September 10th - 2010

ON THE MARKETS: Lending rate hike won’t greatly impact real estate market

When the Bank of Canada (B of C) raised its overnight lending rate by 25 basis points in July, it sent fear into the hearts of many would be home buyers.

When the Bank of Canada (B of C) raised its overnight lending rate by 25 basis points in July, it sent fear into the hearts of many would be home buyers. However, the opinion of some of Canada’s top financial experts is that the lending rate hike has had very little impact on the real estate market.

In its announcement the B of C said, “The global economic recovery is proceeding but is not yet self-sustaining. Greater emphasis on balance sheet repair by households, banks, and governments in a number of advanced economies is expected to temper the pace of global growth relative to the Bank's outlook in its April Monetary Policy Report (MPR).”

The Bank’s press release cited economic factors including inflation, employment growth and global uncertainties as reasons for the rate increase. The release also stated that the decision leaves considerable monetary stimulus in place to achieve the bank’s two per cent inflation target and that any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

Here’s what some of the experts had to say about the rate hike:

Mortgage broker David O’Gorman says, “While the prime rate has gone up, longer fixed term rates have come down 10 to 20 basis points with mortgage lenders. This is good news and suggests a B of C directed change towards more stability in the residential real estate market. The rate change itself should have little effect on the market. If we have too many more in succession, however, we should be very concerned.”

O’Gorman also cautions, “The US – our neighbour and largest trading partner – is still in extreme circumstances. The overall economy and specifically their real estate markets have not settled down. While Canada's economic activity has been the envy of the Western world, expect it to slow down a bit. Basically, if everyone but you in your office has the flu, no matter what precautions you take, chances are you will catch it soon.”

Barry Lebow, broker, appraiser and educator says no one should be surprised by rising interest rates since the government and economists keep saying rates are going up. He predicts rates will hit 7 percent within the next year. “We have to remember that we functioned for years with rates between 10 and 12 percent. But interest rates have been artificially low for a long time now.” Lebow says he doesn’t see higher interest rates hurting the real estate market. “In fact when the market shifts, it will be the better salespeople who will benefit. The competition will change because many part timers will leave the arena making room for the professionals to compete on what they do best. The public will start demanding more of REALTORS® and the ones who can provide the better service will do well.”

In a report by TD Economics, senior economist Pascal Gauthier states: “While the Bank of Canada raised its overnight rate by a quarter-point on July 20, typical five-year fixed rates stabilized in early May and have actually decreased by about a quarter-point since then. It comes as no surprise that the housing market continued cooling from the record levels of activity established last year. After improving markedly in 2008, home affordability eroded significantly in 2009. With the typical lag, this is naturally slowing the pace of sales. Nonetheless, the housing market slowdown should be cushioned by an improving employment and income picture. The level of interest rates remains quite supportive of sales activity, and rising interest rates would only occur against a stronger overall economic backdrop.”

Canada Mortgage and Housing Corporation (CMHC ) Ontario Regional Economist Ted Tsiakopoulos, says, “For those households committing to a variable rate mortgage, the cost of borrowing has increased in light of the Bank of Canada hike in the overnight rate. However, most prospective buyers in recent months and over time have preferred long term mortgage rates. With uncertainty surrounding the global economy coming back to the forefront, long term interest rates have been dropping recently. On net, the interest and mortgage rate story has been a positive development for the housing market in the last couple of months. Also, a number of prospective buyers have brought their purchases forward into the early part of 2010 to avoid higher mortgage carrying costs and new policy changes. As a result, less first time buyer demand has dampened sales in recent months. This story will likely continue until year end at which point improved affordability will boost sales and enable prices to stabilize through the course of 2011.”

Finally, mortgage broker and author, Peter Kinch said in a recent press release. "Often consumers are confused when they hear about a rate hike. They think that interest rates are going to sky rocket, making housing unaffordable. The rate increase is a warranted response to our strong economy, and we will see the prime rate rise as a result. But Kinch cautions consumers not to confuse the prime rate with long-term fixed rates. "The last time rates moved, we actually saw the long-term rates fall the day after the announcement."

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Ontario Real Estate Association

Jean-Adrien Delicano

Manager, Media Relations

416-445-9910 ext. 246