As we move into the final quarter of 2024, it’s important to stay informed about how recent economic developments could impact your mortgage and real estate decisions. The most recent announcement from the Bank of Canada was largely as expected, with a modest rate drop of 0.25%. This predictable adjustment signals a likely trend of further rate reductions in the next 6-9 months. As we anticipate more changes ahead, the focus will shift to analyzing the effects on inflation, the slowing unemployment rate, and the broader real estate market. In this newsletter, I will break down what these developments mean for both existing mortgage holders and prospective buyers, offer insights into how they might influence the Calgary and Vancouver real estate markets, and suggest timely mortgage strategies to help you navigate this evolving landscape. Whether you’re looking to optimize your current mortgage or explore new opportunities, understanding these shifts will be key to making informed decisions.

 

On September 4, the Bank of Canada’s overnight policy rate fell to 4.25% subsequently reducing the consumer prime rate to 6.45% which affects all variable rate mortgages and other loans linked to prime rate (i.e. credit cards and lines of credit). This marks the third consecutive rate reduction since June 2024, reflecting a broader trend of easing monetary policy. With forecasts suggesting two additional 0.25% rate cuts by the end of the year and likely several more throughout 2025, we could see the prime rate approaching the 5% range by spring 2025.

 

Many people misunderstand the implications of a Bank of Canada overnight policy rate reduction, assuming it directly impacts both fixed and variable-rate mortgages. While the overnight policy rate is a key tool for managing monetary policy and influencing economic conditions, its effects are more indirect for fixed-rate mortgages, which correlate with bond markets rather than Prime rate. Variable rate mortgages, however, are directly impacted by changes in the prime rate, which adjusts in response to the overnight rate. Although a change in the overnight policy rate does not immediately affect fixed rates, it triggers a series of economic events that could eventually influence bond markets. Therefore, while the impact on fixed rates is not direct or immediate, it is fair to say that the Bank of Canada’s rate adjustments can potentially lead to changes in fixed mortgage rates as well. As it stands today, you can get a variable rate mortgage between 5.5% and 6% (depending on the market value of your home and the loan-to-value ratio) and a fixed term ranging from 4.5% to 4.89%.

 

Vancouver Real Estate Market Impact

As of August 2024, Vancouver’s real estate market has shown signs of cooling despite recent rate cuts by the Bank of Canada. The average home price in Greater Vancouver has declined slightly, and while condo prices have risen (on a year-over-year basis), detached and attached home prices have decreased. Despite a predicted continuation of rate cuts, the impact on Vancouver’s market may be complex. Lower interest rates theoretically make financing more affordable, potentially encouraging buyers who have been waiting on the sidelines for some sort of signal to re-enter the market. This could stimulate activity, particularly in the condo market where supply is currently abundant compared to the more limited detached home market. Additionally, Vancouver faces ongoing challenges with high population growth and a constrained housing supply, which continue to affect affordability. These factors suggest that while we might see a period of stable prices followed by gradual upward movement, the market’s response will be moderated by supply constraints and increasing demand. 

Calgary Real Estate Market Impact

In contrast, Calgary’s real estate market has been on an upward trajectory, with home prices steadily increasing and approaching record highs. As of August 2024, average home prices have risen significantly across various property types. The impact of a downward interest rate trajectory on Calgary may be less pronounced compared to Vancouver, as the market is already strong and prices are high. However, lower interest rates could still play a role by further boosting buyer affordability and activity. Calgary remains an attractive option for those from higher-priced markets like Vancouver and Toronto due to its relative affordability. Additionally, the stability and potential growth of Alberta’s natural resources sector could provide a further boost to the Calgary real estate market, especially if it rejuvenates. Ongoing inter-provincial migration, coupled with a strong resource sector, suggests that Calgary will likely continue to see robust real estate activity, potentially accelerating further if the natural resource sector gains momentum. 

Based on the applications and phone calls I’ve received over the past few weeks, the pace for new and existing pre-approvals is increasing. My application intake has risen by 40% in the week leading up to the Bank of Canada announcement. It will be interesting to see what proportion of these applications convert into live deals.

Mortgage advice:

If You Are Purchasing: Most applicants are opting for 3-5 year fixed terms to maximize their purchasing power. The lower the rate, the more you can qualify for. For instance, with a variable rate mortgage at 5.95% (P-0.50%), your stress test rate is 7.95%, qualifying you for a maximum mortgage of $565,000. However, with a 5-year fixed rate of 4.89%, you would qualify for a maximum mortgage of $620,000.

If You Are Refinancing: The goal with refinancing is often to achieve a manageable mortgage payment. As a result, 30-year amortization resets are becoming increasingly popular. While the product and term options are broader than those available when purchasing, most people still prefer the same 3-5 year fixed terms commonly chosen for purchases.

If You Are Renewing: A mortgage renewal occurs when you renew your mortgage without making any changes. If you increase your mortgage amount, add or remove a borrower, or extend your amortization period to reduce monthly payments, your mortgage is no longer considered a renewal. In such cases, you are subject to mortgage refinance rates and re-qualification. Renewal rates are often more competitively priced than refinance rates, and most renewal applicants also tend to favor 3-5 year fixed terms.