Real estate myth-busting: Separating fact from fiction on interest rates
Every borrower wants to know where the Bank of Canada will take interest rates next. But understanding the bond market can provide a valuable heads-up for real estate decisions
MYTH: BANK OF Canada rate cuts will trigger a real estate recovery.
This morning, the Bank of Canada lowered its key interest rate by half a percentage point to 3.75 per cent. The announcement will most likely affect buyer and seller attitudes but have little effect on fixed mortgage rates and therefore the pace of enthusiasm for Canadian real estate.
Canadian fixed-term mortgage rates (as opposed to variable rates) represent the majority of housing loans in Canada. These rates are largely dependent on the U.S. bond market. If holders of U.S. bonds want to sell their bonds (driving prices of those bonds down), the yield or rate of return those bonds offers increases. As U.S. bond yields rise, so do Canadian bond yields. Bond yields affect long-term mortgage rates in Canada.
Despite Bank of Canada rate cuts since June, and another whopping cut expected today, fixed mortgage rates in Canada have been rising in October
This year, the U.S. deficit (spending in excess of taxation revenue) will hit $1.8 trillion ― and that’s just this year. Neither the Republicans nor Democrats is expected to reduce the deficit spending going forward. Deficit spending at this level stimulates the economy and is therefore inflationary, driving prices up. Bond buyers are concerned that the U.S. government is contributing to future inflation with this spending. Inflation makes the current value of bonds worth less when they mature, thus motivating bond holders to sell them now, and thus driving bond prices down, bond yields up, and therefore Canadian fixed mortgage rates up.
Despite Bank of Canada rate cuts since June (and the jumbo rate cut today), fixed mortgage rates in Canada have been rising in October. Thus, you see the lack of correlation between Canada’s fixed mortgage rates and Bank of Canada’s rate cuts.
Truth: Bank of Canada rate cuts reduce variable rate mortgages, helping holders of these loans, but does not stimulate new buyers.
Fixed-rate mortgages are currently rising, limiting affordability for new buyers. Real estate markets are slow to move. Approximately 60 per cent of listed homes in 2024 haven’t sold. Half of those left the market and most will likely return to the market at the first sign of buyers coming back out of the bushes. It’s a long steady road for real estate to become a vibrant investment grade product. There is a market for homes; there is little market for real estate investment or speculation.
Real estate may not be a sexy investment grade product again for some time to come. Buying and selling in this market is very, very hard ― full of risk and requiring careful management. It pays to work with experts!
Market analysis provided by Marcus Plowright, Sales Representative, A Team London. Marcus can be reached at 519-872-8326 or [email protected].
High- and low-priced real estate listings around town this week
London East
Low
Address: 200 Sanders Street
MLS number: X9416200
List price: $279,900
Days on market: 1
Size: 2 bedroom, 1 bathroom, under 700-1,100 square feet
Listing agent: Richard Houston, Salesperson, Sutton Group Select Realty
High
Address: 129 John Street
MLS number: X9234740
List price: $5,595,000
Days on market: 79
Size: 9 bedrooms, 19 bathrooms, 5,000+ square feet
Listing agent: Trent Forristal, Salesperson, Sutton Group – Select Realty, Brokerage
London North
Low
Address: 19 Empress Avenue
MLS number: X9493483
List price: $469,900
Days on market: 1
Size: 2 bedroom, 1 bathroom
Listing agent: Andrew Stinson, Salesperson, Century 21 First Canadian Corp.
High
Address: 864 Clearview Avenue
MLS number: X9298104
List price: $4,675,000
Days on market: 45
Size: 5 bedrooms, 6 bathrooms, 5,000-plus square feet
Listing agent: Michael Reis, Sales Representative, Sotheby’s International Realty Canada
London South & West
Low
Address: 81 Briscoe Street East
MLS number: X9415418
List price: $429,900
Days on market: 8
Size: 4 bedroom, 2 bathroom, 1,100-1,500 square feet
Listing agent: Jeff Gard, sales representative, Royal Lepage Triland Realty
High
Address: 1011 Cherrygrove Drive
MLS number: X9053822
List price: $4,250,000
Days on market: 90
Size: 4 bedrooms, 4 bathrooms, 5,000-plus square feet
Listing agent: James Smith, Sales Representative, Sutton Group – Select Realty
Disclaimer: London Inc. does not guarantee the accuracy of the statistical data on this page. The data does not represent the listings of any one agent or agency but represents the activity of the real estate community in the area. Any real estate agent’s ad appearing is separate from the statistical data provided, which is in no way a part of their advertisement.