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The central bank has cut rates by 125 basis points, but builders are looking for 200-300 basis points to gain some confidence
Published on October 24, 2024 • Last updated 3 days ago • 3 minutes reading time
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Homebuilders said they were seeking deeper interest rate cuts to revive the sector. Photo by Brett Gundlock /Bloomberg
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The Bank of Canada cut its overnight interest rate by 50 basis points to 3.75 percent on Wednesday, marking the fourth straight cut this year. While the decline was welcome news for the housing market, it was also widely expected and already priced into many mortgage rates, leaving some industry experts skeptical that this latest cut will have a significant impact on growth or investment.
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Cautious voices include leaders in the commercial real estate (CRE) sector, where the impact of lower interest rates is still seen as limited in the near term. According to Peter Norman, vice president of Altus Group Ltd., the latest rate cut is welcome but not enough to drive a recovery in transaction activity.
“Even with a cut of this magnitude, CRE transactions will likely fall by the wayside until there is confidence that we have more or less returned to balanced monetary conditions.”
Norman also pointed out that while interest rate cuts are aimed at stimulating the economy, their effects typically take time to be felt, particularly in sectors such as real estate. He doesn't expect a noticeable increase in activity until mid-2025, when investors may be more confident about market stability. “Investors want a relatively stable interest rate environment before they start transacting again,” he explained.
For developers, the outlook is even more cautious. Norman stressed that many are waiting for deeper interest rate cuts before moving forward with major projects.
“Developers have previously told us that we need to see cuts of 200 to 300 basis points to really push pro formas higher. We are now in a cutting cycle at 125 basis points, so I think we can expect confidence to rise again at some point in 2025.”
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Ray Wong, another Altus Group vice-president, added that the Bank of Canada's rate cut reflected broader concerns about the health of the economy. “When a big cut like this is announced, it shows concern that consumers are running out of gas and that the Bank of Canada is hoping to boost markets before it tiptoes into recession.”
Despite the cautious mood in the CRE market, Wong sees a spark of optimism.
“We are seeing increased activity in the Canadian commercial real estate market, but not in a tangible sense,” he noted. “Interest is increasing and bid-ask expectations between buyers and sellers are more stable. At the moment it is still expensive to borrow money, but with each further cut investor sentiment improves in anticipation of future transactions.”
The impact of the recent interest rate cut could be felt more clearly in the residential real estate market.
“Activity in the Canadian real estate market has been sluggish in many regions due to higher borrowing costs, but today's more aggressive reduction in borrowing rates could see the tide turn quickly,” said Phil Soper, CEO of Royal LePage Real Estate Services Ltd. , adding that homeowners with adjustable-rate mortgages would benefit immediately and that increased demand could quickly drive up home prices.
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Soper expects more homebuyers to pull back from the sidelines, leading to an early spring market – a trend seen in previous reversals.
In this regard, Ralph Del Duca, president of Chestnut Hill Developments, indicated that lower borrowing costs could have a positive impact on construction. “It moves the needle because our cost of borrowing goes down,” he said. “Financing costs for construction are part of building a house, so lower interest rates improve affordability.”
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Adrienne Lake, managing broker at Corcoran Horizon Realty, provided insights into the preconstruction market and the expected impact of yesterday's announcement.
“We do a lot of pre-construction work and this market is just dead. A lot of developers have gone into administration and projects are being abandoned. I believe that with this drop in interest rates, buyers will start investing again, which will allow this market to regain some of its lost strength.”
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