Canada Monetary Policy

Bank of Canada Provides Relief to Consumers
and Commercial Real Estate Investors

Central Bank lowers policy rate for the first time in four years. On the heels of moderating inflation, softer than expected economic growth, and a gradual easing in wage pressures, the Bank of Canada cut its overnight rate by 25 basis points in June, bringing it to 4.75 per cent. This move comes after the Central Bank slashed its benchmark interest rate to a record low of 0.25 per cent in March 2020, in response to the global health crisis. The monetary authority kept its policy rate at near zero for two years, then started raising it rapidly to tackle runaway inflation. Between March 2022 and July 2023, the Central Bank hiked its overnight rate 10 times for a total of 475 basis points. In addition to the June rate cut, the BoC indicated it believes inflation will continue to trend down, suggesting further cuts will likely materialize over the remainder of the year. These factors will not only benefit consumers, but commercial real estate investors who are awaiting positive signs regarding the cost of debt. 

Positive investor sentiment set to grow. A 25-basis-point cut in the overnight rate may not cause a wave of investment activity right away, given the fact that most commercial mortgages are priced off longer-term bond yields. These have largely been stabilizing around their expected values. However, it does signal to the market that borrowing costs are coming down, providing some renewed confidence for many CRE investors. Falling interest rates will also stimulate overall economic growth, which will fuel space demand across the property spectrum and help drive already healthy underlying fundamentals. Combined, these factors are likely to cause investment activity to gradually gain momentum over the coming quarters.

Commercial Real Estate Outlook

Development likely to benefit the most. Construction financing tends to be priced around shorter-term yields, such as the one- and three-year bond, which are more heavily influenced by the overnight rate. With the policy rate likely to fall further over the remainder of the year and into 2025, both land sales and development could see the largest uptick in activity as falling interest rates will allow more projects to pencil out. This potential uptick in building intentions will be welcomed across the country, especially within Canada’s residential sector. Over the past two years, the nation’s population has increased by nearly 6.0 per cent — an all-time high — and surpassed 40 million residents. At the same time, housing starts fell by just over 7.0 per cent annually in 2023. These factors, combined, caused Canada’s housing imbalance to grow significantly, pushing affordability to all-time lows. Further housing supply is needed, which will likely be aided by falling interest rates.

Housing market likely to perk up. With a clear path for interest rates now materializing, home prices are likely to see marginal gains over the remainder of the year as opportunistic buyers look to capitalize on softening prices and falling variable rate mortgages. Nevertheless, the combination of still-restrictive borrowing costs and the potential for renewed price appreciation will continue to generate ownership hurdles and force many households to remain in the apartment rental market. Multifamily will likely hold as a preferred investment option as the national vacancy rate is forecast to remain well-below equilibrium levels, supporting annual rent growth that will continue to outpace that of inflation.  

* Forecast; market consensus is an average of forecasts from TD, RBC, BMO, CIBC and Scotiabank 
Sources: Marcus & Millichap Research Services; Altus Data Solutions; Bank of Canada;
Capital Economics; CMHC; CoStar Group, Inc.; The Globe and Mail; Statistics Canada