Canada’s Interest Rate Holds at 5%, What It Means for Real Estate Markets

On October 25, 2023, the Bank of Canada (BoC) announced that it would keep its key interest rate at 5%, the same level it has been since July 12 (1). This decision came as a surprise to some analysts who expected a rate hike to curb the high inflation that has been plaguing the Canadian economy. However, the BoC stated that it was concerned that the progress towards price stability has slowed and that inflationary risks have increased (2). The BoC also noted that the housing market has been cooling down, partly due to the previous rate increases and partly due to the structural lack of supply that has been driving up prices (2). What does this mean for Canadian home buyers, sellers, and owners? Here are some of the implications of the interest rate hold for the real estate market: ● For home buyers: The interest rate hold is good news for those who are looking to buy a home, as it means that borrowing costs will remain relatively low for the time being. According to Ratehub.ca, the average five-year fixed mortgage rate in Canada was 5.49% on September 28, 2023, while the average five-year variable rate was 5.95%3. However, buyers should not expect rates to stay at this level for long, as the BoC may raise them in the future if inflation persists or worsens. Therefore, buyers should be prepared for higher mortgage payments in the future and choose a home that they can comfortably afford. Buyers should also be aware of the stress test that requires them to qualify for a mortgage at a higher rate than the one they are offered, which reduces their borrowing power. The stress test rate is currently 6.25%, which is higher than most actual mortgage rates (4). ● For home sellers: The interest rate hold may also benefit those who are looking to sell their home, as it means that there will still be a strong demand for housing, especially in the low-supply markets. However, sellers should not expect to see the same price growth that they have enjoyed in the past few years, as the housing market has been slowing down and becoming more balanced. According to the Canadian Real Estate Association (CREA), the national average home price was $726,000 in September 2023, up 9.4% year-over-year, but down 0.8% month-over-month (5). Sellers should also be realistic about their asking price and be ready to negotiate with buyers who may have more options and bargaining power. ● For home owners: The interest rate hold may not have a direct impact on those who already own a home, unless they are planning to refinance their mortgage or renew their term. In that case, they may be able to take advantage of the low rates and lock in a fixed rate for a longer period, or switch to a variable rate if they expect rates to drop in the future. Home owners should also keep an eye on their home equity, which may have increased significantly due to the rapid appreciation of home values. Home equity can be used as a source of funds for various purposes, such as home improvement, debt consolidation, or investment. However, home owners should be careful not to overextend themselves and borrow more than they can repay, as this could put them at risk of defaulting on their mortgage if rates rise or their income drops. The bottom line is that the interest rate hold is a mixed bag for the Canadian real estate market. It provides some relief for buyers and sellers who are facing affordability challenges, but it also signals that the economy is facing some headwinds and that inflation is a serious threat. The BoC will continue to monitor the economic situation and adjust its monetary policy accordingly. The next interest rate announcement is scheduled for December 6, 2023, and it could bring a change in the direction of the rates. Therefore, anyone who is involved or interested in the real estate market should stay informed and prepared for any possible scenarios. Source(s) 1. Canada’s Interest Rate Holds at 5%, What It Means for Real Estate ... 2. Interest rates - Bank of Canada 3. The best 5-year fixed mortgage rates in Canada - MoneySense 4. The complete guide for first-time home buyers in Canada 5. The Bank Of Canada Holds Key Interest Rate At 5% - Forbes