The Bank of Canada is on pause. How will this affect mortgage holders and the real estate market?

Experts agree that the rate hike cycle is likely over after the Bank of Canada left its key interest rate unchanged at its last meeting of the year on December 6. However, it may still be some time before the central bank starts cutting rates.

On Wednesday, the Bank of Canada kept the overnight rate at 5% for the third meeting in a row, which was in line with economists’ expectations.

The Bank said it no longer saw “excess demand” in the economy, but was prepared to raise rates if necessary.

David-Alexandre Brassard, chief economist at CPA Canada, said he was surprised that the Bank of Canada left open the possibility of further rate hikes.

“There is virtually no indication that the Canadian economy requires further rate increases,” he said in a press release.

“If anything, most economists are now forecasting a rate cut.”

Simon Harvey, head of currency research at Monex Europe and Canada, said he believes a rate cut could be coming soon.

“We expect the Bank will have to formally open the policy easing debate in January before cutting rates in April,” he said.

Earl Davis, head of fixed income and money markets at BMO Global Asset Management, however, said he expects rates to remain at 5% until the fall of 2024.

“We expect rate cuts, but we don’t expect them until the third quarter of next year,” he told Bloomberg in an interview, noting that he expects rate cuts to come later than market expectations.

Real estate experts say the Bank of Canada’s decision to hold interest rates steady is a positive sign for variable-rate mortgage holders, although high borrowing costs remain a concern.

The Bank of Canada itself acknowledged Wednesday that high rates are putting pressure on the cost of living.

“Housing cost inflation has strengthened, reflecting faster increases in rents and other costs, as well as continued contributions from high mortgage interest rates,” the Bank of Canada said in a statement.

Many homeowners will likely face payment shock at their next mortgage renewal, but a potential drop in interest rates next year could provide some relief.

Wednesday’s interest rate decision will also have implications for home buyers choosing between mortgage products.

For existing homeowners and those looking to get into the real estate market, the debate gets a little more interesting as to whether they should consider choosing an adjustable rate mortgage or a fixed rate mortgage.

The recent decline in bond yields (the source of funds for fixed rate mortgages) is beginning to be reflected in the supply of banks and mortgage lenders, which is now further widening the gap between fixed and variable rates.

The choice of mortgage product depends on each client’s situation. However, over the past year and a half, most clients have gravitated towards fixed rate products due to greater stability and ease of qualification due to lower interest rates.

Now the floating rate is gaining popularity again, mainly due to the news that we are pretty much at the peak in interest rates and the Bank of Canada’s next move will be a cut.

The landscape for mortgage holders in 2024 will be dynamic and dependent on “many variables,” said Alana Riley, head of insurance and mortgages at IG Wealth Management.

She stressed that the path of interest rates will be influenced by economic conditions and inflation, among other factors.

“Mortgage holders can expect uncertainty, which requires a proactive approach to stay abreast of market developments,” she said.

“Flexibility will be critical as mortgage strategies may need to be adjusted based on market changes.”

We believe Wednesday’s announcement will have little impact on the housing market in the near term.

Interest rates could decline next year, perhaps in the second or third quarter, at which point that could stimulate activity in the housing market. There is still strong demand in the current market, but buyers are being pushed aside, waiting for a window of opportunity to arise.

Once the Bank of Canada cuts rates, which could happen as early as the second quarter of next year, it could be a clear signal to buyers that more rate cuts are likely to follow. In this case, buyers will rush into the market, and once this happens, the housing market will become extremely active again.