The Shifting Impact of Interest Rates on Housing Affordability in Canada

The hope that interest rate cuts would improve housing affordability is unlikely to materialize. A new survey by Royal LePage indicates high pent-up demand, while real estate statistics show that housing supply remains low.

Two years ago, the Bank of Canada started sharply increasing its overnight rate to combat rapidly rising inflation. Despite this, the real estate market has continued to attract interest, with over a quarter of the country's adult population (27%) being active in the market. However, more than half of these individuals have had to pause their housing search due to higher rates.

Inflation and Interest Rate Outlooks

The fight against inflation seems to be yielding results. The Consumer Price Index (CPI) showed an annualized increase of 2.9% in January, bringing it back within the central bank's target range of 1.0% to 3.0%. Expectations for a rate cut later this year are widespread, with buyers appearing ready to jump back into the market.

Market Response to Rate Cuts

According to the Royal LePage survey, half (51%) of respondents who had put their home purchase plans on hold now say they would re-enter the market if rates were to drop. A mere 25 basis points cut (a quarter of a percent) would be enough to bring back 10% of these individuals, while 23% are waiting for a cut of more than 100 basis points (more than a full percentage point) before acting.

Housing Shortage and Sales Ratio

The latest data from the Canadian Real Estate Association indicates that the housing shortage persists. The sales-to-new-listings ratio was close to 59% in January. This is significantly tighter than the 50% recorded just three months prior and the long-term average of 55%.