“The reaction of the markets [to the rate cuts] largely subdued so far,” wrote RBC Deputy Chief Economist Robert Hogue in the most recent Economic report on the housing market. “To significantly boost demand, even deeper interest rate cuts are clearly needed as buyers continue to struggle with high property costs and a lack of affordability.”
With more rate cuts expected by yr’s end, MoneyDown asked 4 experts to share their views on whether it’s an excellent time to purchase a house in Canada. Will improvements in mortgage affordability boost demand and result in higher home prices? What other economic aspects are at play? And how will high housing costs affect different groups of Canadians, from first-time buyers to retirees planning to downsize? Let’s see what the experts must say and what Canadians can expect.
Is this an excellent time to purchase a house in Canada?
From an economist’s perspective:
You won’t like my answer: Now is pretty much as good a time as any. Because rates of interest are progressively being reduced, [mortgage rates] may very well be cut faster than we thought. Most economists agree on that. On the opposite hand, it means the economy is doing worse than we thought. Interest rates are forward-looking. Lending institutions have economists like me who forecast and estimate future rates of interest. Most expect rates of interest to proceed to fall through the top of 2025.
So your query essentially boils all the way down to: Will mortgage affordability improve in Canada? I do not think that is going to occur. What we have seen in Toronto and Vancouver particularly is that more household wealth is tied up in real estate. In 2019, that was already about 46 to 47 percent of net value. Across Canada, it was almost 34 percent. Over time, an increasing number of of our wealth is invested in our homes. And there are two problems with that: one, what you put money into your property, you are not saving in your retirement; and two, there’s not as much room for real estate prices to understand.
If you take a look at the price-to-income ratio across Canada, it’s currently at 8x, so for those who’re a two-income household, the home remains to be essentially going to cost 4 times what you each herald. In Vancouver and Toronto, it’s between 11 and 12 times.
As rates of interest are continually reduced, banks will allow households to borrow just a little more, as the prices [of borrowing] is falling. And given the gap between housing demand and provide, prices are prone to rise. It’s crazy to think that we went from a base rate of 0.25% to five% after which saw prices fall by 10% to fifteen%. That means there is a housing supply problem.
I even have been saying this for several months, but for the past eight months we’ve not had an ‘inflation problem’ but a ‘housing problem’ which robotically creates inflation.
