— We take our content seriously. This article was written by a real person at BREL.
What’s happened
- On September 4th, the Bank of Canada announced it was lowering the policy interest rates by 25 basis points to 4.25%. This is the third consecutive decrease since June.
- The Toronto Real Estate Board released the August 2024 statistics, which reflected a continued summer stagnation.
What does this mean?
In a way, these two events are looking in different directions: the August statistics looked backward at what is typically one of the slowest periods of the year, and the interest rate change reflects the BoC’s view of the current economy, as well as where they expect it (and want it) to go in the future.
In August, Toronto sales were down and new listings were up, both on a year-over-year and month-over-month basis. This was no surprise to realtors, as August was one of the slowest months in recent memory! The collection of properties for sale continued to increase, giving buyers more choice and increasing the average time it took to sell.
Ironically, one key reason for this was the expectation of the BoC’s rate cut at the beginning of September, a trend that is generally expected to continue in the coming months (predictions are that the rate will likely be 3.75% by year’s end). Buyers have been sitting out the market in record numbers in anticipation of lower rates and increased affordability. At the same time, many condo owners need to sell…with predictable results.
So is this a doom and gloom scenario? Not necessarily.
Here are 4 takeaways from this week’s news.
1. Inflation is on track, but it needs lower rates too.
Our Consumer Price Index (CPI) came in at 2.5% year-over-year in July, and mortgage interest costs accounted for 1.2% of that increase. Given the direct link between the BoC’s policy rate and mortgage interest costs, the faster the Bank cuts, the sooner inflation will return to its 2% target.
Read: yet another reason for the BoC to cut rates further.
2. The economy is still weak, but the government is trying their best.
Consumer spending has slowed, debt utilization and default rates are rising, and businesses and consumers are both less confident. GDP increased by 2.1% in Q2 on a quarter-over-quarter basis (q/q), but it actually fell by 0.1% on a per capita basis (which is what individual Canadians actually feel). Most interestingly though was the fact that most of Q2 gain was fueled by government spending (which increased 6.7% q/q). Most of the job creation we have seen over the past twelve months has come from the public sector as well.
Clearly the government is doing what they can, but that of course is not sustainable – they need to get the economy going on its own.
The best way to do that? Reduce interest rates.
3. It’s not quite that simple, and the BoC knows this.
There is a delicate balance when it comes to tweaking interest rates to fight inflation. The BoC specifically said in their release:
“We are determined to get inflation down to the 2% target, and we want it to stay there. We care as much about inflation being below the target as we do above. [italics added] The economy functions well when inflation is around 2%.”
This language is new, and reflects the fact that they are juggling between reducing inflation and stimulating the economy. Cut too fast and “there is a risk that the upward forces on inflation could be stronger than expected.” Cut too slow and they could overshoot, and “the slowing that is now increasingly evident in our economic data will intensify. That will, in turn, increase the odds that the Bank will end up having to drop the policy rate below its neutral-rate range (to compensate for having overtightened, as it had to do in several of its past rate-cut cycles).” [David Larock]
4. It might be a good time to buy.
I know, realtors always say this. However, consider: this is a rare balanced/buyer’s market for Toronto. Prices are moderate, buyers can negotiate, and the slower pace of everything means you have time to research and make a thoughtful, carefully considered decision. This is rare in Toronto’s typically frenzied real estate market.
At the same time, interest rates, while still higher than many would like, are (by all predictions) coming down. Bond market investors expect rates to fall to 3% by next July. This means that if you were to purchase TODAY and get a variable-rate mortgage, even by the time you get your new home rates could be .25% or even .5% lower. A year from now your payments could be lesser still. We broke down the math so you don’t have to in our recent blog post, Should You Buy Now or Wait for Interest Rates to Come Down Further?
TL:DR? If you buy now before the lemmings descend, you’ll still get most of the interest rate benefits, while avoiding the frenzy.
[Thanks to mortgage broker David Larock for some of the economic analysis in this blog]
