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The Bank of Canada's recent decision to lower its key interest rate by a quarter-percentage-point to 4.75 per cent has sparked optimism among potential homebuyers and market analysts. This move, the first rate cut in over four years, comes at a time when major Canadian cities like Toronto, Calgary, and Vancouver have experienced a surge in property listings without a corresponding rise in buyer demand. For instance, Toronto saw a 21.1 per cent increase in new listings year-over-year in May, but home sales in the city dropped by 21.7 per cent. Real estate experts believe that declining borrowing costs over the next 18 months will encourage more buyers to enter the market, including first-time buyers, thus alleviating pressure on the tight rental market.

The interest rate cut is particularly significant given that a substantial portion of Canadian adults have postponed their home-buying plans since the Bank of Canada started raising rates in March 2022. According to a survey by Royal LePage, over half of those waiting would resume their search if rates decreased, with a notable fraction ready to act on even a 25-basis-point reduction. This pent-up demand suggests that lower interest rates could lead to rising home prices as buyers re-enter the market. However, experts caution that the market rebound will be gradual, as many prospective buyers are waiting for more substantial rate cuts before making a move.

The rate reduction is also expected to ease financial pressure on current homeowners, especially those with variable-rate mortgages. Mortgage specialist Victor Tran notes that each 25-basis-point decrease could save variable-rate mortgage holders $15 per $100,000 of mortgage. This relief is crucial as many face significant increases in monthly payments upon renewal. While the central bank is expected to proceed cautiously with further rate cuts to prevent a resurgence of inflationary pressures, this initial reduction is seen as a positive step towards stabilizing the housing market and supporting homeowners.

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