The Bank of Canada (BoC) has lowered its key overnight bank lending rate by 25 basis points to 0.25%. The Bank of Montreal, Royal Bank of Canada, CIBC and TD followed suit shortly after the announcement and lowered their prime rate by the same amount to 2.25% (see National Post).
While market analysts and participants were generally expecting a rate cut, they were also somewhat surprised by the amount of transparency shown by the Bank of Canada in their rate cut announcement: The Bank said it will leave the overnight rate at 0.25% for the next year to stimulate the economy out of recession.
Normally the Bank wouldn’t provide public statements (or guidance) about its expected future rate decisions any further out than the next scheduled rate announcement. The new higher level of guidance provided by the BoC is part of the Bank’s ground work for unveiling its updated framework for quantitative easing (watch for a further announcement on this from the Federal Government on Thursday).
What is quantitative easing?
That’s a topic that’s worthy of its own post — that said, in broad terms, central banks (such as the BoC) have various tools at their disposal to influence the supply of money that’s available to banks, businesses and consumers — their policies are mostly influenced by business and economic cycles.
During recessionary periods the central banks tend to look to stimulate the economy by making money and credit readily available, which in broad terms is referred to as quantitative easing. The “quantitative” speaks to the supply of money, the “easing” refers to easier access to credit and money. The “easing” also refers to the opposite of what the central banks do during inflationary (growth) times in the economy: they aim to restrict the supply of money in the economy to moderate inflation which is often brought about by high levels of spending. Okay, that’s enough of an economics lesson for today! 
The effects on real estate:
Interest rates were already at all time lows prior to the BoC’s announcement this morning. The real estate market in Greater Victoria has seen significant increases in sales volumes since January (see posts from February and March, with April sales already over 400), most of which has been attributed to extremely low interest rates combining with decreased average prices levels to drastically increase the level of affordability for home buyers: The prevailing interest rates levels have reduced monthly mortgage payments by hundreds of dollars for home buyers. While the bulk of the sales in Greater Victoria have been in the entry and mid level markets, we are also seeing increased sales over $1,000,000 (click).
Given that buyers already appear to have returned to the market prior to this morning’s rate cute, we expect the decrease in prime rates will further support increased market activity, especially in Victoria and elsewhere in B.C.
“But there’s a recession”
One of my mantras on this blog is that real estate markets are highly regionalized. In this morning’s rate cut announcement the BoC stated that the rate cut is intended to stimulate an economy expected to be in recession longer than expected (until at least 2010).
Although Victoria is not completely immune to the effects of the recession, the local economy is far different than those found in Ontario and Alberta — in a nut-shell, Victoria has a diverse economy (Government, Department of Defence, Information Technology, Tourism) that isn’t as reliant on trade with the economically depressed United States as Ontario (manufacturing) and Alberta (oil) are.
Please remember that I did not say we are independent of trade with the United States, we do rely on trade with the U.S., just not as much as Alberta and Ontario. Given that those regions have the bulk of the Canadaian population they also tend heavily influence Canadian monetary policy decisions, including the BoC’s decision to lower rates again today. With a (relatively) stronger economy, this is great news for the local real estate market! Did I mention the amazing quality of living we enjoy on the west coast?
Maybe it’s the clean air, the ocean or the mountains, or perhaps it’s the diverse economy, but British Columbia’s real estate markets are also benefitting from increased migration, both from within Canada, and internationally. B.C. had a net increase of 73,000 people to its population in 2008, with almost 18,000 of those coming in the last quarter alone (Statistics Canada click).
Please let us know if we can refer you to a great mortgage specialist to illustrate just how affordable real estate is at these historically low interest rates!
Thanks for reading, please contact us for all your real estate needs in Victoria.
Decreases to fixed rate mortgages range from 5 to 20 basis points (bps) with the 5 year fixed rate decreasing 10 basis points. Variable closed rates remain unchanged.