Not since 2008 have central banks reacted so swiftly to an ever-evolving situation like this. First, the US Federal Reserve dropped rates by 50 basis points. Finally, the Bank of Canada dropped their overnight rate by 50 basis points as well. I say finally because the Bank of Canada was one of the the last central banks to cut rates. What did it take to get the BoC to react? #COVID19, rail blockades, teachers strikes and winter weather were all noted reasons why the Bank decided to act in solidarity with other banks around the world. What will this mean for our housing market? First, I want to reassert the following point. This only (may) affect variable rate pricing. This does not mean an automatic drop in FIXED rates.
Variable rates: priced by Bank of Canada.Fixed rates: priced by the bond market (more on that in a moment).
I’ve always believed that our housing market is fuelled by two things:
1. Consumer confidence.1. Rates.
(In no certain order)
When the Bank of Canada is dropping rates, this means our economy isn’t doing great. This is bad news for Canadians. Yet, our economy isn’t doing that bad, and so – as you have seen the first 8+ weeks of 2020, people are feeling very confident. People are buying (like crazy). Sales are UP. 2020 started off very much like 2017: Low supply, tons of sales, new price records. The party was BACK.
With rates coming down, I don’t see that party stopping. Not unless confidence gets zapped by two factors: 1. A sudden shift in economy, job losses, etc. and 2. Public anxiety over #COVID19. Either one could happen. What’s interesting to me is that in 2017 we started off on the same foot – rates were low, and I thought “well 2020 is different. NOTHING is stopping this train”. Nothing, it seems, except a virus. Ugh!
Going back to fixed rates. Fixed rates are priced by the 5 year bond yield (for 5 year rates, for example).. And if you like to ski, you should check out this chart:
The last time the bond market had this yield, rates were around 2.29%. Right now, 5 year rates are 2.49-2.89%. Fixed rates are ALSO dropping.
Now here’s the catch. When Bank of Canada drops its prime rate, it does not always mean the Banks (RBC, BMO Etc) will follow suit. TD bank started this trend of NOT following in line with the Bank of Canada a long time ago. Sure enough, other lenders realized Canadians are financially apathetic and don’t really care, and didn’t take to the streets. So, I expect a 30 basis point cut out of 50 which means the big 5 are way out of whack with the actual PRIME pricing.
This is good news for:
- refinance clients
- people whose mortgages are renewing
- people who want a lower rate
- the housing market
This is bad news for:
- the economy
So, let’s not celebrate this rate cut. In a micro-view of things, yes. This is GOOD news. In a macro-view, I don’t celebrate when banks have to do this because I know they do not WANT to. This also means SMART planning of your borrowing (and buying). Low rates won’t be here forever and the last thing you want to do is over-extend yourself at a time like this.
As always if you have any questions or comments, shoot them my way. If you are an anxious buyers, let me know and I’d be more than happy to chat with you. And if you need any help with your personal financing, you know where to find me!
Thanks for reading,
_____________________________________Jake AbramowiczE: Jake@mortgagejake.comC: 416 910 4448