January 19th, 2024 | Buyers

The Bank of Canada’s Potential Interest Rate Cuts and Amir’s 2024 Real Estate Market Predictions

As the Canadian economy continues to evolve, all eyes are on the Bank of Canada’s potential decision to cut interest rates before inflation reaches its target. According to a recent report from TD Bank, there’s a growing argument for an early interest rate cut to spur economic growth. However, this move isn’t without its challenges. And boy are there challenges, certainly on the heels of the most recent inflationary data released that saw inflation rise from 3.1% to 3.4%.

TD Bank’s report emphasizes that leaving interest rates high for an extended period could stifle economic expansion, potentially leading to a detrimental recession. Despite the risk of increased inflation and home prices, TD Bank outlines three key reasons why the Bank of Canada might consider a rate cut.

They assert that the real policy rate is already in restrictive territory, emphasizing that failure to act may harm the economy. Additionally, the report highlights the potential financial risks associated with high interest rates for too long and suggests that other measures of inflation are showing signs of improvement, which isn’t entirely untrue.

But the report also warns of the complexities associated with communicating this decision effectively. Managing inflation expectations and addressing the potential consequences on housing prices are crucial challenges the Bank of Canada must navigate in convincing Canadians that a rate cut won’t reignite inflation.

Meanwhile, here’s the problem, if housing prices rise as a result of cutting rates too soon, it’s unlikely that Canadians won’t panic. Time and time again we’ve seen history repeat itself, as FOMO driven Buyers flood the market and headline after headline perpetuates this narrative. It is therefore on the Bank to tread carefully and avoid undoing all the work (and suffering) up to this point – Canadians will not be pleased if we see a decline followed by multiple (rate) hikes, right?

So, what does Amir think all of this means for the 2024 Toronto Housing Market? 

• The 2024 Toronto Real Estate Market will see stagnation and a decline when it comes to condominiums.
• Freehold homes will more than likely keep value in and around where they are with a marginal uptick in prices at best toward the end of the year, into mid 3Q and early 4Q
• Condos will see a 5-7% decline in pricing
• Pre-construction condos will see an even more aggressive price drop, particularly for projects just coming up for possession, as most if not all of those Buyers bought at absolute peak prices and hence, Lenders will not appraise those units and the owners will be faced with difficult decisions 
• Resale condos, pending on area especially, will have to compete for Buyers as carry costs exceed what makes sense to hold the investment
• While rental rates are already quite high, they are still not enough to cover a good majority of condo investment costs and hence, most investors, and certainly Mom and Pop investors who might own 1-2 condos beyond their primary residence, will be running large deficits in excess of 1-1.5K per month or 12-15K per year
• This coupled with the uncertainty in the market alongside the potential for equity decline in the condo market will lead to aggressive price drops and a competition between Sellers to attract the Buyers willing to take a chance and invest their hard-earned cash into the market 
• If the Bank of Canada cuts rates, which we believe it will, it won’t happen until minimum the third quarter of this year, at which point it’s unlikely to cut beyond 0.25% at a time, up to a maximum of 3 times or 0.75% total
• This would mean that the policy rate may drop from 5% to a best-case scenario of 4.25%, which still does not change affordability by much, and hence, is likely to change the pace at which homes are currently increasing in value
• The more likely scenario is that the Bank cuts by 0.25% in June, waits until 4Q and pending inflation data, in particular core inflation CPI indicators, and pending we are moving in the right direction, plans to make future cuts
• The danger in cutting too soon lies in the fact that all the work and financial pain people have endured thus far will be undone, and the Bank will have to start all over – simply put, a price the Bank cannot afford to pay, very literally
• Bottom line, condos are subject to further adjustments
• Rental demand will likely increase and cause rent prices to increase marginally with it
• Homes will stagnate with certain pockets outperforming others due to schools and proximity to highways, transit, desirably communities etc.
• There will be plenty of opportunities in the condo market for those with cash on hand – however, the flip side of this is that it’ll cost more cash up front and may require a period of negative carry in return for a likely reasonable equity gain potential
• As always, our advice is simple, don’t sensationalize, just take the facts and interpret them properly to help guide your decision based on your circumstances
• No FOMO, just facts