Canada's Interest Rate Cut May Spur Housing Market

The pent-up demand is expected to drive both sales and prices higher

When the Bank of Canada cut its overnight lending rate by 25 basis points recently, the response from housing experts largely fell into two camps: those who believe that relaxing interest rates will buttress the struggling real estate markets, and those who believe the cut is not large enough to influence market outcomes this summer.

Housing markets are extremely sensitive to movements in interest rates, which subsequently affect mortgage rates and monthly mortgage payments. Sales, too, have tended to react strongly to changes in rate regimes. So, estimating the impact of declining rates, along with the expectation of future rate changes, is paramount for lenders and mortgage-seekers.

Regional housing markets from coast to coast contribute to the national housing portrait. While regional deviations from national averages are meaningful in local decisions, the overall impact of interest rate movements needs to be examined at the national scale.

The latest data from the Canada Real Estate Association (CREA) suggests that April 2024 sales have been considerably lower than the peak sales recorded in early 2021. COVID-19 is mostly responsible for large swings in post-pandemic sales and prices. Interestingly, April sales are mostly in line with the pre-pandemic longer-term trend of 40,000 seasonally adjusted monthly sales. Equally important is the realization that housing sales have been mostly below the long-term average of 40,000 since June 2022. If the pre-pandemic average trends had continued, one could estimate a shortfall of approximately 70,000 sales since June 2022.

With a supportive environment, new homebuyers — those who were previously inactive — as well as individuals who had deferred purchasing in anticipation of more favourable interest rates are likely to re-enter the market this summer in search of deals. This pent-up demand is expected to drive both sales and, to some degree, prices higher than what has been observed in the recent past.

Homebuyers will be greeted with an abundance of choice. New listings have been growing since the third quarter of 2023, and the sales-to-new listings ratio has been under 60 per cent nationally for almost a year. The downward trend in recent months suggests that sellers are anticipating an increase in demand and have entered the market sooner than buyers.

The assertion that interest rate cuts push housing prices higher is mostly accepted in the economics literature, though research questioning this notion is also available. Analysing the impact on housing prices from both short- and long-term perspectives may yield divergent conclusions. In the short term, it’s clear that the average housing prices in Canada currently sit below the peak reached in early 2022.