Analysis: How will interest rate cut affect London home sales?

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If one interest rate cut didn’t spur activity in London’s housing market, two likely won’t move the needle much either, industry observers say.

On Wednesday, the Bank of Canada cut its key lending rate for the second time this year, from 4.75 per cent to 4.5 per cent, as inflation has continued to ease.

For months now, real estate watchers have been monitoring Canada’s central bank hoping a cutting cycle on interest rates could bring life back to a sluggish local market.

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But despite Wednesday’s decision, analysts’ response has been mostly muted, with many observers saying affordability remains a concern, keeping potential buyers on the sidelines.

Kathy Amess, who chairs the London and St. Thomas Association of Realtors (LSTAR), said the latest rate cut was “a step in the right direction” that will help build consumer confidence.

But its impacts won’t be felt for a few months, she said.

“It’s good news for most homeowners and borrowers and anyone that’s got a mortgage coming up for renewal and on a variable rate,” she said. “But I don’t think that we’re going to see numbers jump drastically right away.”

After years of intense activity, London’s housing market has cooled significantly since the Bank of Canada began raising its key rate to fight rampant inflation in 2022.

As of June, the latest data available, 3,839 homes had been sold this year in the London-area market that includes Strathroy, St. Thomas, and parts of Elgin and Middlesex counties. That’s only 63 more homes than this time last year, which saw the fewest homes sold in the local market since 2000.

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That’s despite the average home price dropping from a record $825,000 in early 2022 to $671,000 in June.

Even after factoring in Wednesday’s rate cut, variable-rate mortgages at Canada’s biggest banks will still be north of six per cent, and getting approved for one would require passing a stress test at eight per cent. Such a high qualifying rate could significantly reduce the amount for which a borrower is approved.

“Combined with the rate cut in June, this decrease will provide a bit more breathing room for homeowners with floating variable-rate mortgages,” said Victor Tran, an analyst with RATESDOTCA.

“However, in terms of the broader housing market, this rate cut isn’t likely to spur much activity. For many, budgets are still too tight and buyers are willing to wait.

“We would likely need to see another 25- to 50-basis point decrease before there is a significant uptick in sales activity.”

Bank of Canada governor Tiff Macklem’s comments after the rate announcement, indicating more cuts are possible this year, may give some buyers confidence to start exploring their options.

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As inflation edges nearer the central bank’s two per cent target, the risks of keeping interest rates high become more important to consider, he said, noting undershooting the inflation target would be just as concerning as overshooting it.

“That need for growth to pick up was something that was part of our decision to cut the policy interest rate,” Macklem said.

The Bank of Canada’s emphasis on the state of the economy and the risk of keeping rates high too long suggested to economists more rate cuts could come sooner rather than later.

“It is definitely a clear shift in tone,” BMO chief economist Douglas Porter said.

“It almost does seem like now the bias is to continue cutting. They almost need to be persuaded not to keep cutting, I think.”

Though the summer is traditionally a slow period for home sales, if consumer confidence builds, we could see some patterns shifting and people looking at properties before fall, Amess said.

“Every little bit helps and, certainly, an interest rate decrease can maybe make some properties a little bit more affordable for some people or perhaps give buyers the confidence to purchase a semi-detached instead of a condo, or a detached home instead of semi,” she said.

Amess also dismissed concerns increased demand could send prices spiralling out of control.

“We have a pretty good supply right now,” she said. “I think that we would need to see a somewhat reasonable uptick in demand before supply becomes an issue.

“I think we have a little bit more room before we have to start to panic about prices.”

The Bank of Canada’s next interest rate announcement is slated for Sept. 4.

With files from the Financial Post and The Canadian Press

jjuha@postmedia.com

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