Stuck in the Waiting Room The Canadian Housing Market Anticipation of Bank of Canada Rate Cuts

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The sentiment expressed in Fugazi's "Waiting Room" resonates with the current Canadian housing market as stakeholders await the Bank of Canada's decision on interest rates. Despite a notable decline in fixed mortgage rates since the beginning of the year, the market remains stagnant, with potential homebuyers hesitant due to the Bank's recent rate hikes. The Bank's primary concern is achieving a sustained inflation rate at its 2% target, which, despite a drop to 2.7% in April 2024, has not yet been consistent enough to warrant a reduction in rates.

Shelter costs, which make up a significant portion of the Consumer Price Index (CPI), are rising due to factors beyond the Bank of Canada's control, such as high net migration and increased mortgage payments due to previous rate hikes. These costs, now at a 6.5% year-over-year increase, inflate overall CPI figures but are not indicative of broader economic overheating. Excluding shelter costs, inflation is significantly lower, suggesting the Bank's current high-interest rates might be unnecessarily straining Canadian households.

As the rationale for cutting rates strengthens, the Bank of Canada's cautious approach implies gradual reductions aiming for a policy rate around the "neutral rate" of 2.75% over two years. However, this is unlikely to lower five-year fixed mortgage rates significantly, as the bond market has already anticipated these changes. Thus, the current mortgage rates near five percent may persist, suggesting that it might be time for the Bank of Canada and market participants to adjust their expectations and actions accordingly.

Read the full article on: REAL ESTATE MAGAZINE