The Impact of a Lower Bank of Canada Interest Rate on the Canadian Real Estate Sector
When the COVID-19 pandemic began, governments across the world put policy measures in place to minimize its human and economic impact.
Similar was the case in Canada.
Right from the beginning of the pandemic, there was a strong reliance on fiscal and monetary policy measures, designed to sustain economic activity. Back in March 2020, the Bank of Canada lowered its target for the overnight rate by 50 basis points to 0.25%.
These measures seem to be working because, since the economy started opening up in summer, the rebound in employment and GDP has been stronger than expected.
According to Statistics Canada, employment increased by 378,000 in September which brings employment to within 720,000 of its Pre-COVID-19 February level.
This means that the economy has officially recovered more than three-quarters of the jobs that were lost.
The GDP also showed a positive upward trend in summer 2020. Following a 6.5% increase in June, real GDP grew by 3.0% in July.
The Conference Board of Canada shares that as COVID-19 cases increase, across multiple provinces, economic recovery will continue but at a more moderate pace.
Now that the economy has entered the recuperation phase, would the interest rates increase any time soon?
Well, the short answer is no.
This is because the Governing Council has confirmed that it will hold the policy interest rate at 0.25% until economic slack is absorbed and the 2% inflation target is sustainably achieved.
The bank forecasts that after a decline of about 5.5% this year, it expects the Canadian economy to grow by almost 4% in 2021 and 2022.
While the policy rate remains the same, the bank did announce some changes in the month of October. These include:
- Recalibration of the QE program – shifting purchases towards longer-term bonds and reducing the total purchases to at least $4 billion a week.
- Scaling back some emergency liquidity measures in response to the signs of improvement appearing in the market:
I. The Bankers’ Acceptance Purchase Facility (BAPF) has been discontinued
II. The Canada Mortgage Bond Purchase Program (CMBP) has also been discontinued.
III. The frequency of Term Repo operations has been reduced from a weekly to bi-weekly basis. Additionally, the Bank also shared the updated terms and conditions for the eligible securities for regular Term Repo operations.
What does this mean for the real estate industry?
Despite rising COVID-19 numbers, the real estate industry has proven to be quite resilient. Additionally, keeping the interest rate at 0.25% is helping the real estate industry weather the COVID-19 storm.
Last month, the Teranet–National Bank National Composite House Price IndexTM showcased a 1.1% month-on-month increase, indicating a revival in the real estate market. In fact, this is the second-biggest gain for the month of September in the 22 years of the composite index!
Similar insights were shared by the Canadian Housing Market report by RBC. It highlighted that higher home prices will be seen in the near-term.
It also confirmed that home resales set a record high, by rising 6.2% from July to 672,000 units nationwide, in August. This summer increase more than made up for the decline in March and April.
So, what’s next?
As the lower interest rates are here to stay (for a while), the real estate market activity and prices will remain stable. Though, there may be a slight decline in activity in the winter season as the pent-up demand from spring has largely been exhausted and the season itself is usually slower.
Read the full Bank of Canada rate announcement here: https://www.bankofcanada.ca/2020/10/fad-press-release-2020-10-28/
The next BOC release is scheduled for December 09, 2020.
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