Bank of Canada’s Rate Cut Could Spur Housing Demand as Toronto Home Sales Fall in May

In a move that has garnered much attention, the Bank of Canada announced its first interest rate cut in over four years, reducing the key rate by a quarter percentage point to 4.75%. This decision is expected to have significant implications for the housing market, particularly in Toronto, where home sales have been struggling.

Toronto's Housing Market in May

The Toronto Regional Real Estate Board (TRREB) reported a 21.7% decline in home sales in May 2024 compared to the same month last year, with only 7,013 homes sold. Despite the drop in sales, new listings continued to rise as homeowners anticipated a resurgence in buyer activity. The City of Toronto saw a 17.8% year-over-year decrease in sales, while the Greater Toronto Area (GTA) experienced a 24.3% decline.

The average home price in the GTA also saw a slight decrease, falling 2.5% year-over-year to $1,165,691. However, the City of Toronto's average home price rose by 3.6% month-over-month to $1,193,202, although it was down just 0.3% compared to May 2023.

Impact of the Interest Rate Cut

Real estate analysts suggest that the Bank of Canada's rate cut could be the catalyst needed to reignite the housing market. Many potential buyers, who had been waiting for a clear signal of declining mortgage rates, may now feel confident enough to enter the market. This is particularly relevant for first-time buyers who have been deterred by high borrowing costs.

A survey found that 56% of Canadian adults active in the housing market had postponed their property search due to previous rate hikes. Among these, over half indicated they would resume their search if interest rates decreased, even by as little as 25 basis points.

Looking Ahead

Economists predict that the Bank of Canada will continue to cut rates cautiously to ensure that inflationary pressures remain under control and to avoid an overheated housing market. The next rate cut is anticipated in September 2024. For variable-rate mortgage holders, each 25-basis-point decrease could reduce their monthly payments by approximately $15 per $100,000 of mortgage.

As borrowing costs are projected to decrease over the next 18 months, it's expected that more buyers will enter the market, relieving some pressure on the tight rental market and potentially stabilizing home prices.

Conclusion

The Bank of Canada's recent rate cut could be a turning point for Toronto's housing market, which has seen a significant decline in sales over the past year. With lower borrowing costs on the horizon, the market may experience a surge in buyer activity, particularly among first-time buyers. While the full impact of the rate cut will unfold gradually, it marks a hopeful sign for those looking to enter the housing market and for the overall stability of home prices in the GTA.