Canadian Homebuyers Are Waiting for More Rate Cuts

The Bank of Canada’s first rate cut in four years isn’t going to be a game-changer for the Canadian housing market, experts suggest.

By Josh Sherman | 4 minute read

Many would-be Canadian homebuyers will likely continue to play the waiting game as another Bank of Canada rate announcement approaches.

One Bank of Canada rate cut won’t be enough to shake homebuyers off the sidelines in droves, but it should help at the margin, recent polling and commentary from market-watchers suggest.

On June 5, Canada’s central bank embarked on a cut to its mortgage-influencing overnight rate for the first time in four years, trimming it to 4.75%, down from 5% where it had stood since last July.

While the move may boost sentiments towards the real estate market, it’s not enough to materially influence many homebuying decisions, suggests Karen Yolevski, COO of Royal LePage. “Twenty-five basis points is not a dramatic decrease when it comes to what you’re actually going to be paying for a mortgage,” she tells Wahi.

While BMO Senior Economist Robert Kavcic writes in a recent report that the first cut since 2020 should provide “a psychological boost,” he echoed Yolevski’s remarks, noting it offers “very little actual relief when most borrowers have already moved to lower fixed-rate mortgages.”

It will likely take further rate cuts to substantially move the needle on sales activity, which is something Yolevski expects to see happen later this year and into the next. However, even one cut should have some effect, she suggests.

For example, Yolevski points to the results of a Leger survey of 1,579 Canadians, 18 years or older, conducted on behalf of Royal LePage, in January.

The survey found that of house hunters who had paused their property searches because of high interest rates, a 25-basis-point cut would be enough to encourage 10% back into the market. “Even a small decrease in interest rates is going to drive some more demand,” she says.

Homeowners and Renters Both Need Rate Relief Before Buying

A separate poll undertaken by Ipsos just days following the BoC’s cut earlier this month suggests that for many Canadians rates would need to drop by multiple percentage points before shopping around — regardless of whether or not they own a home already.

Some 25% of non-homeowner respondents say they need rates to drop between 1% and 3.99% before they’ll wade into the market. Meanwhile, 10% would need rates to fall by at least 4%.

“First-time buyers, they’re going to be the most sensitive to not just the sticker price of the home, the actual purchase, but they’re going to be most sensitive to their monthly payments and most sensitive to the deposit they need to come up with to buy that first home,” Yolevski explains.

For just 6% of non-homeowners, a drop of less than 1% would be sufficient, the Ipsos poll found. That percentage drops even lower — to 3% — when only considering homeowner responses. “There isn’t going to be a lot of property climbing if someone has to break a 2% fixed 5-year term and then sign on at 5% in order to do it,” Sean Simpson, an Ipsos spokesperson, tells Wahi via email.

Regardless of the 25-basis-point cut, 63% of Canadians surveyed say high interest rates are still keeping them from buying or selling a home, according to the poll of 1,001 Canadians aged 18 and up. 

“Canadians maintain their pessimistic outlook on housing market affordability,” according to the poll, which further revealed that 78% of Canadians consider homeownership exclusively for the rich today. 

Homebuyers in Smaller Markets to Benefit More

In Canada’s secondary cities, where real estate values are typically lower, a single rate cut is more helpful than in markets such as Toronto and Vancouver, which have much higher barriers to entry. “When you’re looking at.. [the] affordability of homes, [in] markets that are more accessible — particularly to first-time buyers — an interest-rate decrease does help,” Yolevski tells Wahi.

Those Canadians who require only a small decline in interest rates before buying may be in luck if a new forecast from Scotiabank is correct. The BoC has four more rate announcements scheduled for this year, and Scotiabank anticipates 25-basis-point cuts at each of the next three, beginning on July 24.

Continued rate cuts, however, could present new challenges for first-time buyers,  Yolevski warns: “Future interest-rate decreases will continue to help provided that prices don’t increase to the point that negates any of those interest-rate decrease benefits — and that’s a distinct possibility.”