Mar 6, 2020 - Bank of Canada Governor Stephen Poloz attempted to ease concerns yesterday that lower interest rates will further stoke overheated housing markets.

Poloz argued this week’s rate cut was needed to combat the risks posed by the current global health crisis, adding that the easing will in fact help stabilize housing markets.

“Not surprisingly, the threat to the global economy of COVID-19—the coronavirus—played a central role in our deliberations, and we are coordinating actively with other G7 central banks and fiscal authorities,” he said in a prepared speech on Thursday.

The 50-bps rate cut was in stark contrast to the cautious “wait-and-see” approach that the Bank had previously adopted as it held rates steady while dozens of central banks around the world were cutting rates to head off growing economic headwinds. This week’s rate move also flew in the face of Poloz’s own fears about further stoking heated housing markets.

Just two months ago, Poloz told BNN Bloomberg: “Should this housing rebound continue, we will be watching for signs of extrapolative expectations returning to certain major housing markets—in other words, froth…It can be very unhealthy when the situation becomes speculative.”

But extraordinary times call for extraordinary measures.

“…Risk management demands a prompt and sizable policy response to larger shocks to ensure that the economy remains well anchored. Governing Council agreed that the downside risks to the economy today are more than sufficient to outweigh our continuing concern about financial vulnerabilities,” he told a Toronto audience.

“Indeed, declining consumer confidence would naturally lead to reduced activity in the housing market. In this context, lower interest rates will actually help to stabilize the housing market, rather than contribute to froth.”

Capital Economics’ senior economist Stephen Brown hinted at this in a research note published last week.

“While [the Bank of Canada] has been worried about the effects of looser policy on house prices, it may become more welcoming of a further boost to housing wealth if equity values continue to plummet.”

That seems to be Poloz’s thinking. Even if people are losing confidence (and money) as a result of rising coronavirus infections and plummeting stock markets, they can at least be reassured that the value of their home is continuing to rise (so long as you’re not a first-time buyer looking to enter the market).

“Further, we expect that the B-20 mortgage lending guidelines will continue to improve the quality of the stock of mortgage debt,” Poloz added.

Remember, these are the same lending guidelines (for uninsured borrowers) that OSFI is proposing to loosen as early as this spring, pending a review of public consultation.

More Cuts Are on the Way

While Poloz is defending the Bank’s larger-than-expected rate cut this week, the easing is still far from done, at least as far as the markets are concerned.

Canada’s 5-year bond yield continued to fall on Thursday, coming within 0.36 percentage points of its all-time low. The continued panic over the growing fallout of COVID-19 has markets pricing in up to 75 bps of rate cuts by October, with the next cut coming as early as April.

By the time all is said and done, this week’s 50-bps rate cut may look like just a warm-up.

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There could be a spike in mortgage applications in the third quarter if a rate forecast from the British Columbia Real Estate Association is realized.


The association’s economists are expecting interest rates to ease during much of 2019 as weaker economic conditions force a hold-steady from the Bank of Canada.


If 5-year bonds maintain their current level, there should be a move for the 5-year qualifying mortgage rate, which has not moved for almost a year.


Their forecast calls for 5-year qualifying mortgage rates to fall from 5.34% in the first quarter of 2019, to 4.99% in the second quarter, and reaching a year-low of 4.84% in the third quarter.

Rates are then predicted to climb to 5.15% in the last quarter of 2019 and early 2020 before plateauing at 5.34% for the rest of 2020.


The 5-year average discounted rate is set for a drop to 3.44% in Q2 2019 (from 3.60% in Q1), then a low of 3.30% in Q3 before climbing back to 3.44% in Q4, 3.64% in Q1/2 2020, and 3.74% in Q3/4 2020.

BoC to cut rates?


There are some economists predicting that the BoC may actually cut rates in 2019 rather than just maintain their current level.


However, BCREA’s economists do not expect this, favouring a rate freeze in their outlook.


The outlook also notes that longer term, when the BoC moves towards a ‘neutral’ interest rate, its stated intention, the corresponding hike in the level at which mortgage borrowers are stress-tested will make that policy unsustainable under its current methodology.

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Financial experts say most Calgarians won't feel much pain as the Bank of Canada hikes its key interest rate to 0.75 per cent, the first increase in seven years.

 

"It's not going to have anywhere near the impact that a lot of people are afraid it will," financial advisor and educator Tammy Johnston told CBC News on Wednesday.

 

"If people are dealing with a variable rate mortgage or a line of credit, for $300,000, it is only going to increase their monthly payment by $37. While nobody wants to pay more, that isn't that much."

Johnston says, perhaps more importantly, consumers need to take a hard look at their monthly bills to find far greater savings.

 

"I can still have the lifestyle I want but reduce my spending on things that I don't want, don't need or wasn't even aware of," she said.

 

"That is a better long term strategy than getting all worked up about interest rates."

 

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