Posted on
July 24, 2024
by
Omeed Ghafori, PREC*
The Bank of Canada has reduced its target for the overnight rate to 4.5%, with the Bank Rate at 4.75% and the deposit rate at 4.5%. This move is part of the Bank’s ongoing effort to normalize its balance sheet while addressing economic challenges. This decision is likely to have significant implications for the real estate market, both nationally and in local areas.
The Global Economic Context
Globally, the economy is projected to grow at an annual rate of about 3% through 2026. While inflation remains above target in most advanced economies, it is expected to ease gradually. In the United States, economic slowdown and moderated consumption growth are evident, and inflation is on a downward trend. The euro area is experiencing a recovery after a weak 2023, and China’s economy is seeing modest growth driven by strong exports despite weak domestic demand.
Financial conditions worldwide have eased, characterized by lower bond yields, rising equity prices, and robust corporate debt issuance. In Canada, the economy has been relatively stable, with the Canadian dollar holding steady and oil prices aligning with expectations set in April’s Monetary Policy Report.
Canada’s Economic Performance
In the first half of the year, Canada’s economic growth likely picked up to about 1.5%. Despite robust population growth of around 3%, the economy’s potential output is growing faster than GDP, indicating an increase in excess supply. Household spending, including consumer purchases and housing, has been weak, and there are signs of slack in the labor market. The unemployment rate has risen to 6.4%, with employment growing more slowly than the labor force.
However, GDP growth is forecasted to increase in the second half of 2024 and through 2025, driven by stronger exports, a recovery in household spending, and business investment as borrowing costs ease. Residential investment is expected to grow robustly, while population growth is projected to slow in 2025 due to new government limits on admissions of non-permanent residents.
Implications for the Real Estate Market
Lower Borrowing Costs:
Homebuyers: The rate cut reduces mortgage interest rates, making home loans more affordable. This can increase homebuyer activity, allowing buyers to qualify for larger mortgages or consider higher-priced properties.
Homeowners: Those with variable-rate mortgages will benefit from lower monthly payments, providing financial relief and potentially freeing up disposable income.
Increased Market Activity:
Buyer Interest: With more affordable borrowing costs, buyer interest is likely to rise, leading to increased market activity. This is particularly relevant for areas like Crescent Beach and Ocean Park, where demand for homes remains strong.
Seller Advantage: Increased buyer activity can benefit sellers, leading to quicker sales and potentially higher offers, especially for well-priced and attractive properties.
Impact on Property Prices:
Potential Stabilization or Increase: As borrowing becomes cheaper, demand for housing typically rises. This could stabilize property prices or even lead to an increase, especially if housing supply remains limited compared to demand.
Economic Forecast and Inflation Outlook
The Bank of Canada forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026. The strengthening economy is expected to gradually absorb excess supply through 2025 and into 2026. CPI inflation moderated to 2.7% in June and is expected to slow to about 2.5% in the second half of 2024, easing further through 2025.
While broad inflationary pressures are easing, shelter price inflation remains high, driven by rent and mortgage interest costs. Services closely affected by wages, such as restaurants and personal care, also contribute to elevated inflation. The Bank expects CPI inflation to settle around the 2% target next year, with ongoing monetary policy adjustments guided by incoming economic data.
Strategic Advice for Buyers and Sellers
For Buyers:
Act Swiftly: With lower interest rates, it’s an opportune time to enter the market. Locking in a lower mortgage rate can save substantial amounts over the loan's lifetime.
Financial Preparedness: Ensure your finances are in order. Obtain a pre-approval from a lender to strengthen your position in the competitive market.
For Sellers:
Market Timing: Now is a favorable time to list your property, with increased buyer interest driven by lower borrowing costs.
Property Appeal: Enhance your property’s appeal through upgrades and staging to attract higher offers and quicker sales.
Conclusion
The Bank of Canada’s rate cut to 4.5% is poised to influence the real estate market by making borrowing cheaper and stimulating market activity. However, economic uncertainties and inflationary pressures, particularly in shelter costs, remain important considerations.
For personalized advice and expert guidance in navigating the dynamic real estate market, reach out to me, Omeed Ghafori:
Stay informed and make strategic decisions with insights tailored to your needs.
Keywords: Bank of Canada rate cut, real estate market impact, Crescent Beach real estate, Ocean Park realtor, Omeed Ghafori, mortgage rates, home buying advice, selling property, economic forecast, inflation outlook.
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