Many believe that the short-term pain will be worth the long-term gain
Potential homebuyers have been choosing variable-rate mortgages as they assume that they will be seeing gains in the long run when the Bank of Canada issues its long-awaited rate cuts, according to the Financial Post.
The Canadian Real Estate Association (CREA) found that home sales in Canada rose by 22% in January, which pointed towards a possible “turnaround” in the sector. CREA further found that prices continued to drop in places where home sales increased the most, with the national benchmark prices falling by 1.2% month-over-month.
Farah Omran, an economist from Bank of Nova Scotia (Scotiabank), said that the sales surging ahead of the spring season of home hunting could be because potential homebuyers were trying to take advantage of falling home prices. They were also opting for variable-rate mortgages because they believed they would see long-term gain of lower rates once rate cuts finally begin.
Variable-rate mortgages currently sit at 7%, accounting for about 20% of new originations in December 2023.
“Buyers are pricing in a sure increase in house prices once cuts begin and are therefore choosing variable mortgages now, betting that the cuts will be significant enough to offset the higher initial payments and reduce the overall cost of the mortgage over the long term,” said Omran.
Omran further noted that homebuyers may be taking advantage of the lower prices because they believe that once the central bank begins cutting down interest rates, prices will increase as more people enter the market.
“Given the widespread expectation, of everyone from the BoC to CREA to most economics shops, that rate cuts will eventually lead to an uptick in activity and prices, this is a reasonable bet on the part of buyers,” said Omran.
While many still anticipate the rate cuts to occur soon, current inflation and jobs data have caused economists to revise their expectations. Scotiabank believes the first rate cut will happen late in the third quarter with 75 basis points of cuts. Initially, the bank believed it would be 100 basis points starting in the second quarter of the year.
