Interest rate cuts would ease housing supply constraint, Fraser suggests – National

Cuts to interest rates in Canada may lead to better housing supply, Housing Minister Sean Fraser suggests.

Fraser told reporters in Ottawa on Tuesday that based on conversations he’s had with housing developers, his feeling is that stalled projects will begin to move forward if that happens.

“Don’t ignore the impact that interest rates have on restricting supply as well,” he said.

“My expectation is if we see a dip in interest rates over the course of this year, a lot of the developers that I’ve spoken to will start those projects that are marginal today, but will actually pencil out six months from now if interest rates were to take a dip.”

Click to play video: 'Business Matters: Bank of Canada says timing of rate cut is a moving target'

Business Matters: Bank of Canada says timing of rate cut is a moving target

Fraser’s comments come as Canada’s housing market is showing early signs of recovery, with several realtors telling Reuters last week that pent-up demand, a chronic shortage of homes, a spike in rents and hopes of an interest rate cut may fuel a rally in the sector.

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The Bank of Canada’s policy interest rate has sat a five per cent since July 12, and Governor Tiff Macklem said on Jan. 24 conversations at the central bank have shifted from debating whether interest rates are high enough, to how long the central bank needs to keep rates at current levels.

However, the central bank has not yet indicated if and when cuts to interest rates are coming.

Many economists are predicting that interest rate cuts will begin in April or June, but Macklem has explicitly said interest rates alone can’t “fix” higher shelter cost, which is one of the biggest contributors to inflation.

Regardless, some buyers are already coming out of hibernation.

Click to play video: 'When will interest rates be lowered in Canada?'

When will interest rates be lowered in Canada?

John Pasalis of Realosophy Realty told Reuters that a three-bedroom townhouse his company listed for $828,000 last month in Newmarket, Ont., received 40 offers and sold for $1.06 million.

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“All of these multiple offers … are working now because demand is a lot higher than in the fall,” Pasalis said.

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Mike Moffatt, founding director of the Place Centre, a think tank focused on sustainable housing, said demand “is going to absolutely explode when rates come down and first-time homebuyers can start qualifying for mortgages again.”

Despite that, the Canadian Home Builders’ Association (CHBA) said in an August report that high construction costs and rising interest rates have been hurting developer confidence in the market.

Click to play video: 'Real estate market predictions for 2024'

Real estate market predictions for 2024

Two out of three builders told CHBA that they’re building fewer units, while 22 per cent of developers have fully cancelled projects in recent months.

Canada will need to grow its housing stock by an average of 315,000 units every year between now and 2030 to meet demand, said Robert Hogue, assistant chief economist at the Royal Bank of Canada.

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“That’s more than a third above the pace of housing completions in the past few years,” he said.

Ottawa has introduced a slew of measures to boost housing supply, including reviving a war-time housing program that offers pre-approved designs to developers.

Click to play video: 'Economists expect spring interest rate cut after Bank of Canada holds steady'

Economists expect spring interest rate cut after Bank of Canada holds steady

Fraser said Tuesday regardless of what happens with interest rates, the federal government is focused on helping to increase housing supply.

“We need to make it easier to build at the municipal level by ensuring that we’re getting bang for our buck on the infrastructure investments that we make, and putting incentives to reduce red tape. We need to invest in affordable housing. We need to grow the capacity of the workforce to build the homes that are necessary,” he said.

“Regardless of where the rate of interest sits today or six months from now, the actions that we take today are going to be identical. We need to do everything we can, as quick as we can, to build as many homes as we can, and that’s going to be true today and six months from now, regardless of what may happen in the interest rate environment that we’re dealing with.”

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Budget to create conditions for rate cuts: Freeland

Deputy Prime Minister and Finance Minister Chrystia Freeland told reporters on Tuesday the federal government will prioritize creating the economic conditions in its next budget to allow for lower interest rates.

“We definitely are conscious as our priority, when it comes to economic policy, of acting in such a way that creates conditions that will make it possible for interest rates to come down,” she said.

Macklem told the House finance committee earlier this month that major spending increases in the next budget could hinder efforts to bring down inflation.

The budget is expected to be tabled in Parliament this spring.

— with files from Reuters

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