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Last fall, when the Bank of Canada (BOC) signalled that it was likely done raising interest rates and would start reducing rates in 2024, Bay Street traders, economists, car buyers, would-be homeowners—pretty much everyone — began obsessing over a single question: When will the BOC start cutting rates? As early as December, there was speculation that rates would fall by as much as 1.5% in 2024.
The BOC increased interest rates from .25% to 5% between March 2022 and July 2023 to curb inflation, which peaked at 8.1% in June 2022. Despite the BOC’s aggressive streak of rate hikes, which caused mortgage rates and other borrowing costs to surge, the Canadian economy defies long-standing expectations that it would weaken or end up in a recession. The Bank of Canada’s inflation target is 2%, but with so much money on the sidelines waiting to go to work once rates start declining, does the Bank of Canada need to cut interest rates to stimulate the economy?
Economists are analyzing every angle to determine the BOC’s course of action, but these are unprecedented times. At no time has Canada had this large a proportion of the population sitting on so much cash, waiting to deploy it in the housing market, which is a rare commodity in terms of affordability and accessibility.
Inflation has decreased since June 2022 to near their target of 2%, but the threat as far as the BOC is concerned is still evident in the recent economic reports. Canadian Stock prices on Friday peaked intraday at the highest they have ever been; house prices in Canada are on an upward trajectory, moving up 2% YoY in March as people either feel comfortable about listing their homes for sale or had to sell because they had no choice due to the accumulation of higher rate over the last two years. Car sales in March were up by 24.40%, while the interest rates rate was 5% higher than in March 2022.
What does statistics mean? These reports indicate that consumer spending is still strong, and if it is strong, the BOC might think that reducing rates at this time isn’t their best course of action.
The worst economic news on Friday was that the unemployment rate moved from 5.80% to 6.10%, which was good news, as all the other results are reasons for the feds to keep rates high as those stoke the inflation fire. Higher unemployment, which has been resilient until now, was one of the results they expected from the rate hikes. One month, though, does not constitute a trend, and they will need at least two consecutive months of increasing unemployment rate to factor that into their decision.
In March of 2023, while the rate was 4.50%, the Bank of Canada decided not to increase rates, which resulted in a flurry of real estate activity. The feds had to fire a warning shot by raising rates in April by .25% to signal that if there was inflationary activity, they would continue to raise rates. At 5%, most economists think they have gone far enough. Still, by reducing the rate, there would be a stampede to buy consumer items like cars, other big-ticket items, and houses, and an increase in stock investment.
A recent report by CMHC states, “We anticipate a rebound in MLS® sales and prices from 2024 to 2026, fueled by declining mortgage rates alongside stronger growth in population and real disposable incomes. Sales dropped by about one-third from their early 2021 peak to the end of 2023. Prices fell by nearly 15% in the same period. During this time, the pool of potential homebuyers grew through robust population growth, increased savings, and higher incomes. As mortgage rates and economic uncertainty decrease in the second half of 2024, we expect buyers to start returning to the market”.
They have, as we have seen in the last three to four months, with house prices inches up. The report said, “We project sales levels in 2025 – 2026 to slightly surpass the past 10-year average but remain below the record 2020 – 2021 levels because housing will remain expensive for the average household”.
Inflation is still here, and the FEDs are hesitating to reduce rates because even if inflation goes back to 2%, with so many Canadians sitting on cash, they might be asking themselves: Why do we need to reduce rates to stimulate an economy that is running like a well-oiled machine? Lower interest rates might not be that close around the corner, and if stock prices continue to go up and house prices start increasing 10%-15% or more a year, we may be right back where we started.
Many homeowners and investors have underwater properties or mortgage rates that have increased so much that they cannot afford their mortgages. For some, just a .25% reduction is all they need for things to turn around, and sadly for the BOC, high inflation is again.
The good news for consumers is that the longer the BOC waits to make a decision, the better. With fixed rates trending lower and housing prices lower than two years ago, now is a great time to buy or invest in real estate. Even at these interest rates, 2024 Canadians will come to buy homes at higher than modest levels as they come to terms with the current rate environment. Just over 20 years ago, a five-year fixed-rate mortgage was 5.24% at the beginning of one of Canada’s most extended housing boom.
Sunlite Mortgage offers very competitive rates on mortgages for residential and commercial properties. Contact us today for your next mortgage.
