A Rate Cut Cuts Both Ways

If you believe financial traders who bet on interest rates, the chance of the Bank of Canada lowering rates this Wednesday is almost a coin flip. If the Bank does bring down rates, it could goose the housing market even more.

As most of us intuitively realize, there’s an inverse relationship between interest rates and property prices. According to TD’s research, for example, a 50 bps reduction in the 5-year mortgage rate can lead to as much as a 15% increase in home sales nationally. That’s top of mind for policy-makers who are bombarded by headlines about how housing markets are “clearly detached from reality.”

Unfortunately, the Bank of Canada can’t tailor rate cuts by region. It can’t leave Toronto mortgage rates and Vancouver mortgage rates as-is while cutting them everywhere else. That’s why, if the Bank of Canada does stimulate the economy again by lowering rates, there’s a very real chance that the Department of Finance could act again to decelerate home prices.

The DoF has been looking at the possibility of raising down payments for a while, but credible sources say they could get more serious about it if the Bank of Canada were to ease again. Raising the minimum down payment is the most direct leverage policy-makers have at their disposal to keep our red-hot markets from boiling over.

If Poloz takes rates lower either this week or on September 9, our bet is that the Department of Finance takes some action in the months that follow. It could do it behind the scenes or it could announce a policy change like raising the minimum down payment to between 7% and 10%. Such a move would have immediate impact. According to a Maritz poll, 22% of buyers say they would not have been able to afford a down payment if the minimum required equity was 10% instead of 5%. Keep in mind that almost 70% of CMHC’s transactionally insured mortgages in Q1 had down payments less than 10%.

Such a policy change would take a sizable minority of buyers out of the market, outweighing any affordability improvement of lower rates. So this Wednesday’s rate meeting could get very interesting indeed.

  1. You want to fix affordability? Raise the down payment to 50%, no ifs and buts. My kids can’t afford to buy, even in New Westminster, BC, and I would gladly give up equity-on-paper in my home to improve their odds to live near me.

  2. lowering rates is a short term fix. it won’t boost manufacturing as this is not the 80s. the manufacturing sector is in decline.

    what it will do is make people go into higher debt. the ‘real’ life inflation is rising fast and as the dollar drops in value, the cost of living is getting higher. sure it might hold off the so called ‘soft’ landing of the housing sector…or should i say an implosion of the sector….but for how long.

    with china slowing and russia in an economic beatdown, the ham and putin money is on a standstill for the near term. it might be brewing into the perfect storm or maybe they can delay the storm until the election is over. eitherway, there are no sunny skys left in the long term forecast.

  3. Raising the minimum down payment affects the whole country and not just Vancouver and Toronto. Seeking easy solutions to complex issues can have serious unintended consequences. Assuming of course, that a problem exists in the first place, of which I am not convinced.

    In Latin I believe the phrase is: “Aegrescit medendo” (The cure is worse than the disease).

  4. to appraiser
    After 2 years of Latin, my teacher introduced us to that phrase. I responded that perhaps if the cure were not in latin, that would not be the case. I received a detention for that comment, and a subsequent D ( which fortunately was still a pass). Today, I find many economists speak a language similar to Latin, that I still fail in understanding.

  5. So when will we see 5 year fixes rates drop? they have been stuck at 2.50ish for a while now, would love to see them around 1.99%

    1. Hey Jason, The 5yr yield is trading down in the 0.60’s range today, not far from the all-time low. We may see some lenders cut fixed rates modestly by next week, barring any big rebound in yields.

  6. The rate cut (now realized) certainly does cut both ways. For variable rate mortgagors it means that they are building equity even faster than before.

    Of course that fact will never make the news. It’s all about “fueling the fire” and “gorging on debt” etc. etc. Why? Because fear and negativity always sells better than good news.

  7. Rate cuts will effect everyone in Canada including clients in Quebec, but rate cut or not people are still going to purchase, renew or refinance when the rate are high or low.

  8. With the U.S. poised to raise rates, wouldn’t it be likely that our bond rates (and fixed rates as a result) stay steady? What is the correlation between variables rates dropping and property sales?

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