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A home that is sold is photographed along Runnymede Rd. in Toronto on Wednesday, March 4, 2020.

Tijana Martin/The Globe and Mail

The Bank of Canada’s interest-rate cut threatens to overheat the country’s booming housing markets, making it easier for home buyers to borrow and further driving up real estate prices.

A number of cities, including Toronto and others in Southern Ontario, Ottawa, Montreal and Victoria, were already under pressure with strong demand for homes and dwindling supply inflating property values.

But with the coronavirus spreading around the world and business activity slowing, the central bank slashed its key interest rate Wednesday to 1.25 per cent from 1.75 per cent in an attempt to keep the economy humming. That followed deep anxiety in public markets where investors sought protection in bonds, sending yields down.

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“The dramatic rate cuts and the related bond rally to record low yields will put housing on steroids,” said Douglas Porter, chief economist with Bank of Montreal. “This will probably override consumer caution related to the coronavirus, although there may be a temporary chill in activity due to those concerns.”

Realtors in the Toronto region say the market was active in January and February because of the shortage of home listings and growing demand. They say the climate is reminiscent of 2017, when prices were increasing rapidly and frantic buyers were making offers well over asking. The average selling price of a home reached $910,290 last month, a 17-per-cent increase over the previous year.

In the Niagara area, the benchmark selling price has nearly doubled over five years as investors have flocked to the U.S. border region because of the relatively low house prices. “Rate cuts typically increase interest and give buyers more buying power,” said Brad Johnstone, a realtor with Royal LePage who has worked in the Niagara region for more than two decades. “Low inventory and high demand are still fuelling a strong real estate market. … Prices keep going up,” he said.

In Montreal, the number of sales hit a record high last year and the area’s real estate board has said the city has entered a “phase of exuberance.” In Victoria, the benchmark selling price is up 4 per cent over the past year and the national housing agency, Canada Mortgage and Housing Corp., has said the region has a “high degree of vulnerability” because of accelerating prices and overvaluation.

In the greater Vancouver area, sales are rebounding dramatically and the average selling price is starting to rise again after housing policies slowed activity in 2018. “Demand has been picking up steadily and supply is low. Anytime that happens there is upward pressure on prices,” said the area’s real estate board president Ashley Smith, calling the rate cut helpful for buyers.

The federal Finance Department announced changes to its stress test last month for insured mortgages by making it more responsive to market mortgage rates, which have been falling. Some economists had warned that move alone could overstimulate hot markets.

Wednesday’s rate cut, the first since the oil crash in 2015 when the central bank reduced the key interest rate twice to ward off a recession, and the change in the mortgage stress test are expected to further stimulate the real estate market.

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“It will accelerate an already active market. … Multiple offers and competition are rampant across Southern Ontario and Ottawa,” said Christopher Alexander, Re/Max’s regional director for Ontario and Eastern Canada. “Even before this rate cut, mortgage rates were historically low."

Corinne Lyall, a broker owner of Royal LePage Benchmark in Calgary, said prospective home buyers are asking “Should I take advantage of this and how long do you think it will last?” Ms. Lyall expects the rate cut to give buyers an opportunity to lock in preapproved mortgage rates and get into the Calgary market, which has suffered from the oil slump and economic downturn.

The lower interest rate will make it easier for consumers to get a bigger mortgage, refinance their home loans and take out lines of credit. That is expected to drive up household debt, which is at a record high of $2.3-trillion and had been one of the Bank of Canada’s top concerns. In its statement announcing the rate decision, the central bank did not mention household debt or the real estate markets.

Consumers had been reducing their lines of credit since the Bank of Canada raised interest rates three times in 2018. The higher borrowing costs made it harder for consumers to service their debt, leading to an uptick in delinquency rates. Equifax said the Bank of Canada has given those consumers a temporary reprieve, but warned against loading up on debt on the expectation that rates would remain at this level.

“That stress should go down,” said Bill Johnston, vice-president at Equifax Canada. “Our concern is that they start to grow that line of credit again.”

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