First National Financial LP

Residential Market Commentary - Coronavirus treatment has side effects

  • First National Financial LP

The Coronavirus and the broader economic concerns around the world have seen the Bank of Canada make two, 50 basis point cuts in its benchmark interest rate in the last two weeks.  It now stands at 0.75%.  And it is very likely to go lower.

The emergency rate cut on Sunday that dropped the U.S. Federal Reserve rate to, essentially, zero all but guarantees the Bank of Canada will cut rates further.  Market watchers predict the overnight rate will drop to 0.25%, and that could happen at any time. 

The cuts are part of a larger tool kit of measures being unpacked to support the broader economy as the Coronavirus pandemic spreads.  One of the tools that will not be used, though, is the easing of the mortgage stress test.  And there are mixed reactions to what all this means for the housing market.

The most predictable reaction is: hot markets will get even hotter.  Lower interest rates tend to improve affordability and draw more buyers into the market.  Given the tight supply of housing across the country, though, it seems certain there will be renewed price acceleration.

Commenting on the first 50 bps cut made on March 4th, Phil Soper, CEO of real estate giant Royal LePage speculated it could act as a “relief valve” for overheated markets which have seen a lot of “pent-up” demand.  In an interview with the Financial Post he was not explicit about how the relief valve would work, but he hinted at a possible increase in housing supply.

On Friday the 13th, during the announcement of the emergency 50 bps cut, Bank of Canada Governor Stephen Poloz made it clear the BoC’s concerns about the housing market have been overtaken by worries about the Coronavirus.  But, during the announcement of the March 4th cut, Poloz said that move could help stabilize the housing market.  He cited declining consumer confidence in the overall economy as a factor that could have led to a housing market slump.

However, those same consumers could just as easily stay away.  Social distancing, self-isolation and fears of a recession could see purchasers putting their buying plans on hold.  The stock market plunge has stymied many people who were working to build their down payment through investments.

The potential decline in buyers and forecasts of a recession already have some sellers rethinking their plans.  An absence of multiple offers and fears that the value of their property may be declining could delay plans to sell, or even see properties taken off the market, further tightening supply.