Rate Cuts Are Coming

The Real Estate Espresso Podcast

Rate Cuts Are Coming

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An Analysis on the Impending Rate Cuts

As host of the Real Estate Espresso Podcast, I, Victor Menasce, constantly keep my finger on the pulse of the housing estate and investment world. Today’s topic of interest is the expectation that rate cuts are coming. This is likely to have noteworthy consequences for both the U.S. and Canada. Let’s dive into why we can expect this change and what it signifies for the real estate market.

The Evolution of Lending Rates

In its recent announcement, the Bank of Canada has decreased its benchmark rate by a quarter point to four and a half percent. This rate cut is not a singular occurrence, but the second consecutive quarter point reduction since June. The U.S. and Canada now almost have a full percentage point difference between their respective benchmark lending rates.

What does this mean? Economically, these concurrent rate cuts are an attempt to incentivize economic growth. The Bank of Canada cites, high debt levels and weak economic strength as primary reasons for the move. Lower rates mean the marginally increasing unaffordability of housing can be circumvented to a certain measure.

Most significantly, this could be a moment of sigh for commercial real estate investors. The past month has recorded steady drops in the yield of the commercial bond, with today’s rates standing at 3.54 percent. The prime commercial financing available in Canada is priced 35 basis points higher than that, resulting in a 3.89 percent interest rate, provided the rate is locked today.

Canada Versus the U.S

The rate is significantly better than the rates U.S investors get from agencies like Fannie Mae and Freddie Mac, which are currently pricing at around 5.82 percent. Moreover, the two percentage point spread between commercial mortgage rates of the two countries is noteworthy.

Differences between these two vast markets affect the housing estate situation vastly. The U.S. is known for its large supply of rental housing entering the market ahead of demand, creating an oversupply in certain markets. In contrast, Canada’s housing market remains tightened nationwide with a record low vacancy rate of about 1.5 percent.

The numerous rental units being delivered into the market have not been able to solve the low vacancy problem. Rent has also seen an average increase of 8 percent over the last year. On the other hand, cities like Houston, Nashville, Charlotte, and Raleigh in the U.S., have vacancy rates exceeding 10 percent.

Summing Up

While both countries have the purchasing power for housing, the demand and supply dynamics differ vastly. Federal Reserve Chairman Jerome Powell’s signaling of at least one more rate cut this year may close this gap. Maybe the July meeting might just announce this, or we could be looking at September. Perhaps, the Bank of Canada’s rate cut gives some cover to the Fed to cut rates sooner rather than later.

Checklist for Investors:

Sr.No	Checkpoints
1	Monitor Benchmark Rates
2	Keep an Eye on Inflation Rate
3	Study the Market for Vacancy Rates
4	Watch for Future Rate Cuts
5	Consider Differences in Canadian and U.S Markets