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A house with a sold real estate sign in a neighbourhood of Ottawa on April 17, 2023. The real estate industry believes that a possible rate cut on Wednesday would encourage buyers to wade back in.Lars Hagberg/Reuters

A Bank of Canada interest rate cut could give Canada’s slow housing market a jolt, as prospective buyers gain confidence that borrowing costs are on the decline.

Many buyers have been delaying their house hunting in anticipation of an interest rate cut, which will also have implications for those with car loans and lines of credit.

But any mortgage payment relief will be relatively small at first, as the central bank is expected to cut rates slowly in the coming quarters, and many would-be buyers will remain priced out of the market.

Since mid-2022, activity in the country’s real estate market has been mostly weak with sales consistently below the 10-year average. Homeowners have had to deal with the highest borrowing costs in years and would-be buyers have been cautious about making purchases because of uncertainty over the direction of interest rates.

The real estate industry believes that a possible cut on Wednesday – which could see the Bank of Canada lower its policy interest rate to 4.75 per cent from 5 per cent – would encourage buyers to wade back in. Financial markets put the odds of a cut this week at around 80 per cent.

Will the Bank of Canada get caught behind the curve again?

“There’s been so many buyers sitting on the sidelines waiting for interest rates to go down, that when we get the interest rate cut announcement, a lot of them will start coming out of the woodwork,” said Christine Cowern, founder and managing partner of The Christine Cowern Real Estate Team, who has sold homes in the Toronto area for 17 years.

“We’ve had multiple homebuyers tell us that they’re waiting for the Bank of Canada to drop rates before they start their search,” she said.

A survey conducted earlier this year by Royal LePage found that around half of the people who put their home-buying plans on hold over the past two years intend to return to the market when interest rates start to fall.

“We know there are consumers who are waiting for this moment either because of affordability concerns, they need rates to be lower in order to qualify for a mortgage … or because consumers tend to wait until they don’t believe there will be any more price decreases,” said Karen Yolevski, chief operating officer with Royal LePage.

However, one rate cut won’t do much to lower mortgage payments, and any relief could be offset if a flood of demand pushes up house prices. That’s more of a problem for new homebuyers than people already in the market who are looking to move.

Christopher Alexander, president of Re/Max Canada, said a quarter-point rate cut will give some buyers “breathing room but not enough to bridge the affordability gap.”

Keisha Johnson, a mortgage broker with RTS Mortgage Financial, agreed and said an incremental interest rate cut won’t make much of a difference in monthly mortgage payments.

Indeed, mortgage rates may fall less than many are anticipating, said Beata Caranci, chief economist at Toronto-Dominion Bank.

Fixed-rate mortgages are priced off longer-term bond yields, such as three- or five-year Government of Canada bonds, rather than directly off the Bank of Canada’s policy rate.

Bond yields have already come down since the fall, as markets have priced in future rate cuts. But yields won’t move one-for-one with the Bank of Canada’s policy rate, especially as the Canadian bond market is heavily influenced by the U.S. Federal Reserve, which is not expected to start cutting rates until later in the year.

“People are thinking, ‘Hey, they’ll start cutting and I’ll lock into these great three- and five-year rates.’ But there’s not going to be much movement there,” Ms. Caranci said. “It is not as if everything starts to move down, especially if the Bank of Canada is moving at a gradual pace, because there’s not a whole repricing of the [yield] curve that happens.”

In contrast to fixed-rate mortgages, variable-rate mortgages will move down in lockstep with central bank rate cuts. However, Bank of Canada governor Tiff Macklem has warned that the policy rate will likely fall much more slowly than it rose. Financial markets have fully priced in only two quarter-point rate cuts before the end of the year, which would bring the policy rate to 4.5 per cent.

Although real estate values are lower than in February, 2022, the typical price for a home across the country is still more than $700,000, according to the Canadian Real Estate Association, which is out of reach for many homebuyers.

Royal Bank of Canada’s assistant chief economist Robert Hogue expects a very gradual appreciation in Canadian home prices through the end of next year. Home prices have already started to level off after declining for five straight months.

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