Rate cut insurance against impact of oil price changes

Interesting times for sure at the WinnipegREALTORS® forecast breakfast last week. It happened to fall on the morning of the Bank of Canada interest rate announcement. Usually, since 2010 that is, the bank rate remains unchanged at 1 per cent. Not this time. And to add to the timing of this forecast breakfast, deputy-chief economist Benjamin Tal of CIBC World Markets was the messenger as well as the feature speaker who came on later in the program when the rate cut of 0.25 per cent had already been confirmed. The Canadian dollar dropped 2.3 per cent to $81.07 and the Bank of Canada lowered its forecast to the Canadian economy from 2.4 to 2.1 per cent. 

Prior to Tal sharing the news, WinnipegREALTORS® market analyst, Peter Squire, made a general comment about rates being historically low and in all likelihood will not be increased in 2015 as was heavily speculated up until the free fall in oil prices. So what does this all mean for Winnipeg’s housing market or other Canadian markets?

As Tal pointed out in his address to the 300 people gathered at this event, Canadians will not be motivated one way or another as they have been used to these low rates for some time now. It is when interest rates do go up that there will be more reaction and potential impacts depending on the extent of their rise. Tal said he thinks it will not happen until at least the second half of 2016. 

Fast forward to this week and one major bank is calling for another bank rate cut. TD Bank said the Bank of Canada may shave another quarter point off the overnight lending rate to 0.50 per cent. They then expect it to remain at this level until the second half of 2016.

Just to be clear here, the Bank of Canada Governor Stephen Poloz did not make this move to help homebuyers take advantage of another mortgage price battle among financial institutions.

Note: Royal Bank of Canada decreased its five-year fixed rate for qualified borrowers to 2.84 per cent. This is not surprising who started the price war as at the 2014 forecast breakfast it was noted the Royal Bank precipitated a rate cut back then to grab the public spotlight. 

Poloz’s stated position is the cut is insurance against the impact the drop in oil prices will have on the Canadian economy. He in essence wants to buffer or cushion the decline in household income due to job losses in the energy and other related sectors. He hopes by making the interest rates even lower it will be enough incentive to make more Canadians invest in the economy by finding better returns than leaving money in a savings account earning such meager yields.

WinnipegREALTORS® kept its forecast projection at a narrow range (0 to 2%) in keeping with what has actually transpired in the last few years. No reason to think any differently given low interest rates will prevail again in 2015. Steady as she goes, but market analysis reveals that we may get off to a better start this year given warmer weather and the surprise interest rate break for homebuyers. “The last few years we have being playing catch up, so it would be nice to get a better head start on the year,” said Squire.

It also needs to be said that Winnipeg is a model of consistency in direct contrast to other real estate markets which see much more variance in activity from year to year. In many respects, Winnipeg’s real estate market is more stable and reliable due to the economic foundation it is based on. Manitoba’s economy is resilient and has strength in so many sectors to spread the risk from any downturn. This was borne out when Canada went into recession in 2008. Manitoba performed much better than other provinces. So any talk about Winnipeg’s market being overheated is totally out of step with how our market performs and will continue to behave in the next few years.

A really salient point made by Tal at WinnipegREALTORS® forecast event last week was with low interest rates Canadians have been paying down their principal quicker than usual. This is happening despite all the talk of consumer debt. Even lower rates now will hasten this positive development.