Rate cut expected to fuel home sales

March 10, 2020

The dramatic rate cut by the Bank of Canada could throw fuel on a rapidly developing housing sales recovery in Canada’s biggest and most expensive housing markets.
On March 3 the Bank of Canada lowered its overnight lending rate by 50 basis points, trimming the rate from 1.75 per cent to 1.25 per cent—the first-rate cut in five years and the only time the rate was lowered by 50 basis points in a single day since the 2008 financial crisis.
The Bank cited the current coronavirus outbreak for the rate cut, but in reality Canada, at 1.75 per cent, had had the highest central bank rate among the G7 nations so the reduction was not a big surprise.
The depth of the cut and its effect on the housing market, however, could prove remarkable, particularly in Vancouver and Toronto, where February housing sales were up more than 40 per cent from the same month a year earlier.
Sherry Cooper, chief economist at Dominion Lending Centres, noted that Bank of Canada Governor Stephen Poloz “has long been bucking the tide of monetary easing around the world, concerned about adding fuel to a red hot housing market, especially in Toronto.”
Cooper predicted the rate cut could “boost housing demand” via lower interest rates, although she added “reduced travel from China might crimp sales in Vancouver.”
James Laird, co-founder of Ratehub.ca and president of CanWise Financial mortgage brokerage, suggests the Bank of Canada rate cut may not be its last.
“The Bank says they are ready to adjust monetary policy further,” he said. “This suggests additional rate cuts may follow this year. Consumers who currently have a variable rate will see their mortgage payments drop once Canadian mortgage lenders adjust their prime rates. The expectation is that prime rates will drop by the full 50 basis points, although there have been times when lenders have not passed along the full savings to their customers.”