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Robert McLister: A measly 0.25% discount is not enough for legions of homebuyers
Published on 04 July 2024 • Last updated 1 day ago • 3 minutes reading time
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Bank of Canada Governor Tiff Macklem will make the next interest rate announcement on July 24. Photo by Justin Tang /The Canadian Press
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With the country's housing prices stagnating, housing inventories growing and housing affordability still abysmal, the Bank of Canada's quarter-percentage-point interest rate cut last month was helpful, but economically equivalent to bringing a butter knife to a gunfight.
Canadian real estate and over-leveraged borrowers need a bigger savior. A measly 25 basis point drop in average mortgage rates only represents an improvement in solvency (home purchasing power) of just over two percent. Therefore, the psychological boost from the bank's initial rate cut can only drive the market so far.
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What the housing market really needs is to wake up the sleeping giants – the disconnected buyers. And they are out there, you can be sure of that. In addition to domestic housing demand, Canada saw a record population increase of 1.27 million in the 12 months to June 30, up from 1.06 million in the period before that and 0.54 million in the 12 months before that.
In total, 2.87 million new home seekers have been added in three years. According to official estimates from Statistics Canada, this is more than the entire population of Manitoba and Saskatchewan combined.
So when will interest rates fall sufficiently to protect borrowers’ wallets and keep property prices stable?
All economists agree that average mortgage rates may need to be cut by more than 100 basis points to offset economic headwinds such as rising unemployment.
Since inflation targeting was introduced, there have been five rate-cutting cycles of at least 100 basis points (in 2015, the Bank of Canada cut rates by only 50 basis points). Admittedly, this is a small sample, but in those cases, it took the central bank an average of 3.2 months to cut rates by 100 basis points.
If a bank sees a reason to cut interest rates, there is usually enough reason to follow through. But this time, our central bankers are more cautious due to sluggish inflation.
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It's worth noting that a widening gap between Canadian and American interest rates, while damaging to our loonie, is not a sufficient reason to stop easing. History has shown that the Bank of Canada's policy rate can go its own way for several months. Our overnight rate, for example, was 250 basis points below the Federal Reserve's in 1997, albeit under different circumstances.
Now, no one should trust that history will repeat itself and Canadians will have to accept 100 basis point cuts by September. While it cannot be completely ruled out, inflation is still too unpredictable, as demonstrated by the disappointing rise in the consumer price index last week. CanDeal DNA forward rate data shows that markets expect it could take until April next year for the next 75 basis point cuts to occur. It's like waiting for spring in Winnipeg during the winter – it will come, but not as quickly as you would like.
Why are there delays in the cuts?
Unfortunately, the economy will have to slow further to achieve the rate cut that so many people are craving. That takes time. In fact, it may take even longer this cycle, given the aftermath of fiscal stimulus, ongoing wage pressures, global trade tensions, sluggish services inflation, etc.
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This makes Friday's unemployment figures in Canada and the US all the more important. The Canadian central bank and the Fed want a looser labor market to ensure that consumer and price pressures ease. And so far, that seems to be happening. On our side of the border, the total number of full-time employees for the important over-25 demographic appears to have peaked. And this despite the fact that immigration numbers in Canada are higher than Snoop Dogg at a house party.
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In the meantime, borrowers should batten down the hatches in case we have to ride out this rate storm longer than expected. With each passing month, however, heavily indebted Canadians feel more pressure from a policy rate that is still 300 basis points above its 20-year average. Unless there is another inflation shock – which is unexpected but not impossible – slowing growth will eventually force the Bank of Canada to act. Once the economy cries “Uncle,” it will have no choice but to offer more interest rate stimulus – whether that happens at the July 24 meeting, the September 4 meeting, or some other time.
Robert McLister is a mortgage strategist, rates analyst, and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
Mortgage interest rates
The rates shown below are updated by the end of each day and are taken from the Canadian Mortgage Rate Survey by MortgageLogic.news. Postmedia and Imaginative. Online Inc., the parent company of MortgageLogic.news, receive compensation from certain mortgage providers when you click on their links in the charts.
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