Today was another step in the right direction from the Bank of Canada with a rate drop that could impact the housing market and ultimately your financial decisions. The Bank of Canada has recently lowered its target for the overnight rate to 4.5%, with the Bank Rate now at 4.75% and the deposit rate at 4.5%. This move is part of their strategy to normalize their balance sheet.
What Does This Mean for You?
When the overnight rate decreases, borrowing costs for consumers and businesses generally follow suit. This is particularly relevant if you’re considering buying a home, refinancing your mortgage, or investing in property. With lower interest rates, mortgages can become more affordable, potentially easing some of the financial burden many of us have been feeling.
The Bigger Economic Picture
On a global scale, the economy is projected to grow at an annual rate of about 3% through 2026. Although inflation is still above target levels in many advanced economies, it’s expected to gradually decrease. In the United States, economic growth is slowing, with consumption growth moderating and inflation declining. Europe is experiencing a recovery after a weak 2023, and China’s economy is growing modestly.
In Canada, economic growth is estimated to have picked up to about 1.5% in the first half of this year. However, with a robust population growth rate of about 3%, the economy’s potential output is still outpacing GDP growth, leading to excess supply. Household spending, including on consumer goods and housing, has been weak. Additionally, the labor market is showing signs of slack, with the unemployment rate rising to 6.4%.
Housing Market Outlook
Looking ahead, GDP growth is expected to increase in the latter half of 2024 and through 2025, driven by stronger exports and a rebound in household spending and business investment as borrowing costs decline. Residential investment is anticipated to grow significantly, which is positive news for the housing market. New government limits on non-permanent resident admissions are expected to slow population growth in 2025, potentially balancing supply and demand more effectively.
Here’s a key point to note: The Bank of Canada forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026, indicating that the economy will gradually absorb excess supply through 2025 and into 2026.
Inflation and Its Effects
Consumer Price Index (CPI) inflation moderated to 2.7% in June after a rise in May. Broad inflationary pressures are easing, and the Bank’s preferred measures of core inflation have been below 3% for several months. However, shelter price inflation remains high, driven by rent and mortgage interest costs, indicating that while overall inflation is cooling, housing costs continue to be a significant burden for many Canadians.
The Bank expects core inflation to slow to about 2.5% in the second half of 2024 and ease gradually through 2025. They also anticipate that CPI inflation will drop below core inflation in the second half of this year, mainly due to base year effects on gasoline prices.
What Should You Do Next?
With the recent rate reduction, now might be a good time to review your financial and real estate plans. If you’re thinking about buying a home or refinancing your mortgage, this rate drop could present an excellent opportunity. Lower interest rates can lead to lower monthly payments and more manageable debt.
As always, we are here to provide personalized advice based on your unique situation. Feel free to reach out if you have any questions or need guidance on navigating these changes in the market.
Stay informed and make the best decisions for your future! In the meantime, we’ll watch for the possibility of another rate drop in September.
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If buying is in your future, make sure that you view our home buyers FAQ to get all your questions answered. We want to ensure that whether you are buying or selling, you are educated and ready to tackle the market!