Will a central bank rate cut spark FOMO and light a match under the housing market?

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A quarter-point cut won’t dent today’s historically high borrowing costs

For those Canadians anxiously waiting for lower interest rates, good news. Rate relief may be coming this summer – perhaps as early as June or July.suggests inflation is cooling and has boosted expectations the Bank of Canada will lower rates by a quarter of a percentage point within the next two months, and perhaps by three-quarters of a percentage point by the end of the year.

After the first quarter of a percentage point cut, the prime rate in Canada – which is based on the BoC’s benchmark rate – will fall from its current 7.2 per cent to 6.95 per cent. That in turn will lead to decreases in variable-rate borrowing products, which are priced based on prime plus or minus a percentage.

Despite a sleepy start to the spring selling season , real estate boards predict buyers will reappear once rates start to fall. That would in turn push home prices higher, a correlation we’ve seen play out through past rate drops. This was largely driven by the psychological shift that occurs in a lower-rate environment; borrowers see the upward pressure on home prices and feel urgency to jump in, in turn driving up prices and competition. It’s a self-fulfilling prophecy.

 

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