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Borrowing costs are becoming more affordable ahead of the new year as the Bank of Canada announced today that it is lowering the overnight lending rate by 50 basis points to 3.25%. October’s jumbo half-point rate cut brought renewed optimism to the market, with the Canadian Real Estate Association (CREA) reporting national home sales increasing month-over-month by 16.7% in October. Will this most recent rate cut announcement bring further energy to the real estate market?
Pent-Up Demand is Growing Among Home Buyers
In a Zoocasa survey conducted a month after the Bank of Canada’s first interest rate cut in 2024, 31.6% of prospective homebuyers said they were waiting for significant interest rate cuts before entering the real estate market. When that survey was conducted, the average 5-year fixed rate was 4.39%, but it has since fallen to 4.04%. Given that borrowing costs are trending down, it’s likely that many buyers who took to the sidelines in 2024 will have the confidence to make a comeback in 2025.
As a result of this pent-up demand, Lauren Haw, Zoocasa Broker of Record & Industry Relations, expects that 2025’s spring market will be busier than in 2024. “Next year, Canadians can anticipate a lively spring market kicking off as early as March. With interest rates stabilizing and strong pent-up demand among buyers, we’re likely to see a return to a more traditional spring surge in real estate activity,” shared Haw in Zoocasa’s 2025 Canadian housing market predictions report.
Home Sellers Feeling More Confident
As the expectation grows that sideline buyers will return in 2025, consequently increasing competition and prices, more sellers will start to list their homes for sale. New listings have already been steadily increasing throughout 2024 and will likely continue if borrowing costs decrease further.
From January 2024 to October 2024, new listings increased by 84% in Toronto, by 40% in Vancouver, and by 52% in Calgary. Similarly, over the same period, months of inventory have grown from 2.8 to 3.8 months in Ontario and from 4.4 to 5.4 months in British Columbia. This increase in supply will likely lead to buyers having more choices than they did in the previous few spring markets.
Lowering Rates May Further Motivate Buyers and Sellers to Enter the Real Estate Market
Now that rates have dropped considerably from the beginning of 2024 it will have a major impact on those with existing variable-rate mortgages. According to Ratehub.ca’s mortgage payment calculator, a homeowner who purchased a home in January 2024 at the national average price of $659,395 with a 10% down payment and a 5-year variable rate of 5.95% previously had a monthly mortgage payment of $3,897. Following today’s rate announcement, their variable mortgage rate would decrease to 4.20% and their monthly mortgage payment would decrease to $3,285—$612 lower than in January.
Penelope Graham, mortgage expert at Ratehub.ca notes “From a home buyer’s perspective, it’ll get more affordable to enter the market as lenders’ prime rates – and by extension, variable mortgage rates – will lower again following the BoC’s announcement. Combined with new amortization and insured down payment reforms coming into force on December 15, this could lead to a hot January selling season, once the holidays are in the rear-view. Anyone shopping for a new mortgage, or coming up for renewal on their existing term, should connect with a mortgage professional to determine their strategy as the market heats up.”
The Bank of Canada’s first rate announcement in 2025 is scheduled for January 29.
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