Impact of Bank of Canada Rate Cuts on the Housing Market Short Term Boost or Long Term Stability
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The Bank of Canada recently reduced its overnight lending rate by 25 basis points, sparking mixed reactions among housing experts. Some believe this rate cut will support the struggling real estate market, while others think the reduction is insufficient to significantly impact market outcomes this summer. Given the sensitivity of housing markets to interest rate changes, which affect mortgage rates and monthly payments, it is crucial to assess the potential effects of declining rates and expectations of future rate adjustments on both lenders and mortgage seekers.
National housing market trends, informed by regional data, reveal significant fluctuations since the COVID-19 pandemic. The latest figures from the Canada Real Estate Association (CREA) show that April 2024 sales are markedly lower compared to the peak in early 2021. However, these sales align closely with the pre-pandemic long-term average of 40,000 seasonally adjusted monthly sales, though there has been a notable shortfall since June 2022. With an improving market environment, previously inactive homebuyers and those who delayed purchases in anticipation of better rates are expected to re-enter the market, potentially driving up sales and prices.
An increased number of new listings since late 2023, coupled with a sales-to-new listings ratio below 60% nationally, suggests sellers are preparing for heightened demand. While interest rate cuts are generally seen as driving housing prices higher, research indicates that housing prices respond gradually to such changes. The current lower-than-peak average housing prices, contrasted with the long-term trend of price growth, suggest that while the moderate rate cuts might boost sales volumes this summer, their impact on prices may be slower. The Bank of Canada will monitor these trends closely, adjusting its policy as needed, especially considering the potential inflationary effects of rising housing prices.
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