Real estate market illustration
by woodley
Bank of Canada announced target for the overnight rate unchanged, reaching 0.25% on 21st July, as predicted. Since the interest rate is so important for real estate market, we should look closer at our situation. Every move of interest rate means huge monthly payment change for all actual (if you don?t have fixed rate) or potential borrowers. And since mortgage is the most common way of acquiring a real estate property, any rate changes have impact on the market mood.
The situation now and then
BoC interest rate reached record low value 0.25% in April this year, following similar trend of FED, Bank of England and other central banks. With upcoming signs of financial and economic stabilization it is probable banks will undo some of their recent steps. The question is ? are there any signs of financial market stabilization in Canada? If yes, will it have impact on BoC interest rate and consequently on the real estate market?
The first answer is yes ? experts have noticed some positive trends in recent months. These are mainly related with improved funding conditions in financial sector. The need for liquidity, so intense in the autumn, is now lower now mainly due to constant deposit growth. Similarly, overall credit growth has dropped, so the overall pressure on liquidity dropped. Also funding conditions (the way in which liquidity needs are fulfilled) are improving. The atmosphere of fear 9 months ago almost froze the market; interbank funding spread and deposit notes spread (can be explained as the price of liquidity for banks) rose. These trends are now inverted.
When you look closer into BoC reports, you can see another signs. Term PRA transaction amount (Purchase and resale agreement, one of the tools bringing liquidity into system) from 13th July wasn?t fully used for the first time (only $2.25 billion out of $3 billion offered). However, the next transaction from 20th July was fully used again. Also the he diminishing utilization rate of insured mortgage purchase program may indicate these special programs being pushed back in the near future.
But let?s not misunderstand current situation. If Bank of Canada is going to do some steps back in upcoming months, it doesn?t mean we have monetary restrictions on program! BoC didn't acte exactly the same way as FED or Bank of England ? while these banks used mass tools to do quantitative easing, the only universal tool BoC have been using is the interest rate. All other steps taken are niche aimed precise hits, addressing concrete monetary issues.
The main policy attitude, represented by the interest rate, will probably remain unchanged as promised. We must have in mind two main forces, which press BoC to maintain low rate. It?s mainly the threat of deflation. For the first time in last 15 years, inflation level reached negative value (-0.3%). The second reason comes with CAD appreciation, which may become even more intense if any monetary restrictions are applied.
Conclusion
Market shows several positive trends, which may mean BoC will take the foot off the gas pedal. However, some sudden movements of interest rate are unreal at least till the next year. That means, Vancouver BC real estate will continue to gain advantage from the very affordable mortgages and proceed in recovery.