BoC Holds Rate, but What Happens When the Expected Fall Does Happen?

BoC Holds Rate, but What Happens When the Expected Fall Does Happen?

As expected by most economists, with today’s rate announcement the BoC held held its key lending rate at 5% for the fifth consecutive time. These announcement dates have become quite a big deal with many Canadians on the edge of their seats, with speculation running high that a rate cut may be on the horizon by mid-year. While the potential benefits of lower interest rates often spark optimism, it's crucial to consider the potential impact on the Canadian housing market, especially if this reduction isn't accompanied by an increase in housing supply.

Lower interest rates typically make borrowing more attractive, encouraging prospective homebuyers to enter the market. This surge in demand, however, can lead to increased competition for available homes, potentially driving prices upward. If the demand outpaces the supply – a scenario that may unfold with a rate cut unaccompanied by increased housing inventory – the Canadian housing market could experience further strain.

As the charts below demonstrate, supply in Newfoundland is at a 10 year low, demonstrating an obvious dearth in the post-covid era that shows no sign of recovery at the moment. 

NLAR January Supply

Housing Affordability Challenges

While reduced interest rates can make homeownership more financially feasible for some, the lack of a corresponding increase in housing supply may exacerbate affordability challenges in certain regions. As demand intensifies, especially in popular urban areas, prospective buyers may find themselves facing higher prices and limited options.

For real estate investors, the changing market conditions may present both opportunities and challenges. An influx of buyers could potentially drive up property values, benefiting those with existing real estate holdings, as increased demand without a corresponding rise in supply could lead to more competitive bidding situations. We saw similar market reaction with a significant increase to the residential average price post-covid, which has levelled off due partially to interest rate control measures. 

Insights Looking Forward

As Canadians await the Bank of Canada's decisions in the coming months, it's essential to stay informed about the potential implications for the housing market. While lower interest rates can be a catalyst for economic activity, a thoughtful and coordinated approach to addressing housing supply issues is equally critical to ensure a balanced and sustainable real estate landscape. Homebuyers, sellers, and investors alike should monitor market developments closely and be prepared to adapt to the evolving dynamics of the market. I suspect that when interest rates do begin to tumble, it will be a slow decline compared to how quickly they increased, and that the market supply will have time to react to any increased demand.

But if the construction industry is not supported by government initiatives to mitigate supply issues, market dynamics will likely dictate a stabilization of interest rates at elevated levels like we are seeing today as a means to control housing prices. I’m not confident that is a great long term solution. 

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