A historical look at the Bank of Canada’s rate cuts: Will they boost the housing market?

The Bank of Canada (BoC) lowered its benchmark rate for the second time in two months on July 24. With government bond yields also dropping, current mortgage rates have hit their lowest point in 17 months. Though some expect these lower rates to stimulate the real estate market, history suggests a different story.

WOWA Leads analyzed mortgage payments versus income over the last 50 years in Canada to explore the relationship between home prices and falling mortgage rates from their peaks. Findings show that mortgage payments for a recently purchased average property in Canada consume nearly all of the average person’s disposable income.

Currently, housing markets in Toronto and Vancouver are stagnant, whereas more affordable markets like Montreal, Calgary and Edmonton are thriving. For instance, in Toronto, the sales-to-new-listing ratio is at 35 per cent, indicating a buyer’s market, with inventory levels close to 25,000, the highest since 2010.

We’ve only seen this level of housing unaffordability twice before: around 1981 and 1990, with peaks in 1995 and 2007. Here’s what happened during those times.

Q3 1981 to Q3 1983

The BoC rate reached a high of 20.78 per cent in August 1981 before falling to 9.26 per cent in July 1983. Despite this significant rate drop, the home price index declined by 14 per cent while inflation rose by 17 per cent. In Vancouver, for instance, home prices dropped by nearly 40 per cent from early 1981 to mid-1982.

Q2 1990 to Q1 1994

The BoC rate dropped from 13.5 per cent to 3.6 per cent, but home prices fell by 8 per cent while inflation rose by 10 per cent. In the GTA, for example, home prices dropped by 28 per cent from April 1989 to August 1993.

Q1 1995 to Q4 1996

During this period, unaffordability peaked again, though less severely than before and today. The BoC rate fell from 8.2 per cent in March 1995 to 3 per cent in November 1996, but home prices declined by 4.5 per cent and inflation rose by 3 per cent. For example, Vancouver home prices dropped by 17 per cent from August 1994 to October 1998.

2007-2008 global financial crisis

In 2007, we again saw an unaffordability peak. From Q2 2008 to Q1 2009, home prices dropped by 9 per cent while the BoC rate fell from 4.25 per cent to 0.25 per cent. In 2009, home prices rebounded quickly.

Why home prices drop when affordability improves

As affordability improves, home prices can likely drop because of the lag effect of rate hikes and subsequent economic deterioration.

Most Canadian mortgages are fixed-rate, so the impact of rate hikes is felt mainly during renewals, often after rates have peaked. This can pressure some sellers to offload properties.

A BoC rate cut usually signals dropping inflation caused by a slowing economy, higher unemployment and lower earnings for the self-employed. Decreasing home prices are strongly impacted by higher unemployment.

What’s next for Canada’s housing market?

The housing market is currently performing differently nationwide. For example, Ontario home prices have declined recently, while Quebec and Alberta are seeing steady growth. Historically, unaffordability tends to lead to price drops after the rate peak.

So, while the full impact of high interest rates on the market has yet to play out, we might see price moderation in Ontario, especially the GTA, while Alberta and Quebec could remain relatively stable.