Interest rate cut will 'keep the real estate party going'

 

The Bank of Canada’s surprise interest rate cut last week will “keep the real estate party going” and "add new life to the housing market", according to experts.

“There had been pressure on the Bank of Canada to actually increase its rate to cool off the housing market,” said John Andrew, director of executive seminars on corporate and investment real estate at Queen’s University.

“Mortgage rates will likely be lowered now as well. It will really keep the real estate party going.”

Sal Guatieri, senior economist at BMO Capital Markets, added: “The rate cut could add new life to the housing market, though it’s probably not large enough to spur a meaningful change in activity.

“The impact is more on confidence, as investors will have more reason to believe that interest rates are not going up for a long time.”

Last week, the Bank of Canada cut its overnight rate target by a quarter of a percentage point to 0.75 per cent. The industry was surprised, as many had expected a rise in interest rates.

“[The market] is looking for any excuse for a significant correction. Increasing the BoC rate would have done it," said Andrew.

“Really, what we need is for [the market] to be cooling off, or for a gradual soft landing."

In an online poll, the vast majority (63 per cent) of CREW readers were blindsided by the interest rate drop, while just 13 per cent said they expected it.

A report published yesterday by TD Bank predicted that we should expect a further cut by the Bank of Canada in March, a move that TD Bank economist Diana Petramala said would likely filter into mortgage rates.

“We don't forecast mortgage rates, but they have typically moved in line with bond yields – and banks may start to lower mortgage rates as well,” she added.

But across all of Canada'a big banks, the Royal Bank of Canada is the only one to cut mortgage rates so far, dropping its five-year fixed rate deal to 2.84 per cent and also cutting its other fixed products.

"When looking at fixed rates, the five-year government bond rate has dropped more than one per cent since April 2014, but discounted five-year mortgage rates have only dropped 0.20 per cent," said Michael Celuch, a mortgage broker at Mortgage Intelligence.

"It is clear that the banks are more concerned about increasing profits than they are passing along the benefits of reduced rates to their clients."

Meanwhile, the mortgage industry is scratching their heads, wondering if the other banks will follow suit. “We all want to know why the prime lending rate is not dropping," said Jerome Trail, a mortgage broker at GreedyMortgage.com.

"At this point in time, we’re putting the bulk of our clients into variable mortgages. They've been asking us: what’s going on?”
 
John Andrew will be speaking at the Toronto InvestorForum, which will be held March 28 and 29, 2015 at The International Centre in Toronto

Canadian Real Estate Wealth

by Jennifer Paterson 27 Jan 2015
Renee Pelland

Renee Pelland

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CENTURY 21 In Town Realty
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