Bank of Canada interest rate cut unlikely to help housing market

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The cut will lead to lower borrowing costs, but analysts stress that the true impact of the cut will only become apparent gradually.

Published on 05 June 2024Last updated 1 week ago3 minutes reading time

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On January 24, 2023, a “For Sale” sign was photographed in the northeast Calgary neighbourhood of Cornerbrook.On January 24, 2023, a “For Sale” sign was photographed in the northeast Calgary neighbourhood of Cornerbrook. Photo by Gavin Young/Postmedia

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In a move widely anticipated by economists, the Bank of Canada announced a 0.25 percent interest rate cut on Wednesday. While the cut is a step toward easing borrowing costs, industry experts warn that it will take some time for any significant impact to be felt in the housing market.

The decision to cut the key interest rate to 4.75 percent came against the backdrop of concerns about economic growth and inflation. While the cut means slightly lower borrowing costs and could make it easier to finance new construction projects, analysts stress that the real impact of the cut will only become apparent gradually.

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“We do not believe that lower interest rates will lead to a construction boom. Monetary easing will take some time to kickstart projects currently on hold, and Canadian housing faces myriad structural challenges. These will likely limit our ambitions in housing and affordable housing over the next few years,” Desjardins said in its latest housing outlook.

“Interest rates have no impact on construction time. They have no impact on the permitting process, nor on the bureaucratic red tape that burdens builders,” said Karen Yolevski, chief operating officer of Royal LePage Real Estate Services Ltd. “So a reduction in interest rates is certainly welcome news, but it is not a panacea for creating housing more quickly.”

Historical data supports this cautious forecast. Previous rate cuts have often had a delayed reaction in the real estate sector, as it takes time for lower borrowing costs to translate into increased developer confidence and construction activity. In the short term, developers may remain cautious as they still face high material costs, labor shortages and regulatory hurdles.

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“There has to be zoning, there has to be materials, there has to be labor. So building more homes will take some time. I don't think there will be a significant change anytime soon. It will slowly increase,” said Michael Cooper, CEO of Dream Unlimited Corp.

However, Cooper explains that a sluggish resale market and slow home sales are directly hindering new home construction. “The first step will be for people to absorb existing inventory, whether through resales or through properties held by developers. That absorption is a critical prerequisite for any significant increase in new construction activity,” he said.

Several other factors continue to put pressure on the housing market. Tighter mortgage stress tests, introduced to ensure borrowers can handle higher interest rates in the future, have indirectly affected the pace of new home construction starts. In addition, rising household debt and stagnant wage growth are limiting the financial capacity of many prospective homebuyers, even at lower interest rates, which in turn affects developers' decisions to start new projects.

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“The stress test is still a hindrance for some people. It can be challenging when you're tested at six or seven per cent on your mortgage rate – those are high numbers and I think from a developer's perspective it's a burden when the buying environment is difficult,” said Benjamin Reitzes, Canada interest rate analyst at Bank of Montreal.

While the immediate impact of the rate cut is likely to be muted, Reitzes said the long-term outlook is more optimistic.

“Builders are probably aware of the fact that supply is increasing in the resale market and I am sure this will attract the attention of some developers and prompt them to start projects when prices come down.”

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Reitzes explained that lower borrowing costs could boost demand for housing as buyers become more confident and financially able. An increase in demand could ultimately boost housing construction and give the construction industry a much-needed boost. Still, patience is key.

“If you look at the overall picture of the housing market, considering what prices and interest rates are like, one of them probably had to fall today, and that was interest rates. Whether that's enough to really balance the market and bring supply and demand back into balance – we'll have to wait and see.”

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