Canada’s slumping economy is leading some to speculate that the Bank of Canada will cut its interest rate from the already-low 0.75 per cent down to 0.5 per cent. Business economist Thomas Davidoff, an associate professor at UBC’s Sauder School of Business, discusses how a rate cut could affect housing markets.
Why might the Bank of Canada make this cut?
It looks like we may be slipping into a recession across the country, so it wouldn’t be surprising for the Bank of Canada to try spicing up the economy with a cut to their interest rate. The goal would be to encourage Canadians to spend more, while encouraging banks to lend more. Most credit card and mortgage rates are tied to the rates set by the central bank.
Will this affect hot housing markets in Vancouver and Toronto?
The downturn is largely caused by a slump in the oil market, which is mostly affecting Alberta, so Vancouver and Toronto are actually not feeling much of a downturn. Their housing markets clearly don’t need any help from a rate cut, but will nevertheless be affected if the central bank makes this changes which will affect the entire country. The cut should help first-time buyers, as they can more easily afford a lower rate on a mortgage, but on the whole it will push up prices – some would say to some uncomfortable highs. And if we think a housing bubble is developing – and I would say that’s possible but not clear to me – then the rate cut would likely exacerbate that.
So housing will become more expensive?
Not necessarily, as there are three competing factors right now: the economic downturn, the interest rate cut, and the Chinese economy, which could especially impact Vancouver. From a researcher’s perspective, it’s actually sort of a shame we’re seeing these happen at the same time, as it will be difficult to know what’s causing what changes to housing markets.
It’s hard to say what the impact of the slump in the Chinese stock market will be. If people in China are seeing their own country’s markets as a poor place to invest, then there might be more interest in investing in Vancouver housing. But on the longer horizon, if there’s less wealth in China, then Chinese buyers might put less pressure on the Vancouver housing market.