UPDATED: Wednesday’s 25 BPS cut to Canada’s overnight interest rate, to three per cent, is likely to help homebuyers but it won’t solve other barriers in the housing industry including construction costs and high development fees, industry observers said.

The cut is the sixth consecutive trim to the Bank of Canada’s benchmark interest rate.

It reflects progress on bringing down inflation to the central bank’s target range of two per cent, anxiety over promised tariffs on Canadian exports to the U.S., and a forecast for modest GDP growth of 1.8 per cent in 2025 and 2026.

“In recent months, inflation has remained close to two per cent, consumer expectations have largely normalized, and there is no longer evidence of broad-based inflationary pressures, “ BoC governor Tiff Macklem said in a press conference Wednesday morning.

The BoC said recent strengthening in consumption and housing activity is expected to continue, and shelter price inflation is easing gradually.

Since the reductions, the housing sector has seen buying activity pick up, though the recovery has been very uneven. Earlier this month, Royal LePage said the aggregate home price in Canada rose year-over-year by 3.8 per cent to $819,600 in Q4 2024, driven by lower interest rates, changes to mortgage lending rules and renewed buyer demand.

The BoC has reduced its benchmark interest rate by a total of two per cent since summer 2024, when it reversed a previous policy of elevated interest rates to control inflation.

Outlook for more rate cuts, and the housing market

“Interest rates have fallen sharply in recent months, with further reductions expected in 2025. We believe the Bank of Canada could lower rates by another 100 basis points by year end, steadily improving affordability,” Phil Soper, president and CEO of Royal LePage, said in a blog post.

A forecast in Re/Max’s 2025 Canadian Housing Market Report said “the sequential interest rate cuts and changes to the mortgage stress test are a much-needed reprieve for those looking to get into the market,” particularly first-time homebuyers.

Home sales in Q4 2024 were up 10 per cent from the previous quarter, the Canadian Real Estate Association said, one of the “stronger quarters for activity in the last 20 years, not accounting for the pandemic.”

“Our forecast continues to be for a significant unleashing of demand in the spring of 2025, with the expected bottom for interest rates coinciding with sellers listing properties for sale in big numbers once the snow melts,” Shaun Cathcart, the association’s senior economist, said.

In a statement to RENX Homes, Soper said borrowing capacity for homeowners will be increased and mortgage holders with renewals coming up will benefit from the rate tapering. The change to monetary policy is also happening before the spring housing market when demand typically rises, which he predicts will spark buying and selling. 

Stronger transaction and development activity should be expected with the latest cut, Peter Norman, vice president at Toronto-based Altus Group, said in an email to RENX Homes. But the 25-basis-point cut suggests “the loosening cycle may be slowing down, which may cause some anxiety.”

Norman said some real estate developers are staying on the sidelines because of strained development economics, and he does not see many signs this will change quickly. “Expect only tepid activity in terms of new project launches at least for the first half of this year.”

The federal government’s reversal on immigration policy to limit newcomers will affect housing demand as well, Norman added.

Construction costs major obstacle to housing

Unlike the optimistic forecasts, Ray Wong, vice president at Altus Group, said in a statement to RENX Homes interest rates have not fallen enough to “significantly jumpstart activity” as high construction and labour costs remain stumbling blocks.

A release by the Canadian Home Builders’ Association (CBHA) also does not forecast a bright situation in the housing sector. Its Q4 Housing Market Index, which tracks industry sentiment from the country’s residential construction industry, neared a record low for single-family housing and hit a new low on the multifamily side.

Toronto-area new home sales in December reached the lowest level in almost four decades, according to Building Industry and Land Development Association.

“Interest rates need to keep coming down and be reflected in mortgage rates, and the stress test needs to be more fluid,” CHBA CEO Kevin Lee, said in an emailed statement. “Importantly, government policy at all levels should focus on decreasing taxes on new homes, reining in runaway development charges, and eliminating costly lags in development approvals.”

While Soper said the Canadian housing market will likely be shielded from the impact of trade policy with the U.S., broader economic challenges would cause activity to slow.

How commercial real estate could be affected

The possibility of 25 per cent tariffs on all Canadian exports to the U.S. would result in “a lengthy interruption to the Canadian commercial real estate market and to the residential development sector,” Norman said, contrasting Soper’s comments. 

Commercial real estate investors, however, could see the latest interest rate cuts as a reason to “step off the sidelines and into the market,” Mark Fieder, principal and president of Avison Young Canada said in a release. 

“We remain optimistic about a longer-term bull run going into the last half of the year, stimulating appetite and capital allocation in such asset classes as industrial and multi-family.”