Trying to time the housing market after the rate cut? What experts advise

This article is part of Global News’ Home School series, which provides Canadians the basics they need to know about the housing market that were not taught in school.

Borrowing costs are starting to drop after the Bank of Canada’s first interest rate cut of the cycle, spurring speculation from all corners of the housing market about how buyers and sellers will react.

The Bank of Canada’s quarter-point cut earlier this month marks a turning point for the housing market, which has cooled significantly from the pandemic-era frenzy that saw rock-bottom interest rates open the door to a fresh crop of buyers.

The ensuing rate-hike cycle boxed out many would-be buyers who either couldn’t qualify or were waiting to see where home prices settled before jumping into the market themselves.

Clay Jarvis, real estate expert at NerdWallet Canada, tells Global News that the idea of “timing the market” usually sees “savvy, experienced” buyers try to capitalize on softening home prices in a quiet period, jumping in ahead of the rush to get the best deal with little competition.

Many housing markets across the country have indeed been slowing this spring, data from the Canadian Real Estate Association released earlier this week showed. Insiders at CREA said the question that will determine how busy the rest of the year will be comes down to how far and how fast the Bank of Canada’s easing cycle proceeds.

Polling from Ipsos conducted exclusively for Global News backs that up. Among non-owners surveyed after the central bank’s rate cut this month, some 63 per cent said they’d need to see more easing before they got off the sidelines and into the market.

But Davelle Morrison, real estate broker with Bosley Real Estate in Toronto, says that buyers who are waiting for their ideal mortgage rate might be missing opportunities to get a better deal in today’s slower market.

When interest rates decrease further, Morrison says it’s likely that more buyers are going to get back into the market. That heats up competition for available listings and could even make bidding wars more common, she says, an environment that could see home values rise.

Morrison says Canadians should weigh both the mortgage rate they can qualify for and their purchase price, but not necessarily equally. Homebuyers only get one chance to settle the purchase price of their property, she notes, but will renew their mortgage rate multiple times over the lifetime of the loan.

“I would suggest to some of those people who are waiting on the sidelines, as they say, that you marry the house, but you date the rate,” Morrison says.

Paying a higher rate up front and hopefully renewing into something cheaper in a few years’ time might be worth the trade-off if you can land an entry-level condo at $600,000 instead of $700,000 when borrowing costs come down, she offers as an example.

Financial realities remain a barrier

Of course, being able to time the market at all assumes that a prospective buyer is able to qualify in the first place.

Jarvis says that while some homeowners might be debating whether it’s good timing to buy a home, for many, “the real barrier would be financial.”

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Qualifying for a mortgage takes into account an individual’s credit history, the size of their downpayment and their income levels.

One quarter-percentage point rate cut will not change the arithmetic for Canadians who were unable to qualify for a mortgage previously, Jarvis explains, because the Bank of Canada’s policy rate decisions directly impact variable-rate mortgages in the market.

But variable rates in the market remain well above six per cent in many cases, while fixed rate mortgages are usually at least a percentage point lower. When it comes to qualifying for a mortgage and passing the stress test, right now homebuyers are qualifying at rates two percentage points above their contract rates.

That means qualifying at rates of at least eight per cent for variable-rate mortgages, or closer to seven per cent in the case of some fixed rates.

Jarvis says that for first-time home buyers looking to qualify, it makes more sense to consider the fixed-rate route right now because of that lower bar.

But he notes that the fixed-rate market is not as closely tied to the Bank of Canada’s decisions. Rather, fixed mortgages are priced off of the bond market, which derives its rates from bets about the central bank rate path. The bond market can move lower in response to not only the Bank of Canada’s rate cuts, but to market expectations based on inflation data or even the tone of central bank policymakers discussing their outlooks.

Hanif Bayat, CEO of comparator site Wowa.ca, tells Global News that there has been some easing in fixed mortgage rates amid the start of the Bank of Canada’s easing cycle.

Since the start of June, the benchmark five-year Government of Canada bond yield — the one that informs the rates offered on five-year fixed mortgages — has dropped nearly half a percentage point.

Bayat says that some major lenders in Canada have begun easing their fixed rate offers in response, but he cautions that movements here are more gradual than the Bank of Canada’s cuts.

When fixed rate mortgages have dipped enough for Canadians to qualify for the size of mortgage they need and a monthly carrying cost they can handle, Jarvis says it will only be a matter of time before competition heats up in the Canadian housing market.

Ipsos polling from earlier in the month showed that six per cent of non-owners surveyed said interest rates would have to drop by less than one percentage point for them to consider buying a property. One in four said they’d need to see cuts of between one and 3.99 percentage points to get into the market, while 10 per cent said they needed steeper drops to make home ownership a possibility.

“As soon as people decide, well, rates are low enough for me to go, they’re going to go. And once they do, it’s going to increase competition,” Jarvis says.

“Maybe not to the point that we’ve seen the last few years — certainly not during the pandemic — but once the barrier to entry comes down for everybody, why would people wait?”

Will prices rise as rates fall?

Bayat, however, is unconvinced that the next few rate cuts will necessarily see demand — and by extension, prices — surge.

He concedes there have been past instances of price accelerations after rate cuts, most notably the COVID-19 pandemic, when home prices surged as buyers flooded into the market with cheap mortgage rates.

But Bayat explains that was only possible because of the relatively stable household incomes during the pandemic recovery, supported by a robust package of fiscal stimulus from governments.

Today, however, the Bank of Canada’s interest rate easing cycle comes amid signs of weakness in the Canadian economy.

“There is a factor there that is becoming more important — that is the job market,” Bayat explains.

The unemployment rate is up to 6.2 per cent nationally and stands even higher in some cities like Toronto, where the May jobless rate rose to 7.9 per cent locally.

With expectations from market watchers that the economy will remain weak and unemployment could rise higher in the months to come, Bayat argues that demand in the housing market will remain limited if Canadians see hits to their incomes.

Another factor affecting prices is the availability of homes. While Canada has suffered from a structural lack of supply keeping home prices elevated even during a correction, some segments of the market appear overstocked; Bayat notes that available listings in Toronto stand at a 14-year high as of mid-June, for instance.

The path forward for prices can vary regionally in Canada, Bayat says, depending on which sectors of the economy are hit hardest in the current slowdown. But in some segments, such as the Toronto and Vancouver condo markets, he doesn’t see prices rising rapidly, if at all, this year despite expecting three more rate cuts from the Bank of Canada.

RBC assistant chief economist Robert Hogue said in a report earlier this week that it would take a more “meaningful” drop in rates to “unleash the large pent-up demand” in the Canadian housing market that built up over the past years’ rate hike cycle.

He, too, suspects that housing activity will only pick up meaningfully in most markets come 2025.

FOMO and housing decisions

In Bayat’s view, prospective homebuyers need not rush into the fray and can afford to wait for borrowing costs to meet their financial needs before purchasing.

Jarvis agrees that before letting a fear of missing out, or FOMO, drive a home purchase amid declining interest rates, Canadians ought to “take a step back.”

If owning a home is a critical part of a retirement strategy, for example, then Jarvis says that yes, a buyer should focus their goals around breaking into the housing market.

Here, a buyer should weigh both their long-term and short-term realities: would buying a home today secure your financial future at the cost of a tighter budget for years at a time?

On the other hand, if it’s an emotional drive — feeling that homeownership is a necessary step to “feel like an adult,” for example — Jarvis warns that FOMO can push would-be buyers into bidding situations where they offer more than what’s realistic for their goals.

“The thing about FOMO is that it’s a real motivator before you do something, but once it’s gone … well, what’s your motivation? What’s left?” he asks.

“You’re weighing emotion versus your financial realities. And I think when it’s a contest between those two dynamics, the financial realities are generally going to win out.”

— with files from Global News’s Anne Gaviola