BoC cuts rates again - What does this signal for the Canadian real estate market?

BoC cuts Canadian interest rates by another 25 basis points

Canada has received no shortage of press in recent months. From rising trade tensions with the US to Prime Minister Justin Trudeau announcing his resignation, the recent news cycle has been awash with percolating theories about Canada’s political and economic future.

Heading into today’s Bank of Canada (BoC) interest rate announcement, expectations for another cut to key overnight lending rates appeared mixed; however, one thing was clear – Canada is no longer in ‘guaranteed rate cut’ territory. While the strength of Canada’s economic position has repeatedly been called into question, a stronger-than-expected December jobs report may indicate that the economy is finally responding to the easing cycle that began last year. However, labour market reports can be volatile, and with US President Donald Trump’s threat of impending tariffs weighing heavily on businesses, it is perhaps too soon to determine if the Canadian economy is experiencing the start of a resurgence.

With today’s decision to cut Canadian interest rates by 25 basis points (bps), the BoC signals its commitment to bolstering economic activity during uncertain times, even if the pace of cuts is slowing.

Labour and inflation data take centre stage amid Canadian political turbulence

January could be described as a volatile time in Canadian politics, as Prime Minister Justin Trudeau announced his intention to resign on January 6th, following the appointment of a new Liberal party leader and the prorogation of Parliament. With the race to select a new leader now in full swing, headlines have been rife with questions about the future of the Liberal party and, conversely, the likelihood of an early election.

“I don’t think the leadership race and potential timing for an election will have a big impact on the Canadian interest rate forecast,” notes Peter Norman, Vice President and Economic Strategist at Altus Group. “The speed and magnitude of any monetary loosening in the months ahead will hinge, as always, on economic indicators such as inflation, employment growth, GDP, and the value of the Canadian dollar.”

To this effect, Canada’s December jobs report surged past expectations to paint a more positive picture of the current labour market. Not only did Canada's economy gain a net 91,000 jobs in December – but the gains were largely in full-time work (an increase of 59,100 positions), and the jobless rate edged down to 6.7%, according to Statistics Canada’s latest report. Employment gains were reportedly led by educational services, transportation and warehousing, finance, real estate, health care, and social assistance.

Canada’s latest consumer price index (CPI) report also tells a promising story, with inflation dropping to 1.8% in December, beating analyst expectations of 1.9%. While this decrease is in part linked to the temporary GST relief ushered in by the Federal government, it was also driven by a greater balance of supply and demand in the economy. GDP is estimated to have advanced by about 1.7% in the fourth quarter, which is a slow but modest improvement from 1.0% in the third quarter.

“We’re going to be watching population and migration data very closely in the quarters ahead, as I expect many developers may be too,” notes Norman. “From such a rapid pace of population growth in the past few years during the pandemic, to an about-face by the federal government to ease the pace of immigration and to reduce the number of non-permanent residents, the combined effect is that we may have two years with no population growth at all. There is no way that will not have at least a short or medium-term impact on housing demand, so we’re watching the data on migration and population closely to see how actual trends follow these policy intentions.”

Trade tensions on the horizon

Trade relations between the US and Canada have become something of a rollercoaster over the last few months. US President Donald Trump has signaled his intention to levy tariffs on Canadian goods of up to 25%. While we now understand that US federal agencies have been instructed to study trade policies and relationships with North American neighbours and China rather than imposing immediate tariffs, there continues to be anxiety among Canadian exporters about the potential impacts if and when new tariffs arrive.

“It is very clear that the worst-case scenario – a 25% tariff on all Canadian trade to the US – would be extremely challenging to the Canadian economy,” shares Norman. “In that case, we can expect a lengthy interruption to the Canadian commercial real estate market and to the residential development sector. Other outcomes could be lower, or more focused tariffs, and the subsequent impact would be commensurately lower too.”

Regardless of the outcome, the ongoing threat of elevated trade tensions with the US is making Canadian business and investor communities understandably nervous. “Investors are adopting a wait-and-see strategy, to contend with a fair amount of uncertainty in the market right now,” adds Ray Wong, Vice President of Data Solutions at Altus Group.

What does today’s BoC interest rate decision signal for Canadian CRE?

At each BoC interest rate announcement, we face the same question: will today’s reduction to overnight lending rates have a tangible impact on the Canadian real estate market?

With a total reduction of 200 bps since the start of this loosening cycle, CRE investors are certainly starting to benefit from lower costs of capital. “The direction of this cycle is indicative of strong transaction and development activity ahead. However, the Bank of Canada’s decision to cut just 25 basis points suggests that the loosening cycle may be slowing down, which may cause some anxiety,” explains Norman. “Overall, we are likely to see the continuation of cautious activity in the months ahead, with a more significant pick-up in activity later in the year when it becomes clear that the loosening cycle has run its course and reached a new, stable point.”

With expectations for additional cuts – albeit at a slower pace – in the year ahead, some players in the market may be content to wait for better rates. “Interest rates have come down – but not far enough to significantly jumpstart activity,” adds Wong. “Looking at the resale of homes, some consumers may be quick to take advantage of lower prices. However, construction costs and labour are still impacting new projects and, as a result, new developments are still struggling with their pro formas.”

The market may be shifting in a more positive direction, but the shift is ongoing, and there remain a number of economic and market uncertainties to take into consideration. “To Ray’s point, continued strained development economics are keeping some developers on the sidelines, and there isn’t much in this announcement to suggest that this will turn around very quickly,” explains Norman. “Expect only tepid activity in terms of new project launches at least for the first half of this year.”

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