Decreasing rates won’t all be fun and games.

After well over a year of steadily climbing rates forcing buyers to the sidelines and driving mortgage payments through the roof, the suggestion that we could start seeing cuts this spring comes as welcomed news.

But before we jump for joy, expecting rate decreases to be a miracle cure for our woes, it’s important to consider the greater economic and real estate market implications that cuts could have.

Rate cuts are coming

It looks like 2024 might finally be the year when interest rates start to come down, offering some relief to those who have been anxiously waiting. After well over a year of hike after hike, stress upon stress, many analysts predict that the Bank of Canada could begin lowering benchmark rates this summer, with the possibility of a cumulative decrease of 1-1.5% by the end of the year.

With the overnight rate sitting steadily at 5% for months, hope has been fading for first-time home buyers and current homeowners with upcoming renewals. But now, as inflation has been steadily declining and showing the BoC that its increase cycle has been doing its job, all signs are pointing to some relief in sight.

Whether you are a current homeowner or a prospective buyer, of course, it is exciting to think that the days of record-high rates could soon be behind us, but it’s also essential to understand that decreasing rates won’t mean a sudden reversal of all that ails us when it comes to housing affordability. There's a crucial economic consideration that we need to keep in mind – the impact of stimulus on the real estate market.

The economics of rate fluctuations

Don’t get me wrong - the prospect of lower rates is certainly going to provide hope for buyers who have been forced to the sidelines for a year, or for owners with a renewal on the horizon. Lower rates, of course, mean more affordable mortgages and the potential for significant savings, which can be particularly beneficial for those planning to enter the housing market or renegotiate their mortgage terms. While rate is far from the only factor that contributes to the affordability of your mortgage, there is no denying that a lower rate is never a bad thing in isolation,

But when we add in all the other contribution factors, it might not be so exciting. Think of it this way -

Knowing that lower rates are on the horizon immediately makes you think of the possibilities for yourself, right? Well, you certainly won’t be the only one! As lower rates reignite the appetite of buyers, especially those who have been waiting for affordability to improve, demand will increase for an already low selection of inventory. Investors may also seize opportunities to purchase properties at discounted prices.

The result? It’s basic supply and demand!

More demand + less supply = higher prices

So, while you might enjoy some savings from rate cuts or variable discounts, the rapid rise in property prices can offset the gains in affordability.

This is why, as we draw closer to the spring and the anticipated cuts, we are seeing more buyers trickle back into the market to take advantage of lower prices before rates come down. For buyers who can qualify at today’s higher rates, taking a variable rate today with the calculated risk that they’ll see a decrease in the near future is a viable option!

So, what happens next?

This is why it's essential for policymakers to make judicious and incremental policy shifts that will allow for equilibrium to emerge without extreme pendulum swings. The Bank of Canada has already made it very clear that they will proceed with extreme caution when it comes to stimulus measures and the real estate market's response to lower rates. Because implementing them too hastily or excessively could risk overheating the market and have unintended consequences for buyers and homeowners.

So, while we should celebrate the progress and the trajectory toward greener pastures after a very long few years, it's crucial to maintain realistic expectations about the trade-offs. Gradual improvements in market conditions will help ensure the stability we've worked hard to achieve remains secure!

And remember - timing the market is almost always a losing game. Rather than attempting to calculate the perfect rate/price sweet spot for making your purchase, focus on making the decisions that are best for you and your family today. Your unique situation is going to call for a unique solution, no matter the market environment, and I am here to help you craft that solution today!