Although today's Bank of Canada interest rate announcement may not immediately trigger changes, it serves as a crucial indicator for the Canadian real estate market.
Key Highlights:
- The Bank of Canada’s (BoC) decision to lower its overnight lending rate by an additional 25 basis points today aligns with market predictions for continued rate cuts until the end of the year
- Inflation hit a new low of 2.5% in July, and continues to inch closer to the Bank of Canada’s (BoC) target of 2%
With inflation cooling at a consistent rate, many economists are now turning their attention toward weakening labour market data.
- While BoC interest rate decisions are rarely a catalyst for action in the short term, they are important signals for the broader market and indicate that the tides may be turning, even if a significant uptick in transaction activity doesn’t materialize immediately
- Sentiment supporting loosening monetary policy positions at the next BoC interest rate announcements in October and December is also rising
Ramesbottom, Lauren (2024). What does today's Bank of Canada interest rate announcement mean for the Canadian real estate market? Altus Group. Retrieved from https://www.altusgroup.com/insights/bank-of-canada-interest-rate-announcement-mean-for-the-canadian-real-estate-market/
The Bank of Canada cuts its overnight lending rate to 4.25%
"In what was a highly anticipated – and eagerly awaited – move, the Bank of Canada (BoC) has announced a third 25 basis point cut to its overnight lending rate today. This continued momentum can be largely attributed to cooling inflation; according to July’s inflation data, inflation reached a new low of 2.5% (down from a previous low of 2.7% in June).
In fact, July marked the lowest level seen since March 2021, inching us closer to the BoC’s 2% target.
Of course, the elephant in the room hasn’t changed since the last BoC rate announcement. Will a third consecutive interest rate cut breathe new life into the Canadian real estate market after an extended downturn? If inflation is under control, and the BoC continues to lower bowering costs as the market has forecasted, will investors finally move off the sidelines in the interest of transacting?
Sentiment supporting loosening monetary policy positions in the next few BoC interest rate announcements is also rising. The possibility of rates dipping below 3.00% within the next year or so is becoming much more likely" (Ramesbottom, 2024).
Addressing Canada’s Weakening Job Market
As the Bank of Canada announced its interest rate decision today, inflation data had been the primary focus leading up to the event. However, in the current economic landscape, inflation may no longer be the most pressing concern. Economists are increasingly turning their attention to weakening labor market data. In this context, BoC Governor Tiff Macklem recently suggested shifting policy focus from controlling inflation to stimulating the Canadian economy.
Statistics Canada reported a 0.3% decline in payrolls in June, translating to a loss of 47,300 jobs. Employment fell in 11 of 20 sectors. Notably, June marked the fifth consecutive month of rising unemployment-to-job vacancy ratios. In July, the national unemployment rate held steady at 6.4%, with a loss of about 2,800 jobs. The private sector saw a reduction of 42,000 positions, while the public sector added 41,000 jobs, partially offsetting these losses.
Concerns about Canada's low productivity growth have also been prominent, with Treasury Board President Anita Anand announcing the formation of a new federal working group to analyze labor efficiency trends and recommend solutions. Meanwhile, speculation about the Temporary Foreign Worker (TFW) Program has risen, as it was initially intended to address labor shortages. In response, Federal Minister of Employment, Workforce Development, and Official Languages Randy Boissonnault has announced plans to tackle misuse and fraud within the TFW Program. These measures aim to prioritize Canadian workers and alleviate some of the current labor market challenges.
How will this cut impact Canadian commercial real estate?
"Following the BoC’s two consecutive cuts, we have yet to see an overtly tangible impact on the Canadian commercial real estate market. This was to be expected; after all, both cuts followed an extended period of substantial economic tightening. With the high cost of borrowing and lingering signs of economic volatility, the majority of Canadian consumers and investors seem to have adopted a ‘wait and see’ approach.
“This third BoC interest rate cut is meaningful because it signals that rates are trending down and, more importantly, at a more rapid pace than previously expected,” notes Peter Norman, VP and Chief Economist at Altus Group. “But this is also a double-edged sword for the CRE industry, which can benefit from better financing conditions, but will face escalating risks from the deteriorating economic conditions. Weak labour market conditions and anemic GDP growth portends shelved expansion decisions by office tenants, weaker retail sales by consumers, and delayed home-buying decisions by households.”
The point of rate cuts is to stimulate the economy, but they typically do so with fairly long lags, meaning that the CRE industry may be waiting for improvements in employment and economic conditions well into 2025 before new investment decisions start to make more sense.
“With additional rate cuts expected in October and December, transaction activity may remain muted in anticipation of lower borrowing costs. However, we should see some increase in activity in identifying opportunities for core assets following this decision,” notes Raymond Wong, Vice President, Data Solutions Delivery at Altus Group. “The main challenge we face, right now, is the lack of product and the continued bid-ask gap in expectations between buyers and sellers. Obviously, we need to keep an eye on inflation, GDP growth, and employment – but I think we may also see cap rates start to flatten in the coming months” (Ramesbottom, 2024).
Are Federal Reserve and BoC policy directions coming into alignment?
The Bank of Canada’s interest rate decisions are not made in isolation; while the BoC began its easing cycle ahead of many other major central banks, these decisions are clearly influenced by economic developments in the U.S. There is a delicate balance between the U.S. and Canadian economies, and if the Federal Reserve had not been expected to start its rate-cutting cycle in September, today's rate decision could have placed the Canadian dollar at risk.
Omar Eltorai, Director of Research at Altus Group, observes, “There is growing frustration that the Fed has delayed rate cuts too long, putting the economy in a precarious position. Other countries, including Canada, have already begun reducing base lending rates. The Fed may have missed the optimal time to cut, potentially leading to a more disruptive impact on the U.S. economy.” Currently, markets are anticipating a 25 to 50 basis point cut in the next Federal Open Market Committee (FOMC) meeting on September 18th.
Following today's decision, Canadian consumers and investors are likely feeling a sense of relief. If inflation continues to move in the right direction and the economy shows signs of needing support, the BoC is expected to maintain its current pace of rate cuts. As for the Canadian real estate market, while we may not have fully stabilized, the worst of the turbulence seems to be behind us.
Ramesbottom, Lauren (2024). What does today's Bank of Canada interest rate announcement mean for the Canadian real estate market? Altus Group. Retrieved from https://www.altusgroup.com/insights/bank-of-canada-interest-rate-announcement-mean-for-the-canadian-real-estate-market/