September 2024 LifeSpring Insights

On September 4, the Bank of Canada lowered interest rates for the third time since June. Now the question for home buyers and sellers becomes: What will it mean for me?

To get a sense of this, let’s take a look at the current state of BC’s real estate market, especially in the Lower Mainland. Then we’ll discuss some strategies to consider as the rate picture shifts.

Vancouver real estate: a snapshot

Following the Bank of Canada’s latest move, its policy rate now stands at 4.25%, down from a peak of 5%. By July 2025, many economists see the rate falling to around 3%.

As the central bank’s rate falls, interest rates on variable-rate mortgages will decline in lockstep. Fixed-rate mortgages, which are more tied to government bond rates, aren’t directly affected by the Bank of Canada, but they are heavily influenced by its moves.

Of course, when rates fall, buyers get more purchasing power, which often leads to higher prices. That could add momentum to a market in which prices are holding more or less steady, despite a decline in the number of sales due to higher interest rates.

According to recent figures from Greater Vancouver Realtors, the average home price in Metro Vancouver was $1,195,900 in August 1, down 0.9% year over year.

The number of new listings, meanwhile, rose 4.2% from August 2023, resulting in more choice for buyers.

Provincial government policies shift the picture

Beyond rates, the BC real estate market has been seen a number of new government policies over the last few years, including limits on short-term rentals, a ban on foreign buyers and taxes on underused homes. And with an ongoing housing shortage and a provincial election on October 19, more announcements are likely.

Last spring also saw an increase in the capital gains tax inclusion rate, which meant more of the gains on the sale of a property beyond an owner’s primary residence (such as a recreational or rental property) could be subject to tax. That prompted some buyers to move up sales to get ahead of the increase before it came into effect on June 25, 2024.

The new, higher inclusion rate may affect the plans of those who own second properties going forward. If you’re unsure of the tax implications of a move you’re considering, contact your advisor to make sure you’re doing so as tax-efficiently as possible. 

The best mortgage strategies for the rest of 2024 (and beyond)

At the end of the day, for most people, a real estate decision hinges on two things: interest rates and prices. And of course, rates are critical for those facing a mortgage renewal, too.

So where does that leave someone shopping for a mortgage now?

The fixed-versus-variable debate shifted as rates rose, taking payments on variable-rate mortgages with them. (Note that some variable-rate mortgages come with fixed payments, with more going toward interest and less toward the principal as rates rise; this forced some homeowners to make lump-sum payments or increase their monthly payments as rates rose in order to keep up.)

With rates set to fall, a variable-rate mortgage could be a good choice. But bear in mind that no one knows the direction of interest rates. So anyone considering this route will need to be comfortable with higher payments if rates unexpectedly rise.

For those who need more certainty around their monthly payments, a fixed rate is the better choice. A good strategy here could be to go with something shorter than the traditional five-year term, such as one or two years.

You’d pay a higher rate on the shorter-term mortgage, but potentially gain the ability to renew at lower rates in a year or two, saving money in the long run.

First-time buyers: use these tools to grow your down payment faster

It’s no secret that first-time buyers have struggled to break into the market as rates have risen, so the rate relief we’ve seen so far is welcome.

Today’s first-time buyers also have more tools to boost the size of their down payments. Each one provides the ability to build a down payment a little faster than simply holding the funds in a savings account. Here are three to consider:

1)    First-Home Savings Account (FHSA). Launched in the spring of 2023, FHSAs let you contribute up to $8,000 every year from the year in which you open your account. Contribution room carries over, up to a lifetime limit of $40,000.

Similar to an RRSP, you can deduct your contribution from your income. You can hold a range of investments in your FHSA.

2)    RRSP Homebuyers’ Plan (HBP): The 2024 federal budget expanded the HBP: You can now withdraw up to $60,000 from your RRSP to buy a qualifying home. But unlike the FHSA, these funds must be paid back into the RRSP over 15 years.

3)    Tax-Free Savings Account (TFSA): TFSAs were launched in 2009, and they have built up contribution room since, whether you opened one that year or not.

Provided you were 18 or older in 2009 and have a valid social insurance number, you can hold up to $95,000 in your TFSA, as of January 1, 2024. That rises by an inflation-adjusted amount every year (currently $7,000). You can’t deduct TFSA contributions from income, but they grow tax-free and can be withdrawn tax-free, as well.

Parents and younger buyers: Consider this strategy to “lock in” a price today

The last few years have been difficult for many property investors, as higher interest rates boosted their costs – often beyond the rents they collect. That said, buying a rental property could work for you if you can afford to buy now and want to cut the risk of being priced out of the market in the future.

Doing so effectively “locks in” today’s prices (especially if lower rates fuel price gains) and could be effective for parents looking to gift property to children, for example. This could also be effective for younger investors who may be moving away from the Lower Mainland for work but want to ensure they have housing in place if and when they return.

If things don’t work out as planned the property could simply keep functioning as a rental, potentially generating income, as well as price appreciation that could be booked in the future. Of course, owning a rental property involves work – finding tenants, collecting rent, maintaining the property – so it’s not for everyone. But it could be worth it if you’re willing to accept the risk and cost of doing so.

Your advisor can help take the uncertainty out of your next big move

Before making any real estate move, talk to your financial advisor. They’ll help you build or revise a financial plan so you can ensure your purchase, sale or mortgage renewal meets your family’s needs and goals. They’ll also run different economic and interest-rate simulations to help give you peace of mind no matter what happens. Make an appointment today.