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Interest rate cut unlikely to provide immediate relief for housing market

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In a move widely anticipated by economists, the Bank of Canada announced a 0.25 per cent interest rate cut Wednesday, and while the reduction is a step towards easing borrowing costs, industry experts caution that it will take time before any significant impact is felt in the housing market.

The decision to lower the benchmark interest rate to 4.75 per cent comes amid concerns about economic growth and inflation. While the cut translates to slightly reduced borrowing costs, potentially making financing for new construction projects more accessible, analysts stress that the real impact of the cut will unfold gradually.

“We don’t think lower rates will translate into a construction boom. Monetary easing will take time to stimulate projects currently on hold, and Canadian housing construction faces myriad structural challenges. These will likely limit our homebuilding and affordable housing ambitions for the next few years,” Desjardins said in its recent housing outlook.

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“Interest rates don’t have an impact on the time it takes to build. It doesn’t have an impact on the approvals process and it doesn’t have an impact on any of the red tape that impacts builders,” said Karen Yolevski, chief operating officer of Royal LePage Real Estate Services Ltd. “So certainly a decrease in rates is welcomed news, but not a silver bullet that’s going to get housing built faster.”

Historical data supports this cautious outlook. Previous rate cuts have often had a delayed response in the real estate sector, as it takes time for lower borrowing costs to translate into increased developer confidence and construction activity. In the short term, developers may remain cautious, still grappling with high material costs, labour shortages, and regulatory hurdles.

“You have to have the zoning, you have to have the materials, and you have to have the labour, so building more homes is going to take time. I don’t think you’re going to see a significant change anytime soon. It’ll slowly increase,” Dream Unlimited Corp. chief executive Michael Cooper said.

However, Cooper explains that when the resale market is sluggish and houses are slow to move, it directly hampers the construction of new homes. “The initial step will be for people to absorb existing inventory, whether through resales or properties held by developers. This absorption is a crucial precursor to any significant increase in new housing construction activity,” he said.

Several other factors continue to exert pressure on the housing market. Stricter mortgage stress tests, introduced to ensure borrowers can withstand higher rates in the future, have indirectly affected the pace of new housing starts. Additionally, rising household debt levels and stagnant wage growth limit the financial capacity of many potential homebuyers, even with lower interest rates, which in turn affects developers’ decisions to start new projects.

“The stress test is still an impediment for some people. It can be a challenge when you’re getting tested at six or seven per cent on your mortgage rate –– those are heavy levels, and I think from a builder’s perspective, if the buying environment is challenging, that does weigh on you,” Bank of Montreal Canadian rates analyst Benjamin Reitzes said.

While the immediate effects of the rate cut might be muted, Reitzes says the long-term outlook offers more optimism.

“Builders are probably quite cognizant of the fact that supply on the resale market is starting to pick up and I’m sure that’ll catch some developers’ eyes to kick-start projects as rates go down.”

Reitzes explained that lower borrowing costs can spur increased demand for housing, as buyers become more confident and financially able. A rise in demand could ultimately stimulate housing starts, offering a much-needed boost to the construction industry. Nevertheless, patience is key.

“If you look at the broader picture for housing, given where prices are, and given where rates are, one of the two of them probably needed to fall today, and it was rates. Whether that’s enough to really balance the market and bring supply and demand back into balance –– we’ll have to wait and see.”