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• Dec. 15, 2023

When will interest rates begin to come down in Canada?

For many homeowners and aspiring first time homebuyers in Canada, this might be the biggest question they are asking with the new year on the horizon, especially if you're one of those Canadians whose mortgage is up for renewal in 2024.

That's because for many Canadian homeowners, interest rates are much higher than they were when they purchased their home or last renewed, which means your mortgage payments could go up.

After several years of comparatively low rates, the Bank of Canada slashed interest rates in mid-2020 in the face of the COVID-19 pandemic to try and support economic confidence and provide monetary stimulus. For roughly two years, the Bank of Canada's overnight lending rate – which affects the rate at which Canadian banks lend money – sat at 0.25%, before a series of rate hikes were implemented beginning in March of 2022 to help combat rising inflation.

Since then, the Bank of Canada has raised its overnight rate several times, eventually reaching 5% in July 2023, where it currently stands.

The central bank's interest rate policy has an impact on the rate at which all Canadian banks will lend money to businesses and individuals. For TD, this means that the rate increase can affect the TD Mortgage Prime Rate, which is the variable annual interest rate used as a reference by TD to determine the interest rate charged on its variable-rate mortgages, as well as the TD Prime Rate, which is used to determine the interest rate of various other types of TD loans.

But now, with inflation on the wane, some economists are speculating that the Bank of Canada may be preparing to cut rates at some point in 2024. Which has some Canadians asking: "When?"

While no one has a crystal ball, the team at TD Economics looked at a variety of real-world indicators to help predict when the Bank of Canada might begin reducing its overnight rate.

To get a better idea of when that could happen, TD Stories spoke to TD Economist Rishi Sondhi, who also provided his best estimates about what we might see in the Canadian housing market next year.

When will interest rates go down in Canada?

TD Economics forecasts that the Bank of Canada will begin cutting rates starting in the second quarter of 2024, Sondhi said.

"We think the Bank of Canada will remain on hold through the end of this year [2023], and the first quarter of next year, before initiating a series of rate cuts starting in the second quarter of next year [2024]," says Sondhi.

There are a few factors contributing to TD Economics' prediction, including inflation moving more convincingly towards the Bank of Canada's 2% target, the labour market beginning to show signs of moderation, and several quarters of sub-par economic growth.

"They [the Bank of Canada] are trying to achieve this soft-landing scenario', says Sondhi, referring to a gradual slowing of the economy. "They want to have core inflation moving convincingly towards their 2% target without breaking the back of the economy," or leading to a sudden or steep recession.

Where are average home prices heading in Canada?

It's not just interest rates that could be set to head lower, Sondhi said. Home prices in Canada are expected to fall in the early-part of 2024, largely due to interest rates remaining high (even after the drop in bonds that we're recently seen) and loose market conditions, or what we think of as more of a buyer's market, in Ontario and B.C.

"Our forecast calls for a decline [in house prices] in the fourth quarter of this year, a relatively sizeable one I would say," Sondhi said.

"We're also expecting home prices to fall in the first quarter of next year, but we are expecting them to flatten out in the second quarter of next year, and thereafter for the remainder of 2024."

In all, TD Economics is predicting a drop of around 5% in average Canadian home prices from their third quarter level in 2023 through the first quarter of 2024.

However, even if home prices were to fall by as much as 5% they would still be 20% higher than they were prior to the pandemic, said Sondhi, which means affordability will still be constrained.

Modest to moderate price increases are expected starting in the second quarter of next year. There will be a number of factors contributing to these gains. As noted, the Bank of Canada should be cutting interest rates by then and bond yields (which underpin yields on fixed-rate mortgages) should be falling. In addition, population growth should remain robust, adding to Canada's housing shortage. What's more, employment should remain relatively stable, supporting housing demand.

Do you think housing will become more or less affordable for Canadians in 2024?

"There could be some mild gains in terms of affordability as interest rates come down a fair bit in our forecast, but that's offset to some extent by the fact that we believe that prices are going to increase," says Sondhi.

"You probably shouldn't expect too much of an improvement in affordability. The conditions will still be strained throughout next year."

While affordability will likely remain strained, Sondhi notes that governments at all levels are currently working on introducing new policies to address housing affordability – notably in Ontario and British Columbia, the two most unaffordable provinces in terms of housing.

Sondhi said the effects of those policies is something he will be watching closely throughout 2024.

"The big thing for housing [next year] is how much supply will be boosted by these government initiatives."

Want to learn more about Economy?
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