As many of you know the Bank of Canada lowered their interest rates a further 0.50% to the lowest lending level in over 50 years. The prime rates given by the banks quickly followed suit and now sit published at 4.49% at TDCanadaTrust, 4.30% on a variable rate, and 4.50% on lines of credit. The best recent past rate for variable was prime + 0.80% so that should translate into 3.80%. You may be able to get better than that if you negotiate well or have a very good mortgage broker working on your behalf.
Lowest Level Ever
The big question that must remain on people’s minds is where do rates go from here. The key lending rate from the Bank of Canada is 1.00% which is the lowest point it has ever been in the Bank’s history (since 1934). How much further could rates drop? To zero is the obvious answer and that was the tact the Bank of Japan employed when their economic/housing bubble burst in the early 90′s. It then sat there for around a decade while the country muddled its way through writing off bad loans, closing or consolidating operations, increasing efficiencies, and laying off staff. Interestingly enough one of the biggest problems Japanese corporations had was pensions and salaries of senior staff members (sound familiar Detroit?).
All the while the money became almost free to the general population and the people, for the most part, rejected it. Equity values continued to slide (stocks, bonds, real estate) and saving became a primary focus for the vast majority. In fact, the large amount of savings was actually a problem for the country as the Postal system (which also operates as a bank) became the largest holder of Japanese yen but was limited to what it was allowed to do with it.
Back to the Future
Will that be where we as a continent are headed? I don’t know. No one does. I do know that those who have borrowed in the past couple of years to buy homes and that did so on a variable rate mortgage are doing very, very well when it comes to monthly payments. On of my clients now pays 2.1%! That’s less than what his savings account or GIC pays him! Fortunately for the banks, there are few people who are paying such a low amount or they would go broke.
And that low payment is what I expect will be directly impacting the market today and in the near future. While we have definitely seen an uptick is business/busyness (some more deals, a lot more calls and showings) these lower payments serve to buy the most desperate of sellers more time. It also serves those who were less inclined to sell in that it induces them to rent their properties out as they can now be cashflow neutral or positive where they could not have been just a year ago. I would expect to see more properties come on the market for rent in the short term, rents to drop from competition and ability to accept lower rents (without being bled dry), and sales to increase.
Increased Affordability
Regarding sales increasing. This will be not just for the lower interest rates but also because of the time of year. I am not saying we are going to have a record setting spring but we are going to see a spring which will be much better than would have been predicted just a few short months ago. Low interest rates plus lower prices equals increased affordability. You can argue that it is a mirage based on low interest rates that this increase in affordability comes from. You can argue that if rates go up some people will be wiped out. You can bring up all sorts of metrics that show home prices need to come down a lot more to make sense to purchase. And you’d be just as right as the guy who will argue that interest rates could go lower and that home prices will stabilize for the foreseeable future or decline at a glacial pace (just as they did in Japan) so if you find a home you like and it is affordable to you then go buy it.
We Live in Interesting Times
And I am not sure if that is a good thing. I am not sure where we are headed or how to compare today’s market to the past just as I was unsure how to compare the bull market of the previous seven years to the bear market that preceded it. No one does. We keep saying “We have a new President” but he is not our President. And by “We” I seem to be refering to the world (estimated 2.5billion people watched Obama’s inauguration). There is such hope and optimism in a man who has been shown as a strong leader taking the helm of a ship that is on an unchartered course and throws up a pretty big wake whereever it goes. Is it the Titanic or the Queen Mary? All I know is that we here in Canada are a tugboat chugging along next to it; able to chart our own course and hoping we don’t get tossed aside in a wake or sucked down should she sink. And while our tugboat is rather small and humble in comparison to the majestic ship next to us with all of its pageantry and noise, it does run under its own power and is helmed by those who we trust have the best of intentions and abilities for us Canadians. And I do know that it us up to all of us on the good ship Canada to put our best efforts forth to make sure that we all head toward a greater place than where we are today.
Metaphor-filled literary effort over. We now return you to the no nonsense plain talk you have come to expect from me.
Vancouver, BC 