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Interest Rate Announcements, How it Effects Mortgage and House Prices, and What to Expect in 2025
September Interest Rate Announcement and What to Expect for Q4 of 2024
On Wednesday, September 4, 2024, the Bank of Canada reduced its key interest rate by 25 basis points, signaling potential for further cuts if the economy weakens more significantly in the coming months. This marks the third consecutive rate reduction since the monetary easing phase began in June, totaling a 75-basis point decrease. The new benchmark interest rate is now 4.25 percent. This decision is notable as it is the first time since the global financial crisis of 2009 that the Bank of Canada has implemented rate cuts in three successive meetings. Economists anticipate another 25-basis point reduction in each of the two remaining rate announcements for 2024. As we approach the end of 2024, central banks globally are initiating rate cuts to bolster economic growth or at least mitigate further declines. This trend suggests a potential decrease in mortgage interest rates. If inflation aligns with the Bank of Canada’s targets, further rate cuts of 25 basis points are likely to continue into the first quarter of 2025.
Expectation on Interest Rate Announcements for 2025
The target rate or neutral rate, which represents a rate that neither constrains nor stimulates economic activity, is currently set between 2.5 percent and 3 percent at the Bank of Canada. Given this benchmark, there is potential for a further reduction of up to 1.75 percentage points from the current rate of 4.25 percent, potentially bringing it down to 2.5 percent.
Expectation on Mortgage Rates for 2025
Most bank prime rates have decreased to 6.45 percent. The prime rate, also referred to as the prime lending rate, is the annual interest rate used by Canada’s major banks and financial institutions to determine the rates for variable loans and lines of credit, including variable rate mortgages. Variable rates have greater potential for further reduction compared to fixed rates since it fluctuates with changes in the prime rate. Currently, five-year variable mortgage rates with a 25-year amortization are ranging from approximately 5.3 percent to the high 5 percent range. Fixed rates may experience a further decline of 0.25 percent to 0.75 percent as interest rates trend downward, but it is prudent to wait and see how the economy responds to these rate changes. Presently, five-year fixed mortgage rates with a 25-year amortization are around 4.1 percent to the high 4 percent range. If the downward trend in rates continues as expected, both fixed and variable mortgage rates could normalize to the high 3 percent range by the fourth quarter of 2025. However, unforeseen events could lead to a more rapid economic downturn, necessitating more aggressive rate cuts. Conversely, if inflation rises and the anticipated rate cuts do not materialize as expected, bond yields could increase, driving fixed mortgage rates higher. At this juncture, it is important to remain patient and observe how market conditions evolve. Economic forecasts can shift rapidly, with experts alternating between calls for more aggressive rate cuts and reassurances that conditions are progressing as planned.
Expectations on House Pricing for 2024 Q4 and 2025
A reduction in borrowing costs is promising for the housing market, but its effects may not be immediate. The two rate cuts implemented in June and July had a minimal impact on real estate demand. Experts anticipate that home values will likely remain steady throughout 2024. In major urban centers such as Toronto, housing market activity has not significantly improved in recent months, falling short of expectations. The reality is that the current mortgage rates are still too high for many prospective buyers. The rates have not decreased sufficiently to invigorate the housing market, making home purchases unaffordable for many. It is expected that several more reductions in the overnight rate will be necessary to stimulate the market effectively. With strong anticipation of additional rate cuts following the three consecutive reductions, many potential buyers may choose to wait longer. This is particularly true as many of Canada’s housing markets are currently well-supplied and favorable to buyers. However, once these sidelined buyers re-enter the market, the restrained demand could push prices higher, especially as the availability of homes becomes more limited.
2024 Interest Rate Announcement Dates:
- Wednesday, October 23
- Wednesday, December 11
2025 Interest Rate Announcement Dates:
- Wednesday, January 29
- Wednesday, March 12
- Wednesday, April 16
- Wednesday, June 4
- Wednesday, July 30
- Wednesday, September 17
- Wednesday, October 29
- Wednesday, December 10
