however, will wait longer than that, says mortgage broker Ron Butler, as they’ll want to see interest rates return to around three per cent. That could happen 18 months from now, he said.
“The person who wants to buy a home or a condo to rent out, a quarter per cent is nothing to them,” Butler said, “that doesn’t make the math work at all.”
Investors have fled the condo market in droves largely because of higher mortgage costs, while there’s been a spike in new listings.
“We’ll definitely see a little busier summer than we were expecting. But there’s other market forces at play,” he said.
