Rate cut offers hope for market bounce

The cut in the interest rate at the beginning of June has been welcomed by homeowners and those trying to break into the market.

It wasn’t borrowers’ complaints who forced the Bank of Canada (BoC) to act, but the fact we achieved an inflation rate within the target band of 2-3%.

Our Consumer Price Index (CPI) came in at 2.7% for April, which was enough to reverse the central bank’s campaign of rate rises that Canadian homeowners have endured.

The 0.25% cut brought the interest rate to 4.75%. 

Pundits expect another three cuts within the next 12 months, allowing the benchmark to settle at around 4%.

That view was fortified by a BoC statement that said: “Recent data has increased our confidence that inflation will continue to move towards the 2% target.”

So, what does this mean for homeowners?

Firstly, this is a break the Canadian economy needs. It will enhance job growth and security, two bedrocks of a healthy real estate sector.

One group of beneficiaries will be those with adjustable-rate mortgages who have borne the brunt of the central bank’s campaign to bring down inflation. Indications that the BoC will continue with a program of rate cuts will be music to many ears.

So long as lenders pass on the cut in full, the retail rate for some of our cheapest mortgage deals will move from around 5.9% to 5.7%. 

Lenders are also likely to reduce the percentage offered for fixed-rate home loans. However, with rates likely to drop further, many borrowers will be reluctant to strike a fixed-rate deal.

Those seeking to buy their first home, upgrade or even downsize will see this move as a double-edged sword.

For one thing, money just got cheaper. But cheaper money powers the value equation in the property market, sending prices higher.

While a 0.25% cut will do little to ease the current pressures, the prospect of three or more cuts in the next 12-18 months will provoke more buyer competition.

The stimulus is much needed now. The Canadian Real Estate Association recently reported that home sales fell 1.7% between March and April.

Buyers will likely remain cautious in the short term until they see consistency in the low inflation rate and are confident the BoC will deliver on a series of rate cuts over the next 12 months.