Bank of Canada Rate Cut: A Gift to Buyers; Will It Matter?

The Bank of Canada’s reduction of the overnight rate to 2.5%, its third cut this year, is a gift to home buyers. But the timing’s a little awkward.

The BoC essentially gave trapeze lessons to someone who’s recovering from vertigo: It’s a fun gift, but should they actually use it? That’s the question home buyers will be mulling in the coming weeks.

Variable mortgage rates will soon be around 3.7% at some brokerages, their lowest level in three years. But the reason we’ll have better rates tomorrow is because the economy’s suffering today.

Canada’s gross domestic product — a key indicator of economic health — is in decline, while unemployment is on the rise.

It suddenly feels a lot like January, when tariff uncertainty was rampant and buying a home felt exceedingly risky. It took months before buyers shook off the threat of tariffs and started slowly returning to the market.

For that to happen this time, it’s not just mortgage rates that need to improve.

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Job market jitters

Canada’s unemployment rate was 7.1% in August, according to Statistics Canada. Outside the pandemic years of 2020 and 2021, that’s the highest unemployment rate the country’s seen since May of 2016.

Theoretically, rate cuts should help bolster the job market. That just hasn’t been the case as of late.

The Bank of Canada dropped the overnight rate in January and March, and the unemployment rate has yet to improve. (It was 6.7% when the Bank last cut in March.) Looking back even further, unemployment was 6.4% when the Bank started lowering the overnight rate in June 2024.

Unease around employment is often a major obstacle for home buyers, says Marshall Tully, a Toronto-based mortgage broker with Invis.

“Lower rates are welcome, but uncertainty about employment or the broader economic outlook weighs more heavily on decision-making,” Tully says.

“A rate cut that brings variable rates back to 3.65% would improve affordability, but for most buyers it’s not enough to overcome concerns about job stability or a softening economy. Until buyers feel confident in their personal financial outlook, rate cuts alone won’t trigger a surge in activity or values.”

There’s a sense among economists that unemployment could rise even higher. If this feeling spreads to home buyers, it could be as effective at cooling the market as job losses themselves.

“Gross” is right

Canada’s gross domestic product shrank by 0.4% in the second quarter of 2025, a larger decline than analysts, including the Bank of Canada, had expected.

According to Brendon Ogmundson, chief economist at the British Columbia Real Estate Association, housing demand generally isn’t impacted by GDP unless a major financial shock is derailing the economy.

“That said, a strong economy that is producing robust job and income growth is good for the housing market,” Ogmundson said by email.

That doesn’t seem to be the economy we’re living in, though.

In August, Oxford Economics economist Michael Davenport projected that the Canadian economy will “teeter on the verge of recession” in the second half of 2025, dragged down by the uncertainty caused by the trade war with the U.S.

While the knowledge of weak GDP growth doesn’t drive down home sales, talk of recession might. The belief that the economy is about to contract can be paralyzing for a home buyer who believes their income is in jeopardy, or for an investor worried about unpaid rents.

If a recession does materialize, Ogmundson believes it could be short, shallow and confined to the trade sector. But that’s not a given.

“We’ll see what the third quarter brings,” he said. “Hard to see consumption holding up in the face of a weakening job market.”

Other numbers matter, too

Recent economic data is ugly, but buying a home ultimately depends on the strength of your finances, not the health of the economy.

If your job and finances are stable, it’s not a bad time to be sniffing out a mortgage.

In August, annual home prices fell and inventory counts rose in several major housing markets: Calgary, Toronto, Vancouver, Hamilton.

Variable rates will decrease within hours of the rate cut, and sinking government bond yields indicate that lower fixed rates could be on the way, too.

That all adds up to opportunity for buyers with their finances in order. The broader housing market might struggle under the weight of a lagging economy, but that doesn’t rule out the possibility of individual success.