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The Bank of Canada decided to reduce its target for the overnight lending rate from 5% to 4.75%. The move was widely expected by financial markets and marked the Bank’s first rate reduction since the onset of the pandemic four years ago, bringing rates down to where they stood exactly one year ago.

In a scheduled announcement on Wednesday, June 5, 2024, the Bank noted Canada’s economy picked up in the first quarter of 2024 but still came in weaker than anticipated. While growth in consumer spending, business investment, and the housing market remained solid, the Bank once again made note of the fact that employment has been rising at a slower pace than working-age population growth.

The Bank continues to focus on elevated shelter costs as a significant contributor to inflation. However, it also noted that both headline and core measures of inflation are showing signs of downward momentum and are close to historical averages.

With inflation now back in the Bank’s preferred range of 1-3% and increased confidence that inflation continues to move toward its 2% target, the Bank stated, “monetary policy no longer needs to be as restrictive” in its decision to lower the policy rate by 25 basis points.

The Bank of Canada’s will make its next scheduled interest rate announcement on July 24, 2024, as well as publish its full outlook for the economy and inflation in its next Monetary Policy Report.

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Tara Kennedy
REALTOR® ABR, RENE, SRS
✨ Tara Kennedy Real Estate 🏘️
☎️ 236-992-8989
🌐 TaraKennedy.ca
📧 TaraKennedySells@gmail.com
🇨🇦 Royal LePage ELITE West

Always Putting Your Best Interest First! 🌟

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How the first interest rate drop in months will impact the housing market. hero image

INTRODUCTION

In a widely anticipated rate announcement today, the Bank of Canada (BoC) has decided to drop the overnight lending rate by 0.25 percent to 4.75 percent. This comes as a welcome relief for many consumers, economists and industry professionals, as Canadians have been weighed down by a high interest for over two years.

The CPI (Consumer Price Index) for Inflation has been steadily decreasing since August 2023 from four percent, coming down over half from the high of 8.1 percent in June 2022. This steady decrease to April’s value of 2.7 percent is a welcome sign that the economy has softened back to manageable levels and inflation has eased to the target band of one to three percent for the Central Bank. This morning’s rate decrease mirrors this sentiment that the Bank of Canada is satisfied with the ease in inflation. That being said, it’s likely that another rate cut might not happen until later in the year as they do not want to be too premature and lead us back into high inflation territory.

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How will this impact mortgages and the housing market?

So, what does this mean for consumers? With the rate cut, individuals on variable/adjustable rate mortgages will see a bit of relief in their cost of borrowing. Mortgagors on adjustable rate mortgages should see a payment decrease , whereas borrowers on static variable mortgages will likely not see any change on their payments if they have yet to hit their trigger point on their mortgage. The trigger point of a mortgage is the point at which the monthly payments do not cover the interest of the mortgage anymore and the outstanding balance exceeds a certain percentage of the original purchase price, so the lender would force the borrower to either fix their mortgage into a fixed rate mortgage or pre-pay a lump sum to keep their amortization in line. Many borrowers saw their mortgage hit this trigger point in 2023, so this rate cut would be a welcome change for many individuals that saw their interest rate go up by 4.5 percent or more in the past two years.

Fixed rate mortgages will continue to track the bond market, which moves independent of the prime rate, but decreased borrowing costs will likely offer relief for the fixed rate soon after, as well. With lower rates on the horizon, bond investments become more attractive in the short term which in turn push up the price of bonds and subsequently decrease the yields. Fixed rate mortgages move very closely to government bonds of the same term, so the lower yields on bonds inevitably lead to lower mortgage rates for consumers. We expect this steady decline to continue into Q3 and Q4 of 2024, with rates hopefully settling into the low 4 percent to high 3 percent range, which is consistent with interest rates pre-pandemic.

Consumer confidence in the market has been high, with many waiting on the sidelines to jump once the central bank signals the first cut. With today’s announcement, we expect more buyers to enter the market, which will drive up competition and home prices. We saw an uptick of 4 percent in buyer activity and the Composite HPI (Home Price Index) from January to April already, so lower rates will inevitably increase this value even further. If Q1 2024 was any indication of the real estate market for the rest of the year, we believe a nine percent increase in price by the end of 2024 is not out of the question, compared to the same period last year, based on data from Royal LePage.

Advice for Homeseekers following the rate cut.

For individuals looking to purchase within the next four to six months, I’d highly recommend starting a pre-approval sooner rather than later to ensure you solidify your budget; the market moves quickly so the best thing to do is to be prepared! Have the down payment ready, ensure your mortgage broker or advisor has all the necessary documents, and keep an open channel of communication with your realtor about realistic closing timelines. We’ve already started to see offers go in without subject to financing or other waivers, so we may see more of those as rates drop in the following weeks.

For borrowers who are looking to renew in the next four months, I’d also recommend reaching out to your mortgage advisor to ensure they are securing the best rate for you ahead of renewal. The banks typically do not offer the best renewal rate upfront, so it’s always a good idea to see what other options are available in the market. If rates drop prior to renewal, your advisor can always float the rate down to the new, lower rate, so there’s no disadvantage of starting earlier.

One last note to consider: consumers have been in a high-rate environment for about two years now and we’ve seen prices come down considerably from highs of 2022 due to increased borrowing costs. If you compare the aggregate HPI for Canada over all property types, prices have dropped about 14 percent, reflecting about a $120,000 drop in the benchmark price. Borrowing costs have gone up about 4.5 percent in the same time span, so buyers in this market are still better off than individuals who bought at the peak of 2022 at low rates—a rough savings of around 5 percent or about $43,000 over the past two years, based on the benchmark price. This understandably comes with caveats based on property location, price and whether individuals took a fixed rate mortgage vs a variable rate, but the math holds true when comparing the prime rate over all property types in Canada. With the end in sight, there hasn’t been a better time to buy in the past two years than right now, before market demand catches up with home prices.

As always, our suggestion remains the same to all our clients: invest with intention. We never suggest buyers purchase a property for the sake of a “quick flip” or to try and time the market. If the property fulfills your needs, whether it be for a primary residence or for investment, and the payments are manageable for your long-term goals, purchasing real estate has always been the leading path—albeit not the quickest—towards lasting wealth among Canadian families.

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The number of transactions on the Multiple Listing Service® (MLS®) declined in May compared to what is typical for this time of year in Metro Vancouver. This shift has allowed the inventory of homes available for sale to continue to accumulate with over 13,000 homes now actively listed on the MLS® in the region. 

 

The Greater Vancouver REALTORS® (GVR) reports that residential sales in the region totalled 2,733 in May 2024, a 19.9 per cent decrease from the 3,411 sales recorded in May 2023. Last month’s sales total was also down 19.6 per cent from the 10-year seasonal average for May (3,398). 

 

“The surprise in the May data is that sales have come in softer than what we’d typically expect to see at this point in the year, while the number of newly listed homes for sale is carrying some of the momentum seen in the April data,” Andrew Lis, GVR’s director of economics and data analytics said. “It’s a natural inclination to chalk these trends up to one factor or another, but what we’re seeing is a culmination of factors influencing buyer and seller decisions in the market right now. It’s everything from higher borrowing costs, to worries about the economy, to policy interventions imposed by various levels of government.” 

 

There were 6,374 detached, attached and apartment properties newly listed for sale on the MLS® in Metro Vancouver in May 2024. This represents a 12.6 per cent increase compared to the 5,661 properties listed in May 2023 and a seven per cent increase compared to the 10-year seasonal average (5,958). 

 

The total number of properties currently listed for sale on the MLS® system in Metro Vancouver is 13,600, a 46.3 per cent increase compared to May 2023 (9,293). This total is also up 19.9 per cent above the 10-year seasonal average (11,344). 

 

Across all detached, attached and apartment property types, the sales-to-active listings ratio for May 2024 is 20.8 per cent. By property type, the ratio is 16.8 per cent for detached homes, 25.1 per cent for attached, and 22.5 per cent for apartment properties.

 

Analysis of the historical data suggests downward pressure on home prices occurs when the ratio dips below 12 per cent for a sustained period, while home prices often experience upward pressure when it surpasses 20 per cent over several months. 

 

“With market trends now tilting back toward more balanced conditions, as the number of new listings outpaces the number of sales, we should expect to see slower price growth over the coming months,” Lis said. “Up until recently, prices were climbing modestly across all market segments. But with rising inventory levels and softening demand, buyers who’ve been waiting for an opportunity might have more luck this summer, even if borrowing costs remain elevated.” 

 

The MLS® Home Price Index (HPI) composite benchmark price for all residential properties in Metro Vancouver is currently $1,212,000. This represents a 2.3 per cent increase over May 2023 and a 0.5 per cent increase compared to April 2024. 

 

Sales of detached homes in May 2024 reached 846, an 18.9 per cent decrease from the 1,043 detached sales recorded in May 2023. The benchmark price for a detached home is $2,062,600. This represents a 5.9 per cent increase from May 2023 and a 1.3 per cent increase compared to April 2024. 

 

Sales of apartment homes reached 1,338 in May 2024, a 22.7 per cent decrease compared to the 1,730 sales in May 2023. The benchmark price of an apartment home is $776,200. This represents a 2.2 per cent increase from May 2023 and a 0.3 per cent decrease compared to April 2024. 

 

Attached home sales in May 2024 totalled 523, a 14 per cent decrease compared to the 608 sales in May 2023. The benchmark price of a townhouse is $1,145,600. This represents a 5.2 per cent increase from May 2023 and a 0.9 per cent increase compared to April 2024.

📞 Your Next Step Starts Here—Contact Me Today!

Tara Kennedy
REALTOR® ABR, RENE, SRS
✨ Tara Kennedy Real Estate 🏘️
☎️ 236-992-8989
🌐 TaraKennedy.ca
📧 TaraKennedySells@gmail.com
🇨🇦 Royal LePage ELITE West

Always Putting Your Best Interest First! 🌟

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Down Payment Grants

The standard 20% down payment isn’t always feasible for first-time home buyers, turning them off from the idea of purchasing a home altogether. If this is the case for your client, investigate available down payment assistance options.

 “[Many] lenders have grant programs or down-payment assistance—and in certain cases zero down even for a non-veteran—for first-time buyers who are strapped for cash but desire to own a home,” says Tia Coates, a real estate professional based in Phoenix, Arizona. “There are also zero-down loans for USDA and VA loans for veterans.”

 She says that some grant programs vary state-by-state, but that federal programs from agencies like Fannie Mae and Freddie Mac are available across the country. In some instances, grants of $5,000 or more are available. 

Group Economics

Amid ongoing housing supply challenges and rising prices, many first-time homebuyers are turning to joint ventures or “group economics” in lieu of a solo purchase. In real estate, starting somewhere is crucial, and collaborating as a group often enables greater progress versus acting alone.

 “Typically involving two to four individuals, this strategy entails pooling financial resources and collective purchasing power to acquire property,” says Isaiah Hazward, director of sales for the Coalition Properties Group in Washington, D.C. “By combining their resources, individuals who may lack sufficient funds individually can achieve homeownership collectively.”

Along with getting into a home, this strategy reduces overall financial risk since costs and ongoing maintenance are shared equally among participants. Coates adds that an alternative to this is to utilize a co-signer—such as a parent with well-established credit—to help offset the closing costs and down payment.

NACA Purchase Program

The Neighborhood Assistance Corporation of America (NACA) is a non-profit organization committed to “closing the racial wealth disparity gap through character-based lending.” The nationwide program serves as an economical solution for low-to-moderate income earners buying for the first time.

 “With a proven track record of over $20 billion in mortgage commitments, NACA offers fixed-rate mortgages featuring below-market interest rates, waived down payment and closing costs, and no mortgage insurance, which often creates an increase in purchasing power when compared to traditional loans with mortgage insurance requirements,” explains Hazward. 

Additionally, NACA provides complimentary credit counseling services with no minimum credit requirements for purchases.

Unconventional Purchases

The current housing market guarantees some pretty stiff competition, particularly for first-time home buyers who may not have as much financial leverage compared to those coming in hot with full cash offers. In this case, it may make sense to look into less conventional avenues.

The first option is to consider bank-owned properties in your search, says Tezeta Roro, a real estate professional based in New Jersey. “While the process, decision makers, and paperwork involved is often different from buying from a private owner, it can be a good option for first time homebuyers who may have a hard time competing in the current market due to low down payment,” she says.

Another option is to consider buying from a family member or friend you know. This helps eliminate some competition and can serve as a win-win since it maintains generational wealth. To that end, Roro adds that those looking to downsize can potentially leverage the 1031 exchange tax code to postpone capital gains taxes and buy a property that can be written into a will to be gifted to the adult child, making it a tax-free gift upon death.

Negotiated Seller Concessions

When people talk about what they can afford, they often have a monthly mortgage payment in mind. Coates says that negotiating seller concessions is vitally important to saving your client hundreds of dollars each month. 

“In some areas, we still see sellers willing to pay closing costs for buyers, which helps offset how much the buyer needs to bring to the table,” Coates says. Other examples of seller concessions include covering some maintenance or home repair costs prior to closing, contributing to the down payment, including furniture or appliances in the sale, or buying down the interest rate.

If your clients are feeling the pinch of soaring home prices and inflation, consider whether any of these solutions can relieve financial tension and get them in their dream home sooner than they imagined.

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