The Bank of Canada's decision to cut interest rates on July 24th was expected by nearly everyone watching the markets. The consensus was clear: a rate reduction was coming. The only question was by how much.
The Details: A Quarter-Percent Drop
On July 24th, Tiff Macklem announced a quarter-percent rate drop, bringing the overnight rate to 4.5%. This change lowers almost all banks' prime rates to 6.7%. While this offers some relief, it's not a game-changer for many Canadians struggling with high variable rate payments.
What Tiff Macklem Said
Macklem spoke extensively about downside risks, highlighting:
A significant part of the inflation concern is driven by mortgage and shelter costs, which are influenced by the Bank of Canada's policies.
Impact on Homeowners and Buyers
Current Homeowners
Adjustable/Floating Rate Mortgages: Reduction of approximately $15 per $100,000.
Fixed Payment Mortgages: Lower total interest, potentially reduced payments or amortization.
Potential Home Buyers
No significant increase in borrowing power yet, according to BMO.
Bond yields have dropped, potentially lowering fixed rates and slightly increasing borrowing power.
Market Outlook
Canadian Inflation Trends
Downside Risks: Higher unemployment, lower spending, and lower GDP.
The Bank of Canada aims to balance economic slowdown with controlling housing market stimulation.
Home Buying Sentiment
A recent survey showed 21% of people were waiting for this rate drop to enter the market.
40% are waiting for two more rate drops, which could happen by the end of 2024.
Future Rate Cuts?
Macklem didn't rule out further rate cuts, indicating decisions will be data-driven. If the negative economic trends continue, we might see rates drop by another 0.5% to 0.75% by the end of 2024.
Renewal Options: More people may opt for floating variable rates if rates continue to decline.
Buying Before the Market Heats Up: Less competition in the current market might benefit buyers before further rate cuts potentially stimulate more interest.
Final Thoughts
The market is still finding its balance. Sellers are hopeful for higher prices, while buyers await potential drops. This rate cut might signal an artificial bottom, encouraging some buyers to enter the market now.
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