The Bank of Canada’s third interest rate cut in March is not expected to boost the country’s real estate market, which has slowed significantly over the past week along with the rest of the economy because of the COVID-19 pandemic.
“The rate cut won’t do much to stop the housing market from grinding to a virtual halt in many parts of the country as a result of social, physical distancing orders and or outright real estate industry lockdown,” said Robert Hogue, senior economist with Royal Bank of Canada.
After the first 50 basis point rate cut on March 4, major lenders responded by cutting their fixed mortgage rates with some offering deals as low as 2.29 per cent for a five-year fixed mortgage. (There are 100 basis points in a percentage point.) Mortgage brokers and lenders were flooded with requests for new loans, refinancings and renewals.
But after the central bank announced its second 50 basis point rate cut on March 13, major lenders including Bank of Nova Scotia, Toronto-Dominion Bank and MCAP started raising some of their fixed mortgage rates. One bank said their funding costs were increasing. Mortgage brokers attributed the higher borrowing costs to the rising risks for lenders to make loans with the economy falling into a recession.
On Friday, after the Bank of Canada’s third 50 basis point interest rate cut to 0.25 per cent, lenders were still expected to increase their fixed mortgage rates. If banks cut their prime lending rate, homeowners with a variable mortgage rate and Canadians with a line of credit would pay less interest on their loan. (The variable rate is tied to the lender’s prime rate.)
“Borrowers on floating rates can benefit directly from the Bank of Canada moves. But such relief is for now being swamped by the closure of much of the economy,” said Douglas Porter, chief economist with BMO.
The banks have been inundated with requests for mortgage payment deferrals as thousands of Canadians lose jobs and entire industries shut down.
Meanwhile, real estate activity in Toronto, Ottawa and elsewhere in Southern and Eastern Ontario had been strong up until early last week with properties fetching multiple offers and over asking prices. But as the number of coronavirus cases increase and job losses mount, sales and listings have been drying up.
“Some really need to buy or sell but everyone else is putting their plans on hold. A lot of buyers are reluctant to go out and look,” said Christopher Alexander, Re/Max’s regional director for Ontario and Eastern Canada. “There is more concern about jobs,” he said.
Vancouver, Victoria and other cities’ housing markets have also slowed, according to local realtors.
However, the rock-bottom interest rates – the lowest since the 2009 financial crisis – are expected to help the Canadian economy recover in the future.
“When the worst of the crisis has passed, rates are likely to remain low for an extended period of time, to help support a forceful recovery. And housing will likely play a big role in that recovery,” Mr. Porter said.
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