Introduction to Canada’s Real Estate Market
Canada’s real estate market is expecting some positive changes, with cheaper financing potentially on the horizon. According to a report from BMO Capital Markets, the Bank of Canada (BoC) is forecasted to cut interest rates three times before the busy Spring 2026 real estate market. This prediction is based on the recent erosion of the labor market, which has led to the market fully pricing in the first cut within the next few days.
Expected Rate Cuts
BMO’s current forecast expects 75 basis points (bps) to be trimmed by Spring 2026, which works out to three rate cuts. The market is currently pricing in the first cut in just a few days, at the BoC’s September 17th meeting. Robert Kavcic, senior economist at BMO, notes that "we see scope for 75 bps of further easing through the spring of 2026. That would leave rates at the low end of the neutral range and give the economy a little bit of extra support that it seems to need."
Justification for Rate Cuts
The justification for these rate cuts lies in the weak job market, which is a critical concern for the economy. The "clear slack in the job market" is now evident, with weak demand for the country’s surplus labor. This point has been expressed by the BoC itself, which has warned about the slowing wage growth that naturally accompanies excess labor. Reduced disposable income, resulting from job losses and slowing wage growth, means slower consumption, which in turn means slower price growth.
Neutral Policy Rate
BMO believes that rates would be at the low end of the BoC’s neutral policy rate, which is the point where interest rates neither reduce consumption nor provide an incentive. This is often referred to as the "Goldilocks" of monetary policy, where rates are just right. However, the BoC itself has stated that its neutral policy rate is difficult to determine, as the economy is relatively small compared to its largest trade partner, and it uses the US neutral policy rate in its estimates.
Risks and Uncertainties
While BMO’s forecast predicts three rate cuts before Spring 2026, there are risks and uncertainties that could affect the outcome. The most important risk to market expectations of a rate cut on September 17th is the CPI report scheduled just a day earlier. If inflation remains sticky or accelerates, market expectations can instantly collapse. Additionally, the impact of these cuts may not spark the real estate activity that many expect, as pandemic-era easing was meant to facilitate an intentional reduction of economic activity, and the forecast cuts would be made to address a shrinking economy and uncertainty.
Conclusion
In conclusion, Canada’s real estate market is expecting cheaper financing with the predicted interest rate cuts by the Bank of Canada. While these cuts are expected to provide some extra support to the economy, there are risks and uncertainties that could affect the outcome. The market will be closely watching the CPI report and the BoC’s decision on September 17th to see if the predicted rate cuts will materialize. Ultimately, the impact of these cuts on the real estate market remains to be seen, and it is uncertain whether they will stimulate the activity that many expect.
