What the latest interest rate cut means for the housing market

Well, if you have a mortgage or are in the market to borrow money, or if you have savings, there is important news out from the Bank of Canada today. The central bank has cut its key interest rate, the fourth consecutive decrease since June. The Bank of Canada Governor announced a 50 basis point cut. That brings the key lending rate to 3.75%. Here's what Bank of Canada Governor Tiff Macklem had to say about it. We took a bigger step today because inflation is now back to the 2% target and we want to keep it close to the target. Businesses and consumer expectations of inflation have shifted down and are nearing normal. All this suggests we are back to low inflation. This is good news for Canadians. Now our focus is to maintain low stable inflation. We need to stick the landing. CBC Business Reporter Scott Peterson has more now on what was behind the bank's decision. This is the fourth rate reduction by the Bank of Canada since June and its largest single move going back to before the pandemic, March 2020. So this signals that the Bank of Canada is serious about prompting the economy, stimulating the economy if you will, through low interest rates and the concern no longer solely focused on inflation. It's at 1.6% and that's now comfortably below the 2% guideline that the Bank of Canada wants. But according to the Bank of Canada, Tiff Macklem, that all this data, the slowing economy, rising employment signals and suggests that we are back to low inflation, quote unquote by the Bank of Canada, saying that this is good news for Canadians. Now it has come down so rapidly that Tiff Macklem and Carolyn Rogers and everyone at the Bank of Canada for that matter is equally concerned about inflation going down further as they are now about it going up. So this is a new route really for the Bank of Canada as far as they are concerned about the economy and inflation slowing too much. They predicted economic growth this year pretty much anemic but to pick up next year at about 2.1% and 2.25% by 2026 and this is all according to plan, them now wanting to boost the economy. So good news out there for anyone with high debt levels, with variable mortgages, home equity line of credits and even those trying to refinance their fixed mortgages will see these rates ripple out through the financial system. So good news for large debt holders and really the Canadian economy as well. Scott Peterson, CBC News, Toronto. Well with the Bank of Canada's interest rate cut today, can Canadians finally breathe a sigh of relief? Let's turn to Charles St-Arnaud for more on this. He's the Chief Economist for Alberta Central and a former economist at the Bank of Canada and he joins us from Calgary this afternoon. Charles, always great to speak with you on Bank of Canada Decision Day. Thanks for making the time. Thank you for having me. So what do you make of the Bank's decision and its justification for going with this larger cut, this 50 basis point cut? The three cuts that we saw the Bank do leading up to this were all 25 basis points and typically you wouldn't see a central bank making a big cut like this unless we were in a recession time, wouldn't it? Yeah. Well, I think we have to look at a broader set of indication. There are signs that the economy is not doing very well. We've seen, for example, spending per capita have been declining. We've been seeing job growth being relatively underperforming and leading to higher unemployment rate. But also what's important for the Bank of Canada, we're also seeing the dynamic in inflation being relatively weak. The latest data we got for September shows that over the past three months, the inflationary pressures have been relatively at the bottom of the Bank of Canada target. Okay. So that's where we're at with inflation right now, 1.6%. And that target of one to three or 2% is really the bullseye with the Bank of Canada's target. They're talking now more about maintaining inflation at these levels. How difficult is that for a central bank to do? Well, it's difficult, yes and no. We know where it's going to go. We know that inflationary pressures are weak. We know that inflationary pressures have come down a lot over the past year because of increasing slack in the economy. The fact that growth was weaker than potential for most of 2024 and the increase in the unemployment rate. So what they need to do now is to try to stimulate a bit more growth to prevent further increase in that slack in the economy and try to resorb it to bring it to more of an equilibrium in the economy. And it's clear with that, that where rates were standing at 4.25, we were still in restrictive territory and actually putting some restriction on the economy. So that's where the need for extra easing was required. So what does this sort of situation then mean for the Canadian consumer, Charles? Because we heard the Bank of Canada governor framing this as a good news story. And then we heard some pushback from reporters today in the press conference, or at least questions around, is it really good news when prices have gone up so much over the past couple of years that yes, inflation or price increases are lower now, but prices themselves are still high? Is it just a bit of a reality check now for consumers that this is the sort of level of prices that we have to deal with over the longer term? Yeah, unfortunately, prices will be high for a long time. It will need income to catch up for consumers to regain what they've lost in terms of purchasing power. But the lower interest rates are helping at least, as it was mentioned in the report. Those who have borrowed at variable rates will see those cuts reflected almost instantly. Those who are about to renew mortgages or lending will have most likely better rates. So that's helping at the margins to simulate on the consumer side. But there's also the business side that we have to take into account, that businesses will now be able to borrow at a better interest rate to invest. And the same also for home builders, who will be able to borrow at lower interest rates to increase the supply of housing. Well, speaking of housing, how do you see this playing out for the real estate market in this country? Because we know that that sales have been relatively low during this time of particularly high rates, even though they've started coming down in the past couple of months. But how do you see things going forward? Now we have this 50 basis point cut, the Bank of Canada's key rates at 3.75 percent. There's some changes coming to mortgage rules in December. How do you see demand in the housing market playing out? We should see some demand, or the demand on the housing side, picking up gradually in the coming months. The question is that how many would-be buyers are actually waiting for even lower interest rates? We know the Bank of Canada, actually the Bank of Canada signaled this morning that they will continue to cut rates if everything goes according to their forecast. So how many potential buyers are waiting for the bottom in interest rates before coming in the market? So in some ways, and that's what's been an argument I've been making, maybe the Bank of Canada should be returning to a more neutral rate faster and bring forward that recovery rather than pushing it later. So it's something I'm going to have to see is that as how many of those would-be buyers are still staying on the sideline and waiting for the even lower interest rates. Do you think that that would be a smart move for the Bank of Canada to go lower faster, maybe another 50 basis point cut at its next meeting or something along those lines? Because aren't there risks to, I don't know, the psychology around taking on maybe more debt at a time that there's still quite a bit economic uncertainty ahead, isn't there, Charles? Yeah, well, there is a lot of uncertainty. For me, I see a case to move faster, but that doesn't mean that by moving faster, you move deeper. It's that you cut fast, bring in interest rates towards a more neutral rate of, let's say, 3, 3.25%, but then staying there. You're not going back deeply into accommodative territory and stimulating too much the economy, but also monitoring what's going on in terms of borrowing and housing too. But I feel moving faster to a more neutral and, in some ways, buying some insurance against the downside risk to the economic outlook could actually be beneficial in the current context. Okay. Well, we will see how it all plays out. Charles, thank you so much for the time today. I really appreciate you joining us. Thank you for having me. That's Charles St-Arnaud. He is the Chief Economist for Alberta Central and a former economist at the Bank of Canada.