BMO Analysis Rate Cuts Boost Sentiment but Will Not Solve Canadian Real Estate Affordability Crisis
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The Canadian real estate market, which had slowed down due to rising interest rates, was expected to revive with rate cuts. However, a new analysis from BMO suggests that while rate cuts might boost market sentiment, they won't significantly improve affordability. The market is likely to remain constrained by high inventory levels and ongoing affordability issues, despite a psychological lift from the rate cut.
As interest rates climbed, Canadian real estate activity peaked just before the first rate hike in March 2022. Although it was expected that rate cuts would reverse the sentiment-based slowdown, BMO's senior economist Robert Kavcic points out that a 25 basis point reduction in variable rates provides minimal relief. Most borrowers have shifted to fixed-rate mortgages, which are already cheaper due to their alignment with bond rates. Consequently, the recent rate cut doesn't significantly alter the financial landscape for most buyers, despite a temporary boost in market sentiment.
BMO's analysis also highlights the broader affordability crisis in the Canadian real estate market. Even with recent price corrections and lower fixed mortgage rates, affordability remains strained. Achieving pre-pandemic affordability levels would require mortgage rates to drop below 4%, a further 12% decline in home prices, or significant income increases. With home sales in major cities like Toronto and Vancouver dropping by about 20% and inventory rising, the market faces downward pressure unless buyer activity increases significantly. BMO anticipates that high inventory and limited mortgage rate relief will continue to hold the market back.
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