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The Chances of a Rate Cut From the Bank of Canada: What It Could Mean for Young Buyers.

Written by Posted On Friday, 23 August 2019 13:33
The Chances of a Rate Cut From the Bank of Canada: What It Could Mean for Young Buyers.

By now, most of us who work in the Toronto condo market are used to the ups and downs that go with the territory; in the last decade, there have been far more ups than downs and the juggernaut that is Toronto real estate prices has looked all but unstoppable, until recently.

2019 came in with a whisper — but after a slow beginning to the year home sales rose in July for the fifth straight month. Still, some experts have expressed concerns about the market and over the course of this year there have been murmurs of a projected rate cut from the bank of Canada: that reality is becoming more likely.

Canada is incredibly dependent on global markets and the United States in particular, recent fears of a recession in the United states are bleeding over the border: There's been plenty of talk about a rate cut down south, and if that happens then Canada could follow suit. The Canadian economy has slowed, and turbulent trade and concerns about a global recession are driving factors that could produce a rate cut; something that many in the real estate industry would welcome.

But rumours and speculation don’t equate to action, and most industry experts place the odds of a rate drop at roughly 20%: those as Macquarie place the odds even higher at 50% in this Financial Post aritcle.

The truth is that nobody knows for certain whether or not the bank will cut rates, but if the bank of Canada does in fact cut interest rates it could be a breathe of fresh air for millennials and first time home buyers who are getting pinched by the mortgage stress test and soaring housing prices in markets like Vancouver and Toronto.

Lower Rates Will Stimulate Toronto’s Condo Market

The condo market is alive and well — especially if you look at gains over the last 5 years where some condos have increased by nearly 100% in value.

Though things might appear rosy on the surface, the market hasn’t been all that friendly to first time home buyers: Qualifying for a mortgage in Canada’s priciest markets can feel like an insurmountable obstacle for many young buyers — while necessary, measures to cool these red hot markets have failed to lower prices. Unfortunately, young buyers are carrying much of the burden in cities like Toronto where there’s low supply and high prices.

While young buyers wait for their opportunity to enter the market, investors have little trouble passing the mortgage qualifications and continue to scoop up available units. According to Stats Canada, 1 in 3 condos are investor-owned.

Real estate is important business in Canada, and nobody is suggesting that investors should be forced out; however, a market where young buyers cannot afford to buy the homes that are being sold by retirees and soon to be empty nesters, is anything but sustainable.

A drop in rates could be just what young buyers need to enter to the market and just what the market needs to reduce the stranglehold that investors have on it. Lowering rates would help remove some of the obstacles created by the mortgage stress test, which would not only allow more young buyers to pursue the dream of home ownership, but also encourage developers to take on additional projects. Single family homes will still be out of reach for many young buyers, but condos remain an affordbale option for those who qualify for a mortgage.

A Recent Change in the Qualifying Rate Could be an Indicator

The question is: does the Bank of Canada see the need to lower rates or are the calls to do so simply coming from those with a vested interest? In July of 2019, the Bank of Canada lowered the qualifying rate for the mortgage stress test from 5.34 to 5.19 an act that could dent a market like Toronto. But this could be viewed as an indication that the bank is listening to calls to alleviate the pressure of the stress test, and perhaps dropping interest rates will be the nest domino to fall.

It remains to be seen whether September will pass without a rate cut, but should rates drop, you can bet that many buyers will jump back into the fray.

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Robert Van Rhijn

Robert Van Rhijn is a Toronto based Realtor and Broker-of-Record at Slate Realty Inc. He founded Strata.ca in 2018 — a Toronto condo website featuring data and analytics you don’t need to be a statistician to understand. You can connect with Robert at robert@strata.ca.

https://truelofts.ca/

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