On Wednesday the Bank of Canada made a big cut to interest rates. They lowered the key borrowing rates by half a percentage point. Experts said this could help boost Canada’s slow housing market. The central bank’s policy rate is now 3.75 percent.

Wednesday’s decision is the fourth time in a row that interest rates have been lowered since June. It is also the Bank of Canada’s largest rate cut since the global financial crisis in 2009, except for during the COVID-19 pandemic. “We made a bigger cut today because inflation is now back to the two percent target, and we want to keep it close to that target,” said Bank of Canada governor Tiff Macklem. Phil Soper, the president and CEO of Royal LePage, said the most immediate impact of Wednesday’s rate cut will be felt by those who have variable rate mortgages. “Housing market activity has been slow in many regions due to higher borrowing costs but today’s more aggressive cut to lending rates could cause a quick turnaround. For those with variable rate mortgages – who will benefit from the rate drop right away – or those with mortgages coming up for renewal soon, today’s announcement is very good news,” he said. Soper added that cuts to the lending rate will mean many homebuyers will “get off the sidelines & start buying.” “In turn, rising demand will cause home prices to increase more rapidly, eliminating the advantages of lower borrowing costs,” he said. “We expect an early spring market is on the way – a trend we’ve seen in previous market turnarounds.” James Orlando, director of economics at TD Bank, said, “If there’s one thing that a lot of Canadians don’t want, it’s for housing in Canada to become even less affordable.

Unaffordable Housing

It’s already unaffordable right now.” Orlando said if the Bank of Canada cuts rates too quickly, it could lead to a “recoil” response from the housing market, with prices shooting up dramatically. “It causes buyers to have this fear of missing out in the market that causes prices to start jumping up too high, and it makes housing even less affordable.” Davelle Morrison, a broker at Bosley Real Estate in Toronto, said this rate cut could be a good opportunity for first-time homebuyers and for anyone with debt, such as credit card debt or an upcoming mortgage payment. “This is a great opportunity for those people who’ve been looking to get into the market especially for first-time homebuyers where there are so many condos on the market right now for them,” she said, adding that in the Greater Toronto Area, condo sales have lagged behind single-family homes. Morrison said while Wednesday’s rate cut could spur some movement in the housing market, it is unlikely to be a “runaway situation.” She expects some prospective homebuyers would still be cautious. “Some people might wait for that next rate announcement in December. I would suggest to those people, you could go buy something now & close after the next rate cut. That way you’re getting in at a lower price but you’re taking advantage of the next rate cut,” she said.

She said another obstacle to homebuying for many in Canada is the “stress test.” Before someone borrows money from a federally regulated lender like a bank, they need to prove they can afford payments at a qualifying interest rate. This rate is higher than the actual rate in a mortgage contract. This is referred to as the “stress test.” The stress test requires borrowers to qualify for a mortgage at a rate of 5.25 percent or two percent above the contract rate whichever is higher. Borrowers need to prove they could handle higher monthly payments if the central bank rate rose rapidly. “We’ve got that new rate of 3.75 percent but buyers are still being stress tested and approved at a rate that’s two percent higher” she said. “That impacts our buying power.”

Economists suggest that the Bank of Canada may require another significant rate cut in order to accommodate slow growth.

Economists believe the Bank of Canada’s yearly economic growth forecast is too optimistic. They say another large interest rate cut will likely be needed this year to boost growth. Many economists widely expected the Bank of Canada to lower its annual gross domestic product (GDP) forecast when it released its quarterly report on Wednesday. This is because there has been a series of disappointing growth data recently.

However, the bank only revised its third-quarter growth projection downwards and kept its 2024 estimate unchanged. This surprised many economists and analysts. “The bank had a more positive view on the economy for this year” said Tony Stillo the director of Canadian economics at Oxford Economics. He said annual GDP is likely to come in below the bank’s estimate. As a result, the bank would have to cut rates by another 50 basis points in December to support the economy. In its report the bank revised down its estimate of annualized third-quarter GDP to 1.5% from 2.8% in July.

However its full-year estimate remained unchanged at 1.2%, along with no change to its 2025 projection. “If growth comes in slightly below the Bank of Canada’s forecast, it could be one factor that supports a 50 basis-point cut in December,” said Avery Shenfeld, Managing Director and Chief Economist for Capital Markets at CIBC. A bigger-than-usual cut would also bring the key policy rate to the upper end of what the Bank of Canada estimates is its neutral rate of interest. Economists say this is a prudent level where the bank can start slowing rate cuts. A neutral point is when the policy rate is neither restricting nor stimulating economic growth. “We continue to expect one more 50-basis-point rate cut from the Bank of Canada this December,” wrote Claire Fan, an economist at RBC, in a report. She added that real GDP growth was more likely to stay subdued for longer as interest rates remain restrictive until 2025.

The bank reduced its key benchmark rate by 50 basis points to 3.75% on Wednesday. Governor Tiff Macklem said he would like to see growth strengthen as inflation was largely tamed. He said the pace & timing of further reductions would depend on incoming data between now and December 11, when the bank announces its next rate decision. The bank will have two sets of GDP data – for August & September, inflation numbers for October, and two jobs reports before it makes its next decision.