Canadian Real Estate Won’t Get A Boost From Next Rate Cut: BMO

Canadian Real Estate Won’t Get A Boost From Next Rate Cut: BMO

The Bank of Canada (BoC) is widely expected to cut its overnight rate this week, but it won’t boost real estate activity. That was the take from BMO Capital Markets, which sees little to no impact from the move. In a research note to investors, the bank explains that bond markets have already priced in lower rates and are currently delivering cheaper mortgages. They warn that the overnight rate needs to fall significantly before real estate markets see any meaningful boost. 


Next Bank of Canada Rate Cut Won’t Boost Real Estate Activity


The market is calling a rate cut from the BoC this week, with slim odds of inaction. The move would deliver a 4.5% overnight rate, 0.5 points below the peak of this rate cycle. A cut to the overnight rate usually delivers easy credit, helping to boost demand. This isn’t one of those times.  


“This week’s presumed Bank of Canada rate cut is still not going to provide much relief for Canada’s housing market,” explains Robert Kavcic, senior economist at BMO. 


Canadian Fixed Rate Mortgages Already Providing Easier Credit 


The bank’s skepticism may confuse some, but they have good reason. The market already reflects lower rates, and is currently providing significantly cheaper mortgage credit.  


“We’ll reiterate what we said ahead of the first cut… that is, since the bond market has already anticipated to move, it has already been reflected in fixed mortgage rates,” notes Kavcic. 


He adds, “And, those rates are meaningfully lower than the variable rates that will be directly changed by the BoC move.”


The overnight rate only influences variable-rate mortgages, whereas fixed-rate products are determined by bonds of similar length. The Government of Canada (GoC) 5 year bond yield directly influences the cost of the most popular mortgage product, a 5 year fixed-rate mortgage. The yield of those GoC bonds has plummeted over a point in the past year, providing serious discounts to those borrowers. 


As a result, the gap between a variable and 5 year fixed rate mortgage is very wide. Lender data shows the average variable interest borrower paid 6.8% for new mortgage loans in May, just before the first cut. In contrast, a 5 year fixed-rate mortgage was 1.55 points lower over the same period. It’s easy to see why BMO anticipates little change from the next cut—the gap before the easing cycle began was equivalent to 6 cuts.  




Source: BMO Capital Markets.


Even less surprising is how few households are opting for variable-rate mortgages. 


“As it stood as of May, less than 10% of new mortgage lending in Canada was in variable-rate mortgages, with most borrowers having long moved to shorter-term or five-year fixed,” says Kavcic.  


He concludes, “Like earlier in the summer, more meaningful affordability relief (and therefore juice for the market) will have to come from a more significant pricing in of future rate-cuts.”