The Bank of Canada (BoC) recently announced a 25 basis point cut to its overnight lending rate, bringing it down to 4.25%. This marks the third consecutive rate cut this year, a response to cooling inflation, which dropped to 2.5% in July. While this rate reduction isn't expected to trigger immediate action in the real estate market, it serves as a signal that borrowing costs are likely to keep decreasing. Many are now watching to see if these lower rates will revive the real estate sector, which has been sluggish in recent months.
One key impact of these rate cuts is on housing affordability. As interest rates drop, borrowing becomes cheaper, potentially encouraging more buyers to enter the market. However, economists caution that this relief may not be immediate, as broader economic conditions, including a weakening labor market, are still causing uncertainty. Employment losses and slower wage growth are challenges that could delay any major uptick in real estate transactions, even with lower borrowing costs.
Commercial real estate has also felt the effects of higher borrowing costs and economic volatility, leading to a "wait-and-see" approach from many investors. While lower interest rates are expected to improve financing conditions, the broader economic slowdown, including low GDP growth, could delay significant investment decisions until 2025. Investors are likely to remain cautious until they see more stable economic indicators.
In the near term, the BoC is expected to continue lowering rates through the rest of the year, with further cuts predicted for October and December. While transaction activity might stay muted as buyers wait for even lower borrowing costs, the real estate market may slowly begin to recover as inflation stabilizes and interest rates fall further.
Comments