Rate Drop That Would Affect RE Market By 2025

Rate Cut by the Bank of Canada (BoC)

  • The BoC made a significant move this morning by cutting the overnight rate by 50 basis points (bps) to 3.75%.
  • This follows three consecutive 25 bps rate cuts.
  • The market had already anticipated a 90% chance of this 50 bps cut due to:
    • Slower-than-expected GDP growth.
    • Consecutive weak inflation reports.
  • The larger cut aims to boost growth faster, addressing missed inflation forecasts.
  • Even at 3.75%, the policy rate remains restrictive:
    • It is still 145 bps above the core inflation rate from September.
    • Headline inflation is now below the BoC’s 2% target.

Expectations for Future Rate Cuts

  • The policy rate is expected to drop to 2.50% by spring next year.
  • Today’s 50 bps cut has increased speculation of another 50 bps cut in December.
  • However, further cuts will likely depend on continued weak economic data and low inflation.
    • Wage growth remains strong, and there are concerns about reigniting the housing market, especially with upcoming changes to mortgage insurance rules on December 15.

Impact on the Housing Market

  • According to the BoC’s Monetary Policy Report (MPR):
    • Lower rates will help the housing market rebound, increasing resales and renovations.
    • Renovations will be supported by rising house prices.
    • Changes to mortgage insurance rules are expected to boost housing demand.
    • Although population growth may slow, housing demand will stay strong, supporting new construction.
    • However, challenges like limited land availability, zoning restrictions, and a shortage of skilled labor will slow down the pace of new home construction.
    • As a result, demand for housing will likely outpace supply, keeping the market tight.

Changes to Mortgage Rates

  • Effective tomorrow, the prime rate will drop to 5.95%, reducing floating-rate mortgage rates.
  • The lowest advertised 5-year fixed rate has also dropped by 10 bps this week to 4.09% (according to Mortgage Logic News).

Revised Economic Forecast

  • The BoC revised its growth forecast for the second half of the year to 1.75%.
  • Third-quarter GDP growth was adjusted down to 1.5% from 2.8% in the July report.
  • Inflation is improving faster than expected:
    • Ending this year at 2.1%.
    • Core inflation is at 2.3% and expected to decrease further by 2025.
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