The Bank of Canada (BOC) interest rate has decreased by 1.25% as of March 4, 2020.
The rate was previously 1.75%, but on March 4, the BOC announced a drop of 50 basis points in light of the recent COVID-19 virus affecting business development and supply chains across the world.
What does this interest rate decrease mean for the Canadian real estate economy — specifically the spring real estate market?
Let’s explore.
Canadian Consumption is Stronger Than Expected
While the global economy is struggling under the recent business and trade threats, in Canada the BOC noted several positives.
Consumer consumption is up, they said in the March 4 announcement, and there is a healthy labour income growth. Residential investment is continuing to grow as well, though at a more moderate pace than earlier in the year.
However, business investment and exports are weakened and do not appear to be recovering as expected.
The BOC also noted other factors that are dampening economic activity — specifically rail line blockades, strikes by Ontario teachers, and winter storms in some regions.
Where will the local economy go as 2020 continues?
Changing Mortgage Stress Test Benchmark
At the same time as the BOC is decreasing interest rates, the Canadian government also announced a change to the insured mortgage stress test qualifying rate.
On February 18, 2020, Minister of Finance Bill Morneau announced that the benchmark rate used to determine the minimum qualifying rate for insured mortgages will be the weekly median five-year fixed insured mortgage rate from mortgage insurance applications, plus 2%, effective April 6, 2020.
This change was already widely predicted to bolster the spring real estate market. Will the interest rate decrease also help boost sales?
Spring Real Estate Market Effect
The Toronto Star reported that if the BOC did cut interest rates, it could push Toronto home prices even higher.
The Financial Post reported the same leading up to the March 4 announcement.
“The possibility of interest rate cuts from the Bank of Canada is likely to fuel further declines in mortgage rates and draw buyers into the market,” a March 3 article stated.
“People are not concerned about coronavirus, people are not concerned about recession,” John Pasalis, president of Toronto property brokerage Realosophy Realty, said in the Financial Post article. “The only things they’re worried about is buying a home — and if they don’t buy now they might spend more in the future.”
Share Your Thoughts
What do you think about the BOC interest rate decrease? How will it affect the spring real estate market, particularly in conjunction with the mortgage stress test changes?
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The next BOC interest rate announcement is scheduled for April 15, 2020. Read the full text of the March 4 release here: https://www.bankofcanada.ca/2020/03/fad-press-release-2020-03-04/
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