Bank of Canada's rate cut could spur housing demand as Toronto home sales fall in May

TORONTO — Real estate market analysts say the Bank of Canada's much anticipated decision to lower its key interest rate could be the sign that many would-be homebuyers have been waiting for to make their move.

The central bank announced the quarter-percentage-point cut on Wednesday, its first in more than four years, meaning its key interest rate now stands at 4.75 per cent.

It comes after some of Canada's largest cities have seen ballooning home listings in recent months from droves of sellers listing their properties, despite demand from potential buyers not keeping up.

That includes the Greater Toronto Area, where new listings last month jumped 21.1 per cent year-over-year, with 18,612 properties put on the market. Calgary and Vancouver have seen similar trends, with new listings rising 18.7 and 12.6 per cent, respectively, year-over-year in May.

But home sales declined in all three cities. In Toronto, there were 21.7 per cent fewer sales in May year-over-year, the Toronto Regional Real Estate Board reported Wednesday.

The board said 7,013 homes changed hands in the month compared with 8,960 in May of last year, which coincided with a brief market resurgence. TRREB president Jennifer Pearce said homebuyers were waiting for "clear signs" of declining mortgage rates before going ahead with purchasing a property.

"As borrowing costs decrease over the next 18 months, more buyers are expected to enter the market, including many first-time buyers," she said in a press release.

"This will open up much needed space in a relatively tight rental market."

Around 56 per cent of Canadian adults who have been active in the housing market said they have been forced to postpone their property search since the Bank of Canada began raising its key lending rate from near zero in March 2022, according to a Leger survey earlier this year commissioned by Royal LePage.

Among those waiting on the sidelines, just over half said they would resume their search if interest rates went down, including one-in-10 who indicated a 25-basis-point drop would be enough for them to jump back in.

"There certainly is pent-up demand," said Karen Yolevski, chief operating officer of Royal LePage Real Estate Services, in an interview.

"Typically when rates go down, prices go up. So this would be the time where people come off the sidelines, knowing and anticipating that prices are likely to rise."

In the Greater Toronto Area, the average selling price of a home was down 2.5 per cent year-over-year to $1,165,691 last month. There were 2,701 sales in the City of Toronto, a 17.3 per cent decrease from May 2023, while throughout the rest of the GTA, home sales fell 24.3 per cent to 4,312.

"In general, buyers have been looking for some positive signs," said Scott Ingram, a sales representative with Century 21 Regal Realty in Toronto.

"The sentiment effect of this always punches above the actual dollar and cents. When people are looking for any bit of good news, they'll take it."

Yolevski cautioned the market rebound "won't be an overnight effect" as Canada is likely to see a more gradual return to higher sales levels. The Leger survey found more than two-in-five prospective homebuyers were waiting for a cut of at least 50 or 100 basis points before resuming their search.

"People purchase homes less so on the sticker price, the actual sale price of the property, but more so on the monthly carrying cost of the property," said Yolevski.

"So interest rates going down will, over time, lower monthly carrying costs and that will ease some of the burden that homebuyers feel, particularly first-time buyers, if they're feeling stretched."

Ontario Premier Doug Ford was optimistic the central bank's decision would help spur housing construction in the province.

He said the first cut was a good start but that the Bank of Canada should lower interest rates as quickly as it raised them.

"I believe that when you lower the interest rates, the homes will pop up like mushrooms all over the place," Ford told reporters.

"I'll be all over the Bank of Canada and I'll never stop until they continue lowering the interest rates."

But TD Bank senior economist James Orlando predicts the path for rate cuts going forward will be slow, despite it acknowledging the economy doesn't need such high interest rates any longer.

"It will proceed cautiously. It must ensure that inflationary pressures don't rebound like they have in the U.S. in recent months," he said in a note.

"It also doesn't want to reignite the housing market, where prospective buyers have been waiting for greater interest rate certainty. We expect the (bank) is on a cut-pause-cut path, with the next cut likely occurring in September."

The June decision is welcome news for homeowners with variable-rate mortgages, said Victor Tran, a mortgage and real estate specialist for Ratesdotca.

The company estimated that for every 25-basis-point decrease, floating variable-rate mortgage holders can expect to pay $15 less per $100,000 of mortgage.

"Those up for renewal in the coming months are facing monthly payment increases of up to 60 per cent, according to the Bank of Canada’s annual Financial Stability Report, and a 25-basis-point rate drop is a step towards easing those increases," he said in a press release.

“We will likely see an uptick in mortgage-holders considering variable rates on renewal to take advantage of the downswing, though the spread between fixed and variable is still significant and the Bank of Canada may spread decreases out over a number of months.”

—With files from Liam Casey in Toronto

This report by The Canadian Press was first published June 5, 2024.

Sammy Hudes, The Canadian Press