The Bank of Canada (BoC) is widely expected to cut its overnight rate this week, but it won’t boost real estate activity. That was the take from BMO Capital Markets, which sees little to no impact from the move. In a research note to investors, the bank explains that bond markets have already priced in lower rates and are currently delivering cheaper mortgages. They warn that the overnight rate needs to fall significantly before real estate markets see any meaningful boost.
Next Bank of Canada Rate Cut Won’t Boost Real Estate Activity
The market is calling a rate cut from the BoC this week, with slim odds of inaction. The move would deliver a 4.5% overnight rate, 0.5 points below the peak of this rate cycle. A cut to the overnight rate usually delivers easy credit, helping to boost demand. This isn’t one of those times.
“This week’s presumed Bank of Canada rate cut is still not going to provide much relief for Canada’s housing market,” explains Robert Kavcic, senior economist at BMO.
Canadian Fixed Rate Mortgages Already Providing Easier Credit
The bank’s skepticism may confuse some, but they have good reason. The market already reflects lower rates, and is currently providing significantly cheaper mortgage credit.
“We’ll reiterate what we said ahead of the first cut… that is, since the bond market has already anticipated to move, it has already been reflected in fixed mortgage rates,” notes Kavcic.
He adds, “And, those rates are meaningfully lower than the variable rates that will be directly changed by the BoC move.”
The overnight rate only influences variable-rate mortgages, whereas fixed-rate products are determined by bonds of similar length. The Government of Canada (GoC) 5 year bond yield directly influences the cost of the most popular mortgage product, a 5 year fixed-rate mortgage. The yield of those GoC bonds has plummeted over a point in the past year, providing serious discounts to those borrowers.
As a result, the gap between a variable and 5 year fixed rate mortgage is very wide. Lender data shows the average variable interest borrower paid 6.8% for new mortgage loans in May, just before the first cut. In contrast, a 5 year fixed-rate mortgage was 1.55 points lower over the same period. It’s easy to see why BMO anticipates little change from the next cut—the gap before the easing cycle began was equivalent to 6 cuts.
Source: BMO Capital Markets.
Even less surprising is how few households are opting for variable-rate mortgages.
“As it stood as of May, less than 10% of new mortgage lending in Canada was in variable-rate mortgages, with most borrowers having long moved to shorter-term or five-year fixed,” says Kavcic.
He concludes, “Like earlier in the summer, more meaningful affordability relief (and therefore juice for the market) will have to come from a more significant pricing in of future rate-cuts.”
Real estate bros keep referencing rate cuts as a coming stimulus but literally every real estate correction had falling rates.
Well Slick – how many have you witnessed in your lifetime? I was a real estate investor, builder and agent in all of these corrections. When rates rise substantially – prices go down. I save homes selling for $150,000 in 1981 sell for $45,000 3 yrs later. 1st mortgage rates went as high as 22% at banks from say 10% in 1980. This is a very soft landing we see now compared to the destruction in the early 80s. Even 2008 was not that bad in Canada. Asset values must maintain their values as banks cannot be allowed to fail. Government debt is being rolled over in huge amounts so rates have to come down – even to below real inflation to maintain bank and government balance sheets.
Abe, where does this lead to long term? How long can something like this even be sustained? Once the music stops, they’ll have create some new scheme to prop up the markets because otherwise it will be a cataclysm.
The economy in its current form appears extremely hollow. It’s principles are highly politicized and deviating strongly from those of liberal market economics. Correct me if I am wrong, but it does not feel like we are building a robust economy.
Still well above the BoC neutral policy rate. Credit should be restrictive at this level, and the fact the bond market is undermining this indicates state-introduced ease is present for select parties.
These guys have to start emphasizing there are separate markets throughout Canada. The lower priced markets in the prairies are more interest rate sensitive for especially the local buyer’s. Winnipeg, Saskatoon, Regina, Edmonton, Red Deer, Lethbridge and many areas of Central Alberta are affordable now and will be moreso as mortgage rates come down. I see multiple offer situations in these areas happening now with selling prices over asking being a common sight. Migration to these places is also happening at a record pace. Calgary gets all the attention but the above markets will give you a much better bang for the buck.
This credit tightening cycle is a couple years old, the coming loosening cycle will be too. The next 6-12 months could be a good time to buy as home prices likely continue to decline at the same time rates do too; 12-18 months from now house prices will have bottomed and be on the way up again; not so sure about condos though.
What I am talking about is Financial Repression continuing but at such a pace where it can bring on the feeling of wealth to more people in society by increasing asset values and righting everybody’s balance sheet. Cheap money, the ability to profit from economic activities and grow our economy is needed to uplift more people in our society. Building and producing what is needed to the point of almost over-production will moderate prices and make things more affordable. Private investment is the only way to do it and the government should stay out of the way as the only thing they can do well is build debt. What they must do is create incentive for private investment to create what is needed. The feds in Ottawa now are doing just the opposite and are throwing taxpayer dollars away like drunken sailors plus creating a totally hostile business environment. Private money – not taxpayer dollars should be harnessed to help get us out of this mess. The day of reckoning has to be put off as long as possible as total chaos is inevitable if we bring about a deep recession or depression right now.