Why today's Bank of Canada's interest rate decision might not sway a housing market 'frozen' by uncertainty

Yahoo

4 days ago

The Bank of Canada's lengthy streak of interest rate cuts was expected to help stir the country's dormant housing market. But so far this year, the announcements and guidance from Canada's central bank have highlighted uncertainty in the economy — and underlined a deepening housing market paralysis.
'With looming tariffs and a lot of uncertainty in the market, with potential job losses and rising costs in many aspects of life, I think a lot of people are just really scared to take on a lot of debt,' said Victor Tran, a Toronto-based mortgage broker and Ratesdotca mortgage and real estate expert.
Interest rates remain too high for many potential buyers, Tran says, with fixed and variable rates mostly above four per cent — "still not low enough for buyers to enter the market.'
Compounding this, affordability remains an issue. 'The buyers realize prices should come down,' Ron Butler, a mortgage broker at Butler Mortgage, told Yahoo Finance Canada. 'The sellers don't believe they should come down. So there are 25 to 30-year lows in activity.'
The BoC is widely expected to hold its rate steady at 2.75 per cent today. But the housing market would likely remain "frozen" even in the event of an interest rate cut, Butler says — with any cut likely stemming from more weakness in the economy that will keep most potential buyers in a holding pattern.
Those few who are buying right now tend to be extremely cautious, says Robert Saunders, co-founder of Ownright, a digital real estate legal services startup. 'What we're seeing from a first-time homebuyer point of view is generally, people are doing a lot more due diligence and bargaining more on the deals that they're doing.'
First-time homebuyers 'don't want to catch a falling knife,' given that prices in some markets have dropped considerably, says Tran. In the Toronto condo market, for example, he says 'there's a good chance that by the time they take possession of it, let's say, two months from now, the value can be less than what they bought it for, and that's scary.'
Mortgage business is nonetheless up this year, Butler says, largely because of the glut of owners renewing mortgages taken out at extremely low rates during the pandemic. For those renewing, the BoC's decisions still carry weight, with variable mortgage rates generally rising or falling with the Bank's overnight interest rate.
Those who do have renewals coming up 'simply must shop,' Butler says. The major lenders waged a 'mortgage rate war' in the early spring, he says, competing for the limited pool of people buying in the near-stagnant spring market. But on renewals, the banks are far less aggressive, he says, knowing they can match another lender's offer to an existing customer — but only if the customer gets another offer.
'If you can't be bothered, you're just accepting the fact you're probably going to pay somewhere between $1,500 and $5,000 more over the course of your renewal period,' Butler said. 'Because if you have no ammunition to go back after your bank, they are never going to give you the best offer the first time.'
Many also wait too long, Tran says, and may miss the window to process a transfer application. Most lenders will hold a rate for up to 120 days, he says. 'So start as early as possible, consult a mortgage professional, a mortgage broker, a mortgage specialist with a different bank, lock in a rate, and if the rates go down, that's great.'
Starting early also makes sense given the economy's effects on the bond market, which determines fixed mortgage rates. Bond yields 'are profoundly erratic,' Butler says, possibly the most volatile he has seen in 30 years. The 'very big swings' in yields saw insured fixed-rate mortgages as low as 3.59 per cent in early April, Butler says.
'A lot of people locked in, and now we're back up into the fours,' he said, with 'very slim availability' of rates at 3.99.'
Butler says rates are likely to come down again, with the BoC keenly aware of growing unemployment issues, especially in Ontario, and closely watching data on Canadians' credit health. But he cautions that there is likely a floor to mortgage relief in the months ahead, calling 'very, very low' odds of a mortgage rate in the high two per cent or low three per cent range.
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.
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