As of October 23, 2024 the Bank of Canada reduced the overnight rate to 3.75 percent down 50 basis points from September. After rates increased to 5 percent in July of 2023, we didn’t see rate cuts until June of this year. Since June, the Bank of Canada has consistently cut rates by 25 to 50 basis points. With this news hitting the stands the question remains, will this actually help Canadians with housing affordability?
Let’s take a look at all the information we have regarding the impact of interest rates on Canadian real estate, our housing affordability crisis and what this means for the Ottawa market specifically.
How The Overnight Rate Impacts Canadian Real Estate
The Bank of Canada’s overnight rate will determine the prime rate and in-turn determines the mortgage rates that financial institutions can offer Canadians. The prime rate is set by financial institutions and is always higher than the overnight rate. For example, right now with the overnight rate lowered to 3.75 percent, but the prime rate is sitting at 5.95 percent. When the overnight rate was 5 percent, the prime rate was 7.2 percent.
What does a lower Prime Rate mean for Mortgage Rates?
Your mortgage rate is usually slightly lower than the prime rate, however with the Mortgage Stress Test, mortgage applicants need to qualify at 2% higher than their actual rate. So, if your financial institution offers a rate of 6 percent you need to qualify at 8 percent.
If you’re thinking of entering the Canadian real estate market or have an upcoming mortgage renewal, it’s important to shop rates. You should connect with a trusted mortgage broker and/or your current lender to understand what rates are available to you. Right now, you can find 5-year fixed rates as low at 4% percent and 5-year Variable rates as low as 4.70 percent.
Committing to a Fixed vs. Variable-Rate Mortgage is a choice you need to make with the help of your mortgage broker or financial advisor. A Variable-Rate Mortgage can be a good choice if you’re comfortable with the risk of increased monthly payments in the short-term if rates are expected to continue to drop (big banks are predicting rates as low as 2.25% by the end of 2025).
If you’re in the Ottawa-area and are looking for a trusted mortgage advisor, reach out to us and we can refer you to the best mortgage experts we know.
Will Lower Interest Rates Help Relieve Canada’s Housing Affordability Crisis?
We all know that Canada, and Ontario specifically, is going through a tough time when it comes to housing affordability. Before the overnight rate was lowered, Canada saw the first improvement in housing affordability in Q1 2024 since Q2 of 2023. However, this shift only brought the median mortgage payment in Canada to 58.9 percent of pre-tax household income (National Bank of Canada).
Interest rates are only one part of a large puzzle that contributes to Canada’s overall housing affordability issue. Potential buyers were waiting for interest rates to decrease and have created some pent up demand, but the major issue we have is in our housing supply.
Canada’s lack of housing supply is really what drives prices up in almost every market. When rates are lowered, we do tend to see more homes pop up on the market, as sellers anticipate buyer demand, but there won’t be nearly enough supply to shift prices in favour of the buyer.
How Lower-Interest Rates Will Impact Ottawa’s Real Estate Market
Let’s take a look at where Ottawa’s housing affordability stood before rates were cut.
For Non-Condo (Freehold & Townhouse) properties, the average home price sat at $740,250 and Condo properties sat at $410,184 as of May 2024.
The average household income in Ottawa is approximately $178,938 for Non-Condo homeowners and $100,875 for Condo owners making the mortgage payment as a percentage of income (MPPI) approximately 44.6 percent and 22.7 percent respectively, down about 0.9 percent quarter over quarter.
Ottawa’s MPPI is lower than Canada’s overall ratio which sits at 58.9 percent. Also, when we compare how many months it takes on average to save for a down payment in Canada vs. Ottawa, we see significant differences. Across Canada overall, it takes approximately 70 months to save for a down payment, while in Ottawa that drops to 49.2 months. When we compare Ottawa to other Canadian cities, we sit in the middle range in terms of time spent saving for a downpayment, with Vancouver leading the charge with an average of 336 months and Winnipeg bringing up the rear with 27.8 months.
On the sliding scale of affordability, Ottawa remains one of Canada’s more affordable cities. Ottawa’s real estate market has always remained strong in times of turbulence due to our strong employment rates, income levels and market supply. With lower interest rates we’re already seeing the market heat up with new listings and excited buyers.
If you’re thinking of moving to Ottawa or want to buy a home or Condo in the Ottawa Area, the Adam Mills Team is the only choice for your Real Estate needs!
Book a FREE 1-on-1 call with Adam Mills to discuss your real estate goals and see if our team is the right fit for you.
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