Forecast for 2025: Mortgage Rates to Dip Below 4%, Reshaping the Housing Market

Real Estate समाचार

Forecast for 2025: Mortgage Rates to Dip Below 4%, Reshaping the Housing Market
Mortgage RatesHousing MarketBank Of Canada

Economists predict a year of significant change in the housing market in 2025, with mortgage rates expected to dip below 4%. This trend will be driven by the Bank of Canada's continued easing of monetary policy and recent government reforms aimed at improving affordability for homebuyers. While these changes could benefit buyers, particularly first-time homebuyers, there are concerns about the potential impact on investors.

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As we enter 2025, economists are predicting a year marked by shifts in the housing market, particularly concerning mortgage rates. Robert Kavcic, Director and Senior Economist at BMO Capital Markets, forecasts that mortgage rates will stabilize around or even dip below 4% throughout the year. This trend reflects the Bank of Canada's ongoing efforts to ease its monetary policy, with the current policy rate standing at 3.25%, its lowest point in over two years.

Economists widely anticipate further rate cuts from the Bank of Canada in 2025, although the rate-cutting cycle is nearing its completion. Kavcic estimates that the Bank will implement 75 basis points of rate cuts spread throughout the year, culminating in September. The market has already factored in this anticipated easing cycle into 3- and 5-year fixed mortgage rates, which have remained in the low-to-mid 4% range.Kavcic suggests that the market is currently pricing in approximately 50 basis points of Bank of Canada easing in 2025, indicating that these fixed rates might be reaching their lowest point. While variable rates, currently around 4.7%, have the potential to test the 4% level, Kavcic emphasizes that sustained easing from the Bank of Canada would be necessary to achieve this.BMO's outlook suggests that mortgage rates around 4% will likely persist for a considerable duration, barring any significant macroeconomic disruptions. However, Kavcic acknowledges that the Federal government's recent mortgage reforms, particularly the increase in the price cap for insured mortgages from $1 million to $1.5 million and the extension of 30-year amortizations to all first-time buyers and new home purchasers, could influence market dynamics. While these reforms aim to improve affordability for buyers, particularly first-time homebuyers, Kavcic points out that they primarily serve to moderate valuations rather than making them significantly attractive.From an affordability standpoint, these changes could benefit homebuyers, particularly new entrants to the market. Kavcic notes that combining a 3.9% mortgage rate with a 30-year amortization would bring affordability levels closer to pre-pandemic norms, assuming current housing prices remain stable. This scenario implies that, if interest rate projections hold and incomes continue to rise at a healthy pace exceeding inflation, there is room for modest housing price growth without reintroducing affordability constraints. However, for investors, the shifting landscape may not be as favorable. Kavcic suggests that the current arithmetic surrounding cap rates, borrowing costs, and risk-free returns remains uncompelling for investors, although it has improved compared to the previous year. The expectation of substantial price growth has diminished, making the market less appealing for speculative investment.While lower mortgage rates could entice more buyers into the market, Kavcic points out that cash flow considerations remain a challenge, particularly for new investors. Using Toronto's market as an example, he highlights that new investors faced significant cash flow negativity throughout late 2022 and 2023, struggling to even pay down their principal. While valuations are no longer as extreme as they were, with the spread between 4.5% cap rates and risk-free Government of Canada (GoC) yields narrowing, Kavcic believes investors will likely remain cautious due to limited near-term capital gains potential, low liquidity, economic uncertainty, unfavorable tax treatment compared to dividends, strained landlord-tenant relationships, and a weaker rental market. To attract investors back in a meaningful way, valuations would need to become significantly more attractive

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