Interest Rates; How Low Will They Go?
Athletes playing in venues with no fans, schools being shut down to mitigate the possible spread of germs, Tim Horton’s has cancelled their annual Roll Up The Rim contest under the guise of virus control and face masks in the general public have become the norm. Everyone is getting concerned with the Coronavirus and The Bank of Canada is no exception. Last week resulted in them having cuts their benchmark interest rate by 50 basis points to accommodate the shift in the markets. Canandian banks followed suit after the United States which cut 50 basis points the previous day following a G7 finance minister and central bankers meeting. Other countries have implemented the same steps to keep their economy in check with the focus being on growth.
Everyone and everything have been impacted whether directly or indirectly from the Coronavirus.
This 50-basis point cuts makes the new rate 1.25 %. Think about that rate; 1.25%. Anybody that purchased a home in the 1980’s can appreciate how surreal that number is (but that is a blog for another day).
The following is an excerpt from a recent release from The Bank of Canada “Before the outbreak, the global economy was showing signs of stabilizing, as the Bank had projected in its January Monetary Policy Report (MPR). However, COVID-19 represents a significant health threat to people in a growing number of countries; in consequence, business activity in some regions has fallen sharply and supply chains have been disrupted.”
We are impacted daily on a global scale as the full impact of the Coronavirus is realized. As the proverbial dust settles, we have no choice but to wonder if things will go back to ‘normal’ or is a ‘new’ normal on the horizon. As the fallout from the impact of the virus comes full circle, the expectation is that business and consumer confidence will continue to deteriorate further.
The Bank continues to closely monitor economic and financial conditions, in coordination with other G7 central banks and fiscal authorities,” said the Bank of Canada.
“But the Bank wisely concluded that whatever outlook they previously had for Canada had deteriorated meaningfully given the global slowing, the hit to commodity prices, and the inevitable hit to confidence domestically,” said Shenfeld in a research note. This was a reasonable first step to encourage continued growth and attempt to offer stability and an unstable time. Any future steps will be contingent on how the presence of the virus plays out and where. Up to this point, Canadian exposure has not been on the forefront but that seems to be changing daily as the number of cases are climbing daily and the first Coronavirus related death has been reported within our borders.
With the change of season often comes a natural change in the housing market. Real estate markets in larger cities like Toronto and Montreal were already heating up ahead of the typically busy spring buying season. The lowering of the interest rate on the housing market is equivalent to throwing gasoline on a fire. It is fuel for the housing market. More people will be looking to take advantage of the low rates and get into the market. More people looking means fewer houses to be had and those that are on the market people are willing to pay more to close the deal. This dynamic is always good news if you’re a seller, less so for buyers. “With home sales continuing to soar in the GTA as reflected in today’s TRREB market report, the Bank's rate decision will continue to pull more buyers into the market, which is good news in light of current global economic concerns,” Alexander told Yahoo Finance Canada.
Low interest rates on moderately priced homes sounds like a great deal. Low interest rates on an average home with the above-average prices that are attached to them in the current market seems less so. This almost seems like it would fall into the same category as a cheap home with high interest rates like we saw in the 1980’s. The latter two often result in people having to take the chance and to put themselves in a position where they are potentially one or two pay cheques away from being homeless. Any upwards shift down the road in the interest rates for those buying those average homes with the above-average price tags could be catastrophic in that they could push their housing costs beyond what their budgets will allow. For many millennial's they have no choice but to take the risk if they want to buy that first home...a scary decision that I for one am grateful to not have to make. My kids on the other hand.........