Impact of Bank of Canada’s Latest Rate Cut
After six consecutive rate hikes, the Bank of Canada lowered its key interest rate to 4.75%. Prior to this rate cut, the Bank of Canada had increased overnight rates a total of 10 times between March 2022 and July 2023. With the Bank of Canada having eight scheduled overnight rate announcements per year, with the next coming on July 24th, it will be interesting to see what happens to rates as we move into the summer and fall months.
Interest Rate Changes
A reduction of interest should help to start easing some of the pressures we are feeling in the pocketbook. Looking at the real estate market, it is going to be interesting to see what this reduction (and any future announcements) will do for home sales/prices through the rest of the year, specifically in the Edmonton market. If you have read any of the past blogs, it is no news that I strongly feel that Edmonton (Alberta in general) is one of the strongest marketplaces in the country. The Mortgage Marketplace Website recently produced a report on affordability in the major Canadian cities, measuring the amount of income you will need to purchase an average-priced home when compared to the stress test. Although these reports are not the “end-all-be-all” when it comes to making a conclusion on the state of the Edmonton marketplace, at the very least, they should play a part in the decision-making process…
Impact on the Edmonton Real Estate Market
Edmonton remains one of the most affordable large cities in Canada, where you require about $85,000 annual income to purchase an average-priced home ($390,000 approx.). For some context… Toronto will require an annual income of over $218,000 to purchase an average-priced home, which clocks in at $1.13M! Even with the average home price, across all product types, increasing by 5% year over year (based on Realtor Association of Edmonton reports), Edmonton is still a great place to invest in a home. Bringing this closer to home, based on the same marketplace reports, Edmonton is significantly more affordable than Calgary, which requires an average annual income of over $120,000 to purchase an average-priced home of $587,000.
It is safe to assume, amidst the reduction of the Bank of Canada rate, Edmonton will continue to see a bump in overall sales and increased sales prices as we head into the back half of the year. An interesting trend that I like to keep an eye on is what is called the “Sales to New Listings Ratio” (SNLR), which essentially measures the balance of supply in a marketplace and determines if you are in a “Sellers’ Market” or a “Buyers’ Market.” Simply, in a Buyers’ Market, there is an oversupply of homes and the opposite is true in a Sellers’ Market. If we start to see SNLR at 60% or higher, we are in a Sellers’ Market. Essentially, in this case, we are seeing strong sales (60%) based on the new listings that come to the marketplace. For the months of March and April, Alberta has seen an SNLR of 74% and 76% respectively, making Alberta the most robust marketplace in all of Canada.
Future Outlook
Looking at the marketplace in Edmonton and Alberta as a whole, I feel we are in a very interesting place. Although the Bank of Canada reduced its rates, affecting borrowing costs for banks, it doesn’t necessarily mean that they are in turn forced to lower their lending rates to us, the average folk. That said, banks are historically fast to move their prime rates down when the Bank of Canada reduces its benchmark rates. As of yesterday, June 5th, most banks have taken the step to reduce their prime rates to 6.9% versus 7.2% prior to the rate announcement. So, anyone with a variable rate mortgage is going to see immediate changes in what they are paying. With Bank of Canada Governor Tim Macklem saying it would be “reasonable to expect further cuts,” it could mean that the Edmonton market will continue to see an uptick in the real estate market. Although this will mean higher prices, with lower lending rates and the unprecedented value vs. price you find in Edmonton compared to any other big city in Canada, homeowner affordability is still attainable here…which can’t be said for other cities in Canada.
