Real estate market analysts say that the long-awaited decision by the Bank of Canada to lower the key interest rate could be a reason for the increase in home purchases.

Last Wednesday, the central bank announced a reduction in the interest rate by a quarter of a percentage point, the first decrease in over four years, meaning the key interest rate now stands at 4.75%.

This comes after some of Canada's largest cities have seen an increase in the supply of homes for sale in recent months, although demand from potential buyers has not kept pace.

Included is the Greater Toronto Area, where new home listings for sale jumped by 21.1% year-over-year last month, with 18,612 properties hitting the market. Calgary and Vancouver experienced similar trends, with new listings rising by 18.7% and 12.6% respectively, year-over-year in May.

However, home sales have declined in all three cities. In the Greater Toronto Area, sales dropped by 21.7% in May year-over-year, according to the Toronto Regional Real Estate Board "TRREB" last Wednesday.

TRREB Chair Jennifer Hurst said in a press release, "With borrowing costs decreasing over the next eighteen months, more buyers, including many first-time buyers, are expected to enter the market, providing much-needed space in the relatively tight rental market."

Karen Yulievsky, Chief Operations Officer at Royal LePage Realty, said in an interview, "There is definitely pent-up demand, and typically when interest rates decrease, prices go up."

In the Greater Toronto Area, the average selling price of a home declined by 2.5% year-over-year to $1,165,691 last month, and sales in the city of Toronto fell by 17.3% from May 2023, while in other parts of the GTA, home sales decreased by 24.3% to 4,312.

Yulievsky warned that the market recovery "will not happen overnight," as Canada is likely to see a more gradual return to higher sales levels. A Leger survey found that more than two in five potential home buyers were waiting for a reduction of at least 50 or 100 basis points before resuming their home search.

Yulievsky stated, "Lower interest rates will lead, over time, to lower monthly payment costs, which will alleviate some of the burden felt by home buyers, especially first-time buyers, if they are feeling overwhelmed."

Ontario Premier Doug Ford expressed optimism that the central bank's decision will help stimulate housing construction in the province, stating that the first reduction is a good start but the Bank of Canada needs to cut interest rates as quickly as they raised them, which is expected to happen with future rate cuts.

James Orlando, chief economist at TD Bank, expects the rate-cutting process to be slow, although he acknowledges that the economy no longer needs these high-interest rates.

He said, "It is important to ensure that inflationary pressures do not rebound as they have in the United States in recent months, and the next interest rate cut is likely to occur in September."

Victor Tran, a mortgage and real estate specialist at Ratesdotca, said that the Bank of Canada's decision is welcome news for homeowners with variable-rate mortgages.