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Tens of thousands of Canadians are camping out for real estate discounts. Armed with prayers and price drop forecasts from economists, they’re waiting for the housing market to slap big red “On Sale” signs on front lawns this winter.

What’s more, two-thirds of prospective buyers said they’re holding their breath for lower mortgage rates before pulling the trigger, according to a BMO survey conducted last spring.

So, let’s paint this picture. We’ve got latent demand from all these sidelined homebuyers waiting for lower prices and rates – a Goldilocks dream in one of Earth’s most expensive housing regions. Meanwhile, housing inventories remain low, population growth is excessive, incomes are growing faster than inflation, rents are soaring (which increases homebuying’s appeal on a relative basis), and our government is dead set on keeping hard-up mortgagors in their homes through policies that encourage banks to work with borrowers who bit off more mortgage than they can chew.

Lowest fixed and variable mortgage rates in Canada for November 30 2023

Add lower prices and rates to this soap opera, and you may have everyone with a down payment thinking it’s Black Friday for real estate, sprinting to capture fleeting “affordability” improvements. History has proven that time and again.

But consider this: If average mortgage rates fell merely one percentage point, all it would take to cancel out that nationwide affordability improvement would be a $63,000 bounce in the $656,625 price of an average home.

That kind of gain can happen in two months, as it did last spring. It was only 10 months ago when the Bank of Canada’s premature rate pause inspired homebuying enough to drive prices $74,167 higher in two months and $116,840 (19 per cent) higher in just four months. Part of that rise was because of a change in the types of homes purchased – what economists call the “composition effect” – but the point remains: low rates and low prices attract high demand.

This isn’t a new phenomenon. Canada saw similar bounces in 2001, 2009 and 2020.

The point is, while prices may drop further – and I’m not saying they will because my crystal ball is in the shop – the window of opportunity for discounted real estate could shut faster than you can say “multiple offers.” When it comes to real estate traffic signals, rate cuts mean “go”.

And even without significant mortgage rate markdowns, seasonality generally results in price strength in the spring market, precisely when the bond market expects the first rate cut.

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Bay Street prognosticators are currently pricing in a full percentage point of rate cuts next year as Canada flirts with recession. Home prices have much precedent for rising during recessions, by the way. That’s because homebuyer incomes don’t dive all that much and buying power rises as rates drop. It’s mostly lower-income Canadians, who are disproportionately renters, who get hit the hardest.

And then you have economists like Stephen Brown from Capital Economics. He’s projecting double those cuts — two percentage points in 2024 — mainly because of a faster-than-expected drop in inflation.

Now, anyone who claims that property values wouldn’t surge with two percentage points of rate cuts clearly hasn’t played Monopoly: Canadian Edition. But even if we don’t get the whole two-percentage-point drop in the prime rate next year, we’ll likely see even more than that (total) by 2025. The average percentage drop in Canada’s overnight rate from peak to trough has been 41 per cent since the 1970s. That’s about three percentage points based on today’s 7.2 per cent prime rate.

For my part, I try to avoid the rate-guessing game apart from estimating which part of the rate cycle we’re in. There are just too many wild cards to accurately predict rates 12 months from now. What if lowering rates inflates house prices, which then fan the flames of inflation? Or Uncle Sam’s spending spree keeps global rates high? Or our dear leaders in Ottawa splash more cash to fish for votes, cooking up inflation like a Christmas turkey?

All these outcomes could counterbalance the chill factor of rising unemployment. And believe you me, the Bank of Canada isn’t going to go Edward Scissorhands on rates if inflation is still doing the high jump over 3 per cent.

That said, economies are cyclical, and this one is rolling over. There’s no reason to expect that a 22-year high in the prime rate won’t be enough to get inflation back to 2 per cent. If we don’t get rate cuts next year, it’s because a lower-probability unforeseeable event offset Canada’s inflation progress. And let’s not go there.

Bottom line for first-time homebuyers: If you’ve found a place where you’d happily hang your hat long-term — and can comfortably afford it — don’t play chicken waiting for further “affordability” because you may be ready to retire by the time it gets here.

Mortgage funding costs drop but banks have sticky fingers

It’s another sweet-and-sour report on mortgages this week.

The good news: Selected mortgage funding costs have sunk 92 basis points in less than two months, as measured by four-year swap rate. What’s a four-year swap rate? It’s a handy rough proxy for lenders’ fixed-rate funding costs. (A basis point is 1/100th of a percentage point.)

The bad news: Banks are hoarding all the savings for themselves, like squirrels with winter nuts. That’s particularly true when it comes to uninsured mortgages.

That means lender revenue margins are the widest they’ve been in years. So yes, banks could easily trim fixed rates if they wanted to. But, for now, they’d rather pad their bottom lines ahead of a potential storm with mortgage losses.

That said, lenders far and wide are dying for mortgage volume. They’re hungrier for your business than a pack of wolves at a steakhouse. So this is when you have to negotiate like a pro. Pit multiple mortgage providers against each other and watch the sparks fly. They have the margin to play with and one will be willing to make less money than the others.

Just be mindful of mortgage features and service differences. No-frills mortgage rates often come with less service and advice, or contract limitations that bite you after closing when you try to port or refinance your mortgage.

As for rate changes, the only nationally-available leading rate change this week was to HSBC’s uninsured five-year variable, which rose 10 basis points to prime minus 0.7 per cent.

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