Earlier this week on Wednesday, the Bank of Canada stormed into headlines everywhere by announcing a cut in its key lending rate, dropping from 1% to an all new low of 0.75%. Spurred by concerns over the continuing falling price of oil, the housing market, and the implications this may have on public spending, the Bank of Canada sought to end its “longest period of inaction since the 1950s” to protect consumers. 1
What does this mean for real estate?
By decreasing its key lending rate, the Bank of Canada will indirectly encourage Canadians to spend, which includes the purchases of loans such as mortgages. First-time home buyers and seasoned purchasers of real estate will eventually pay less for their mortgages as the interest rates on them have dropped. Experts suggest those that will benefit most are Canadians opting for variable-rate mortgages as they may have access to “even lower” rates over fixed-rate mortgages. 2 As a result, monthly mortgage payments for new purchasers of real estate will become less and buying real estate may now become ‘more affordable’.
On the opposite side of the transaction, the owner of real estate will now have the same carrying costs, if they are on a fixed-rate mortgage, or even lower carrying costs if they are on a variable-rate. 3 Because of this, the supply of real estate will likely follow its current trends: we are unlikely to see an undersupply or oversupply in the GTA. However, with mortgages now becoming more affordable, it is entirely possible to see an increase of buyers. The classic laws of supply and demand in economics dictate that, if this is the case, an increase in demand will occur and the prices of real estate will slowly rise.
When can I expect this change?
An important distinction to make when considering the implication of this decrease in the key lending rate is that it has been set by the Bank of Canada; the interest rate that your lender, such as CIBC, RBC, or TD, offers you for a mortgage may not immediately change. However, the history of interest rates set by lenders indicates that they closely follow the interest rate set by the Bank of Canada. 4
The Bank of Canada exerts a strong influence on the various banking institutions across Canada, reports financial corresponds of the Financial Post, Barbara Shecter and Garry Marr: “…the last time overnight interest rates were trimmed… the cut was matched within minutes” by Canadian banks. 5 Although the reduction in the interest rate may not be as readily adopted by CIBC, RBC, or the other banks, financial analysts suggest that one of these banking institutions will eventually bow to the pressure and change its rate, which will cause the other banks to follow in suit to remain competitive.
The trends in the selling and buying of real estate are ultimately effected by the lending rate set by the Bank of Canada. Even though your local TD may have not yet changed the interest rate on the mortgage that it is offering you, history suggests that it will eventually have to in order to remain competitive with the other banks. At this time, more buyers will enter the market as mortgages being increasingly affordable and this in turn will have an effect on the price of real estate.
- McKenna, Barrie. “Poloz says cut to key rate a hedge against plunging oil prices.” The Globe and Mail, January 21, 2015. Economy.
- King, Romana. “Rate cut is good for variable-rate mortgage holders only.” Money Sense, January 22, 2015. Economy.
- CBC News. “Bank of Canada interest rate cut: 5 ways consumers may be affected.” CBC News, January 21, 2015. Business.
- “5 things to know about interest rates right now.” Global News, January 22, 2014. Money.
- Shecter, Barbara and Garry Marr. “Bank of Canada could press contry’s top lenders to follow rate cut.” Financial Post, January 23, 2014. FP Street.