Understanding the Impact of Lower Mortgage Rates

On July 24, the Bank of Canada (BoC) lowered its benchmark rate for the second time in two months. Coupled with dropping government bond yields, current mortgage rates have now hit their lowest point in 17 months. While some believe these lower rates could stimulate the real estate market, historical trends suggest otherwise.

At WOWA Leads, we analyzed mortgage payments versus income over the last 50 years in Canada to understand the relationship between home prices and falling mortgage rates from their peaks. Our findings reveal that mortgage payments for a recently purchased average property in Canada consume nearly all of the average person’s disposable income.

A Tale of Two Markets: Stagnant vs. Thriving

Currently, the housing markets in Toronto and Vancouver are stagnant, whereas more affordable markets like Montreal, Calgary, and Edmonton are thriving. For instance, Toronto's sales-to-new-listing ratio stands at 35 percent, indicating a buyer’s market, with inventory levels nearing 25,000—the highest since 2010.

Historically, we’ve only seen this level of housing unaffordability twice before: around 1981 and 1990, with peaks in 1995 and 2007. Understanding what happened during those times can provide insight into the current market dynamics.

Why Do Home Prices Decline When Affordability Improves?

When affordability improves, home prices can decrease due to the lag effect of rate hikes and subsequent economic downturns. As most Canadian mortgages are fixed-rate, the impact of rate increases is primarily felt during renewals, often after rates have peaked. This situation can compel some sellers to offload properties.

A rate cut by the Bank of Canada typically signals decreasing inflation caused by a slowing economy, rising unemployment, and lower earnings for the self-employed. Declining home prices are significantly influenced by higher unemployment rates.

Future Outlook for Canada’s Housing Market

The housing market is currently exhibiting varied performance across the country. For instance, home prices in Ontario have recently declined, while Quebec and Alberta are experiencing steady growth. Historically, unaffordability has led to price drops following the peak of interest rates.

While the full impact of high interest rates on the market has yet to materialize, we might observe price moderation in Ontario, particularly in the Greater Toronto Area (GTA), whereas Alberta and Quebec could remain relatively stable.

Stay informed with more updates and insights as we navigate these evolving market conditions.

Reference: https://realestatemagazine.ca/a-historical-look-at-the-bank-of-canadas-rate-cuts-will-they-boost-the-housing-market/