June 7, 2024 The Bank of Canada Rate Cut: A Potential Spring Turnaround for Presale
This spring’s presale market in the Lower Mainland has left many in the industry disappointed, with lacklustre activity and a palpable sense of uncertainty. However, the recent announcement from the Bank of Canada cutting the target overnight rate by 25 basis points to 4.75% could be the catalyst needed to rejuvenate market confidence and positively impact market dynamics in the coming quarters.
A Quiet Spring
The spring market has been underwhelming, with macroeconomic factors contributing to a tepid environment. Despite April seeing a significant surge in presale activity with 17 projects launching 1,637 units—nearly double last April's figures—overall confidence and demand have been shaky. Approximately 56% of these new units were wood frame constructions, predominantly in the Fraser Valley, which hosted 13 of these projects. The region’s strong population growth and major infrastructure projects like the Surrey-Langley Skytrain extension have supported market optimism, yet price sensitivity remains a major concern for buyers in today’s landscape.
Economic indicators show that the global economy grew by about 3% in the first quarter of 2024, with Canada's economic growth resuming at a slower-than-expected 1.7%. CPI inflation eased to 2.7% in April, leading the BoC to reduce interest rates. However, high borrowing costs and political uncertainties at various government levels have contributed to a cautious market sentiment. Despite this, there is a steady demand for well-positioned presale properties, particularly among end-user buyers in the Lower Mainland who intend to live in their purchased homes. Buyers and investors have been keenly aware of potential interest rate changes, which adds a layer of hesitation to the current market. As such, buyers are being patient and lack urgency when making a purchase decision.
The federal government's efforts to address housing affordability through expanded programs and funds have had mixed results. While these initiatives aim to increase housing supply and stabilize market rents, their impact on the presale market has been limited by the broader economic climate. At the provincial level, policies like the flipping tax and adjustments to Property Transfer Tax (PTT) exemptions aim to curb speculative activities and support first-time homebuyers, but the overall effect on market confidence remains to be seen.
Choice to Cut Interest Rates a Positive Marker
The BoC's decision to lower the interest rate is poised to bolster market confidence. Director of Advisory Garde MacDonald highlights how reduced borrowing costs make market entry more attractive for buyers and investors alike. "This rate cut is likely to bolster confidence particularly heading into the summer in the resale market. Lower interest rates reduce borrowing costs, making it more attractive for buyers to enter the market and for investors to finance new projects," says MacDonald. “Increased sales activity and a more competitive market in resale will eventually trickle into presale, which is by nature, a more speculative investment. Normally, we see sales and pricing activity increase in the resale market before the presale market. Decreasing interest rates could spur more presale activity in the fall or spring of 2025.”
Historically, rate cuts have led to a noticeable uptick in sales and higher buyer engagement due to the reduced cost of borrowing. MacDonald notes that while the rapid rise in interest rates post-COVID was an anomaly, the market generally responds positively to rate cuts. "For the presale market, a rate cut could accelerate the absorption of available inventory, leading to increased sales and potentially higher prices due to increased demand," he adds. “That being said, with a multitude of factors at play, we do not anticipate a rapid market renewal like we saw in late 2020 and Spring 2021.”
Increased Confidence and Activity Predicted
Looking ahead to Q3 and the fall market, MacDonald predicts heightened activity and a strengthening of investor confidence, which is currently very muted. "Q3 is likely to see increased presale registrations and more aggressive marketing campaigns from developers. We predict that investor confidence will strengthen, leading to more investments in housing and new project launches from developers," he explains. If strong sales persist for six to eight months, historical norms could be matched or even exceeded, possibly resulting in higher prices.
While the spring market has been disappointing, the BoC's rate cut offers a glimmer of hope. Reduced borrowing costs are expected to rejuvenate buyer and investor interest, potentially leading to a more active and competitive market. As the market adapts to these changes, the coming months will be crucial in determining whether this optimism can be sustained. The real estate industry will be closely watching how these factors play out, with the hope that a more favourable market environment will emerge by the fall and into 2025.
