Analysis reveals past rate cuts didn't always boost the housing market
The Canadian housing market may be entering a period of stress despite recent interest rate cuts, a new report suggests.
An analysis by WOWA Leads, which examined mortgage payments versus income over the past 50 years, revealed a concerning trend in housing affordability.
The Bank of Canada (BoC) recently cut its benchmark rate for the second time in two months, with the current best fixed and variable mortgage rates at their lowest in 17 months. However, the report indicates that historically, such rate drops have not always led to a boost in the real estate market.
“Mark Twain once said, ‘History doesn't repeat itself, but it often rhymes.’ While he wasn't specifically talking about interest rate cycles, many believe that rate cycles follow specific patterns that can help us forecast market behaviour,” the personal finance platform noted in the report.
The study found that mortgage payments for a newly purchased average property in Canada currently consume nearly all of an average person's disposable income. This level of unaffordability has only been reached twice before, around 1981 and 1990.
The report drew parallels to previous periods of high unaffordability, such as the early 1980s, early 1990s, mid-1990s, and the 2007-2008 Global Financial Crisis. In these instances, significant rate cuts did not prevent home prices from falling.
For example, between Q3 1981 and Q3 1983, the BoC rate dropped from a peak of 20.78% to 9.26%, yet the home price index declined by 14%, with Vancouver seeing a nearly 40% drop in home prices.
Similarly, from Q2 1990 to Q1 1994, the BoC rate fell from 13.5% to 3.6%, but home prices decreased by 8%, with Greater Toronto Area (GTA) prices falling by 28%.
The sales-to-new-listing ratio in Toronto, one of Canada's least affordable markets, is currently at 35%, indicating a buyer's market. The city's housing inventory is close to 25,000 – the highest level since 2010.
The report attributed these price drops to two main factors: the lag effect of rate hikes and economic deterioration.
Read next: What's next for Canada's housing market after Bank of Canada cut?
"In Canada, since most mortgages are fixed rates, the real impact of rate hikes is felt primarily during renewals, which often occur after rates have peaked," the report stated.
Looking ahead, the analysis suggested that different regions of Canada may experience varying outcomes.
While Ontario has seen a decline in home prices recently, Quebec and Alberta continue to experience steady price growth. WOWA said that Ontario, particularly the Greater Toronto Area, may see price moderation, while Alberta and Quebec might remain relatively stable.
“One thing is certain: we haven't yet seen the full impact of high rates on the housing market,” the report concluded.
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