rates
WHAT ONCE WAS LOST BUT NOW IS (PARTIALLY) FOUND In today’s declining interest rate environment, homebuyers are regaining some of the affordability they lost to higher rates. That should continue even as prices start to rise.
The past two years have proved particularly challenging for homebuyers. With the Bank of Canada embarking on a once-in-a-generation tightening of monetary policy in response to rising and high inflation, borrowing became much more expensive. While home prices in British Columbia’s largest housing markets remain below their peaks from the spring of 2022, they have not fallen enough to fully offset the impact of higher rates. In turn, this has led to an overall decrease in affordability for homebuyers. To use some numbers to tell the same story, home prices would have had to have fallen by 42% to neutralize the Bank of Canada's 475 basis-point increase in its overnight rate for affordability to have remained unchanged. In the Vancouver Region, the benchmark condo price—the usual entry point into the housing market for a first-time buyer—was down only 2% from its peak in May 2022 by May 2024 (right before the Bank began to cut its policy rate). The composite benchmark price, meanwhile, fell a little more from its
2022 peak (by 9%, to be specific), but this still yielded a substantial decrease in purchasing power.
The good news for homebuyers is that they’ve started to regain some of that lost purchasing power, as the three 25 basis-point cuts to-date from the Bank of Canada have been accompanied by modest declines in home prices (-1.4% for condos in the Vancouver Region). Looking ahead, we can expect further affordability gains as the Bank continues on its path towards a theoretical “neutral policy rate”. Their stated goal is to settle somewhere in the range of 2.25%-3.25%, which we expect them to achieve midway through 2025. If the Bank's policy rate settles in at 2.75%, price appreciation of anything less than 21% will result in increased affordability. Our expectation is for a modest increase in home values over the next year, and another 175 basis-points in cuts to the Bank’s policy rate, thereby yielding increased purchasing power for homebuyers.
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