Interest Rate Cuts, September Inflation, and the Housing Landscape

The Bank of Canada (BoC) has cut its overnight rate by 50 basis points to 3.75%, following three consecutive 25 bp cuts. This move was widely expected, given the recent slower-than-expected GDP growth and weaker inflation numbers. The output gap has been widening, which runs counter to the BoC’s July forecast, suggesting a softer inflation outlook. The 50 bp cut aims to close this gap by supporting growth prospects. Despite the cut, monetary policy remains restrictive, and headline inflation is now sitting below the 2% target.

The rate cut is expected to benefit the Canadian economy and housing market, with projections of a sharp rise in home resales by early 2025. The Bank’s policy rate is forecasted to fall to 2.50% by spring, assuming continued weak economic data and low inflation. While there are concerns about strong wage growth and its effects on housing, the BoC anticipates that lower rates will stimulate housing demand and support construction—though supply constraints may limit overall growth.

National home sales saw a modest increase in September compared to August, following the Bank of Canada’s third interest rate cut of the year, which appears to be giving the housing market a slight boost.

Home sales across Canadian MLS® Systems rose by 1.9% month-over-month in September 2024, reaching the highest level since July 2023. This increase was led by major markets like the Greater Toronto Area, Hamilton-Burlington, Montreal, Quebec City, Greater Vancouver, and Victoria. Shaun Cathcart, CREA’s Senior Economist, noted that sales have risen for three consecutive months following interest rate cuts. However, with expectations for more rapid rate cuts, some buyers may hold off on purchases, potentially strengthening the anticipated rebound in 2025 but affecting sales for the rest of this year.

Governor Macklem has indicated that if the economy weakens significantly and inflation falls below the 2% target, the Bank may implement more substantial rate cuts, which would provide further support to the housing market.

Recent Consumer Price Index (CPI) data showed a decline in headline inflation to 1.6% year-over-year, largely due to falling gasoline prices amid a slowing global economy. Core inflation remained steady from August to September, but gas prices rose again in October due to increased Middle East tensions. Excluding shelter-related costs—like mortgage interest, rent, and renovations—inflation sat at 1.8%, below the Bank’s 1% to 3% target range. This, combined with slower GDP growth, led to last month’s 50 basis point cut.

Dr. Sherry Cooper, chief economist, commented that October's rate cut signals positive momentum for the Canadian economy and housing market, adding, “Market participants are anticipating a significant increase in home resales in the first quarter of next year. The upcoming spring housing season is expected to be strong, likely driving both sales and prices higher.”

The Bank of Canada will hold its final 2024 rate announcement on December 11th—stay tuned for updates!