The Bank of Canada (BoC) has cut its overnight interest rate a further 25 basis points to 4.5 per cent, a move widely welcomed in the housing development and construction industries and by potential homebuyers.

The BoC is following up on a reduction in the overnight rate to 4.75 per cent from five per cent made in June. The ongoing elevated interest rates have been blamed as one of the major factors slowing development and construction activity in Canada, and for warding off many potential homebuyers and investors. 

Inflationary pressures have moderated, the bank says, with the June total consumer price index being 2.7 per cent, dropping notably from the peaks of seven to eight per cent during the COVID pandemic.

“We expect inflation to moderate further, though progress over the next year will likely be uneven,” BoC governor Tiff Macklem said in a press conference. He identified “opposing forces” of an overall weakness in the economy reducing inflation, balanced by shelter and other service prices sustaining inflation.

‘Opposing forces’ of inflation

The BoC expects core inflation to slow to approximately 2.5 per cent in the second half of 2024, eventually landing at around the bank’s target of two per cent in 2025.

A press release Wednesday morning from the central bank noted Canada's "GDP growth is forecast to increase in the second half of 2024 and through 2025" to 1.2 per cent in 2024, 2.1 per cent in 2025 and 2.4 per cent in 2026.

"This reflects stronger exports and a recovery in household spending and business investment as borrowing costs ease. Residential investment is expected to grow robustly. With new government limits on admissions of non-permanent residents, population growth should slow in 2025."

But the BoC warned with Canada's population growth of approximately three per cent, the economy's potential output is growing faster than GDP, increasing excess supply. It also noted “weak” household spending, rising unemployment and high shelter costs as problems.

Macklem said further rate reductions could happen if inflation continues to fall in line with expectations.

“If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy rate. The timing will depend on how we see these opposing forces playing out. In other words, we will be taking our monetary policy decisions one at a time.”

Positive response from the housing industry

There was immediate, and positive reaction within the real estate community.

“It’s going to slowly but surely pull some buyers off sidelines that have been waiting for interest rates to go down before entering or re-entering the housing market,” Karen Yolevski, COO of Royal LePage Real Estate Services Ltd., told RENX Homes in an interview.

Royal LePage is also seeing inventory growing in major markets, which combined with lower rates, may encourage homebuyers to enter the market in the near future, she added.

“Our research shows that many buyer hopefuls have been waiting for a concrete signal from the Bank of Canada that the economy is moving in the right direction. A second cut to the overnight lending rate indicates just that, and with mortgage qualification thresholds continuing to come down, sidelined buyers may have the confidence they need to make their return to the housing market.”

Sectors not driven by consumer demand, such as industrial buildings, will be less impacted by the borrowing rate. But the multifamily sector is sensitive to interest rates, she said. Condo builders have been carefully watching the rate cut before launching projects, Yolevski added.

“Builders are borrowers too. If a builder or a construction company is looking for capital, they are impacted positively by the lower rates as is everybody else.”

Renters would also be affected. As interest rates go down, more renters feel they can buy housing, which may alleviate pressure on supply and result in lower rents. Smaller investors would also feel more comfortable investing in real estate, unlocking more rental inventory.

Royal LePage is also seeing inventory growing in major markets, which combined with lower rates, may encourage homebuyers to enter the market in the near future, she added.

Other organizations were more pragmatic. Rate cuts will provide “little to no relief for nearly half of Canadians”, a survey by CPA Canada and BDO Debt Solutions found. 

“However encouraging, interest rates remain high and will continue to constraint the economy and household finances for some time,” David-Alexandre Brassard, CPA Canada’s chief economist, said in a statement.

But Canadians with variable-rate mortgages should expect lower monthly payments, CPA Canada says, while “those with fixed-rate mortgages should also see the benefits if the downward trend continues come renewal time.”

The higher-interest-rate policy impacts

Though raising interest rates did help lower inflation, the continued elevated borrowing costs have been unwelcome news to real estate developers, construction firms and potential homebuyers.

In January, the Canadian Home Builders' Association’s CEO Kevin Lee pointed the finger at interest rates for “directly lowering the feasibility of building much-needed new housing supply”.

The Canada Mortgage and Housing Corporation’s Housing Market Outlook released earlier this year noted interest rates and high demand and building costs (affected by interest rates) would challenge housing start numbers and purpose-built rental housing.

The Building Industry and Land Development Association (BILD) reported today Greater Toronto Area new home sales in June 2024 were down almost 50 per cent from June 2023, and 59 per cent below the 10-year average, citing research from Altus Group. BILD blamed interest rates and “structural issues” such as lengthy approval timeframes, which have slowed development despite pent-up demand for housing from a growing nationwide population.