What does today's Bank of Canada interest rate announcement mean for the Canadian real estate market?

The Bank of Canada cuts its overnight lending rate to 4.25%

In what was a highly anticipated – and eagerly awaited – move, the Bank of Canada (BoC) has announced a third 25 basis point cut to its overnight lending rate today. This continued momentum can be largely attributed to cooling inflation; according to July’s inflation data, inflation reached a new low of 2.5% (down from a previous low of 2.7% in June). In fact, July marked the lowest level seen since March 2021, inching us closer to the BoC’s 2% target.

Of course, the elephant in the room hasn’t changed since the last BoC rate announcement. Will a third consecutive interest rate cut breathe new life into the Canadian real estate market after an extended downturn? If inflation is under control, and the BoC continues to lower bowering costs as the market has forecasted, will investors finally move off the sidelines in the interest of transacting?

Sentiment supporting loosening monetary policy positions in the next few BoC interest rate announcements is also rising. The possibility of rates dipping below 3.00% within the next year or so is becoming much more likely.

Addressing Canada’s weakening job market

Leading up to the Bank of Canada’s interest rate announcement today, all eyes were on inflation data. However, in this current landscape, inflation may no longer be the biggest challenge we are up against. With inflation cooling at a consistent rate and nearing the 2% target, many economists are now turning their attention toward weakening labour market data. To this effect, at the last meeting, the BoC’s Governor Tiff Macklem hinted at the need to shift policy focus from inflation control to boosting the Canadian economy.

In June, Statistics Canada reported a 0.3% decline in reported payrolls, signaling a decrease of 47,300 workers.
Employment also dropped in 11 of 20 sectors, while the number of job vacancies remained largely unchanged. However, June marked the fifth consecutive monthly increase in the unemployment-to-job vacancy ratio, hinting at a potential decline in the health of Canada’s labour market. In July, Statistics Canada reported that the national unemployment rate held steady at 6.4%, with approximately 2,800 jobs lost. Taking a closer look at the report, we can see that the private industry constricted with the loss of 42,000 positions, while the public sector offset some of these losses with the addition of 41,000 new hires.

Rising concerns relating to Canada’s low productivity growth have also been splashed across headlines in recent months, with Treasury Board President Anita Anand announcing the creation of a new federal working group tasked with dissecting labour efficiency trends in both the private and public sectors and proposing recommendations to address the productivity concerns raised by both economists and the BoC.

While Canadian labour market conditions continue to trend down, speculation has increased around Canada’s Temporary Foreign Worker (TFW) Program, which was originally designed to address labour market shortages across Canada. In response, Randy Boissonnault, federal Minister of Employment, Workforce Development, and Official Languages, recently announced the government’s plans to “weed out TFW Program misuse and fraud.” According to Boissonnault, these changes will help to prioritize Canadian workers and, in turn, help to mitigate the challenges of the current labour market.

How will this cut impact Canadian commercial real estate?

Following the BoC’s two consecutive cuts, we have yet to see an overtly tangible impact on the Canadian commercial real estate market. This was to be expected; after all, both cuts followed an extended period of substantial economic tightening. With the high cost of borrowing and lingering signs of economic volatility, the majority of Canadian consumers and investors seem to have adopted a ‘wait and see’ approach.

“This third BoC interest rate cut is meaningful because it signals that rates are trending down and, more importantly, at a more rapid pace than previously expected,” notes Peter Norman, VP and Chief Economist at Altus Group. “But this is also a double-edged sword for the CRE industry, which can benefit from better financing conditions, but will face escalating risks from the deteriorating economic conditions. Weak labour market conditions and anemic GDP growth portends shelved expansion decisions by office tenants, weaker retail sales by consumers, and delayed homebuying decisions by households.”

While BoC interest rate decisions are rarely a catalyst for action in the short term, they are important signals for the broader market and indicate that the tides may be turning, even if a significant uptick in transaction activity doesn’t materialize immediately. The point of rate cuts is to stimulate the economy, but they typically do so with fairly long lags, meaning that the CRE industry may be waiting for improvements in employment and economic conditions well into 2025 before new investment decisions start to make more sense.

“With additional rate cuts expected in October and December, transaction activity may remain muted in anticipation of lower borrowing costs. However, we should see some increase in activity in identifying opportunities for core assets following this decision,” notes Raymond Wong, Vice President, Data Solutions Delivery at Altus Group. “The main challenge we face, right now, is the lack of product and the continued bid-ask gap in expectations between buyers and sellers. Obviously, we need to keep an eye on inflation, GDP growth, and employment – but I think we may also see cap rates start to flatten in the coming months.”

Are Federal Reserve and BoC policy directions coming into alignment?

The BoC’s interest rate decisions do not exist in a vacuum; while the BoC began its easing cycle ahead of other major central banks, these decisions are undeniably influenced by what is happening south of the border. There exists a delicate balance between the US and Canadian economies, and if the Federal Reserve was not expected to begin its cutting cycle in September, today’s rate decision could have put our dollar at risk.

“There is growing frustration that the (US) Fed has waited too long to cut rates, putting the economy in a precarious position,” notes Omar Eltorai, Director of Research at Altus Group. “Other countries, like Canada, have already started throttling back on base lending rates. The Fed may have already missed the ideal time to cut, resulting in a not-so-soft landing that ends up disrupting the US economy.” As of right now, the markets are pricing in a 25 to 50 bps cut at the next FOMC announcement on September 18th.

In the wake of today’s decision, Canadian consumers and investors are likely breathing another sigh of relief. If inflation continues to trend in the right direction while the economy indicates the need for a boost, the BoC should have no reason to deviate from its current pace of rate relief. As for the Canadian real estate market – we may not have landed the plane yet, but most of the turbulence appears to be behind us.

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