After a bidding war, Canadians suffered from a nationwide disease called FOMO – the fear of missing out – a disease that made open houses look like AI stock IPOs.
Aside from some sellers' markets in the Prairies, Quebec and the East Coast, the contagion has now turned into FOGI (Fear of Intrusion) – a perfectly rational response to six-figure down payments and sellers who still believe 2022 was an economic prophecy and not a bubble.
Due to Trump's trade blowouts, slower immigration and a weak job market, homebuyer sentiment isn't what it used to be.
This may have played a role in the Bank of Canada's decision to cut interest rates on Wednesday. But one wonders: Will the recent cuts be enough to revive buyer enthusiasm? Finally, interest rates compete with population growth and employment as the most important medium-term drivers of the value of Canadian real estate.
(Side note: Real estate trends are local, but for the sake of time, we're referring to national data.)
In total, the Bank of Canada has made nine interest rate cuts since June last year – a relief of 275 basis points. Canada's key interest rate is now below its 30-year average for the first time in three and a half years. And compared to the central bank's estimate of 2.25 to 3.25 percent as “neutral,” the theoretical interest rate that keeps the economy in balance, it is just 25 basis points to be substantially stimulative.
Historically, interest rates are at a good level.
Of course, this doesn’t suddenly make Canadian real estate “affordable,” but we’re on the right track. For example, if we look at a household with a 20 percent down payment and two people working 40 hours a week at the national average wage, mortgage costs are almost at their lowest in five years.
One would expect that improved economics will lead to more sales activity among homebuyers in the foreseeable future. US studies by JPMorgan, for example, assume that it takes three months for significant interest rate cuts to have their maximum effect. Therefore, we may see more interest in home buying next quarter since not much happens in December.
The Bank of Canada expects the cuts will take 12 to 24 months to take full effect, meaning the first quarter of 2026 could finally see the recovery from last winter's monetary thaw.
Still, there are three pressing obstacles to a housing recovery: population growth, U.S. trade policy and mortgage rates.
Household formation is the basis of real estate demand. And as it happens, we'll get a glimpse of the government's immigration plans when the budget is published next week.
Trade policy is the biggest question mark. Canada can survive the trade status quo because most of its U.S. exports are protected by the Canada-U.S.-Mexico Agreement (CUSMA). But if Trump unexpectedly terminates the pact without a suitable replacement in place, that exemption could disappear and plunge us into recession.
Trump's intentions could become clearer by January, as Americans will have to give six months' notice to withdraw from CUSMA. He will use the agreement primarily as leverage to negotiate a better deal for the United States, but we cannot ignore the chance that he will decide to behave economically and ruin our economy. This scenario would be a buzzkill of operatic proportions, not least for housing.
According to a recent Wahi survey, only 16 per cent of potential Canadian home buyers said they would be less likely to buy due to trade threats. After all, accommodation is not optional and rents are still not cheap. But a full-blown trade war with the country we depend on for a fifth of our GDP would require a very different survey.
By the first quarter we should have much more clarity on trade, inflation and employment. If the coast is clear on all three fronts and interest rates don't skyrocket, we could have a decent real estate market come winter or spring.
Meanwhile, according to the Bank of Canada, there is a “rebound in housing investment” and its rate cuts will provide “more support” for real estate. Just don't expect miracles.
And while we're talking about rising interest rates, let's not forget the following:
- Average core inflation is still 3.15 percent and rising (the target is two percent).
- Consumers' inflation expectations for the coming year are still at four percent and are holding.
- Prices for raw materials (excluding energy) are rising.
- Ottawa is about to spend billions of dollars to stimulate growth.
That's usually not a recipe for low mortgage rates. Furthermore, it is not normally a recipe for central banks to cut interest rates.
The truth is, even if borrowing costs were to go sideways from now on, that would be a win for the real estate market.
None of this means that prices cannot continue to fall nationally. However, if your ambitions include a garden rather than a concrete balcony, be aware that the market for single-family homes is not as weak as the general real estate headlines would suggest.
If you ignore the pandemic, single-family home completions are at their lowest level in almost three decades. And construction costs far exceed inflation.
In short: Regardless of interest rates or Trump's next tariff tweet, those betting on a collapse in real estate prices should pack a lawn chair and a snack. It could be a long wait.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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