Dear reader,
The Bank of Canada (BoC) announced this morning, December 11, that it is lowering its key interest rate to 3.25%, a reduction of 0.5% from the previous meeting. From the peak of 5% reached in July 2023, this represents a cumulative decrease of 1.75%. The market expects an additional reduction of 1.25% for 2025, equivalent to five cuts of 0.25%. With this new level, we are back to conditions similar to those of the fall of 2022 when mortgage rates were significantly lower. The next BoC meeting is scheduled for January 29, 2025.
Inflation Fight Progresses, but Economy Slows Rapidly
With this rate cut, the BoC believes that the fight against inflation is progressing well, making high interest rates less necessary. The October inflation rate stands at 2.0%, a slight increase from September’s 1.6%. At the same time, economic growth remains modest, with a forecast of 1.0% for the year, down from 1.4% in the second quarter. However, GDP per capita is declining for the sixth consecutive quarter, now at $54,900, its lowest level in several years. Compared to the U.S., this GDP per capita is between the poorest states like Mississippi ($51,420) and West Virginia ($57,710). This phenomenon is explained by rapid population growth (over 3% per year), outpacing economic growth. This situation is rare: GDP per capita is falling without the economy officially being in a recession.
Recent federal measures to slow population growth should help reverse this decline, although a decrease in population could also lead to reduced consumption. The unemployment rate, which has risen to 6.8%, is 1.8% higher than in January 2024. This increase would have been more pronounced without the many jobs created by governments (federal, provincial, and municipal), which accounted for nearly half of new jobs in 2023. This trend of government hiring continues into 2024, supporting employment in several key sectors. According to a report from Scotiabank economists Jean-François Perrault and René Lalonde, without the governments’ surplus spending and budgets, the BoC’s key interest rate would have peaked at 3%. These expansionary fiscal policies contribute to maintaining pressure on the economy, potentially slowing the pace of rate cuts.
Impact on Interest Rates
Variable rates still have room for reduction. Fixed rates have been declining for over a year and are already anticipating the BoC’s moves. Nevertheless, a gap remains between fixed and variable rates: currently, the best 3-year fixed rate is 4.19%, while the best variable rate is 4.55%. The BoC may slow the pace of rate cuts since the effects of monetary decisions take 3 to 12 months to reflect in the economy. However, all variable rate mortgages should benefit from a 0.5% reduction with the next payment.
Impact on the Real Estate Market in 2025
This rate cut should make it easier to access mortgage credit, encouraging more buyers to enter the market. An increase in transactions is already visible this fall, with October and November numbers exceeding those of 2023. December, though quieter due to the holidays, hints at a dynamic 2025, especially in the spring when available property inventory could move quickly.
Even in the case of a recession, most potential buyers in British Columbia belong to the wealthiest 10%, with household incomes around $130,000. These households typically hold jobs less exposed to losses during economic slowdowns. You can make far less and still buy a property but a larger down payment will likely be required.
Recently announced new mortgage rules should also support buyers (https://www.refinancebc.ca/post/new-mortgage-rule-taking-effects-in-the-coming-months).
Advice for Mortgage Holders or Seekers
For Variable Rate Loans or Credit Lines (HELOC or Personal): You will see a reduction of about $30 per $100,000 for a mortgage and $40 per $100,000 for a line of credit. A $500,000 mortgage will result in a monthly payment reduction of $150 ($200 for a line of credit). For those with a variable rate mortgage with fixed payment, take advantage of this decrease to accelerate your principal repayment.
For Fixed Rate Loans: No changes until your renewal. If it's due within the next 12 months, start the process now to avoid payment shock.
For New Buyers: If you have a pre-approval, it remains valid. If not yet done, start now to benefit from a still-favorable market with more inventory and less competition.
If you need help with a mortgage, pre-approval, or financial plan, contact us or schedule an appointment with me or Gina via the link below:
Sincerely,
Simon Bilodeau and Gina Lopez
Mortgage Brokers
DLC-Mortgage Negotiators
📞 604-828-9864 | ✉️ simon@refinancebc.ca
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