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Increased demand steadies housing market in Greater Vancouver

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Bank of Canada Lowers Key Lending Rate Again; April 21, 2009

Major Canadian banks follow suit; reduce Prime Rate to 2.25%.

The Bank of Canada lowered the overnight lending rate by 25 bps, enabling financial institutions to decrease their Prime Rate to a new historic low of 2.25%.

The Bank of Canada has announced today that it has revised its recovery expectations for the Canadian and global economy and will reduce its overnight lending rate by another 25 bps to 0.25%.  The BOC has also indicated that all indications point toward the rate to stay at this very low level until June 2010.  The major Canadian banks have quickly announced that they will be passing that reduction to consumers by reducing their Prime Rate to 2.25% effective Wednesday, April 22nd.  This will probably be the last interest rate cut by the Bank of Canada as the overnight rate is almost 0%; they are expected to announce their plan for quantitative easing on Thursday. The next rate announcement by the BOC if June 4, 2009. 

Garry Marr, Financial Post 

The latest rate cut means consumers buying a house can borrow for as little as 3% interest on their loan if they are willing to buy into the Bank of Canada's statement Tuesday that it won't be changing rates until June, 2010.

If you don't believe the bank will hold steady on its promise, you can lock into five-year, fixed-rate mortgages for as low as 3.85% on a discounted basis -- the lowest rate in Canadian history.

But all of that may amount to nothing when it comes to soothing a Canadian housing market in which new construction has fallen below 200,000 on an annualized basis for the first time in seven years. March existing-home sales were off 13.7% from a year ago.

"What is 25 basis points among friends? It's really nothing," said Benjamin Tal, senior economist with CIBC World Markets. "This is not something that is going to change the course of the market. It only helps at the margin."

Mr. Tal did say mortgage refinancings have risen dramatically in the past few months as Canadians who might have borrowed at 5.75% just over two years ago are ready to eat any interest rate penalty because a five-year rate mortgage is now so low.

The penalty to break an existing mortgage is the greater of three months interest or what is called the interest rate differential. The interest rate differential is the lost interest between your current rate and market rates.

Mr. Tal says while there is not much lower for variable-rate mortgages to go, the gap between short-term money and long-term money is still significant enough that the temptation is not to lock in.

"You might do better the first two years [of a five-year mortgage] but not the remaining three. I'm convinced long-term interest rates will rise. I can see [long-term] rising 200 basis points. These are emergency rates and at some point this emergency will end," says the economist.

John Turner, the director of mortgages at the Bank of Montreal says he's never seen anything like what is going on in today's market.

"There is a possibility of another drop," says Mr. Turner. "But does your tummy feel good about something that has a higher possibility of going up than going down any further."

He is convinced these lower rates will boost the housing market. The 13.7% decline in home sales in March was the smallest year over year decline in six months. "I think there is a segment of the market that couldn't afford a home before," said Mr. Turner.

Don Lawby, chief executive of Century 21 Canada, said while rates are declining, banks are getting tighter with how they hand out credit.

"If you are self-employed, the banks are demanding more documentation. Appraisals are getting harder too. It's not what you bought the house for but what it's appraised for," said Mr. Lawby, who also heads up a mortgage broker business. "There is not a lot of subprime out there for people with any credit problems in their history."

Quantitative easing Q&A with the BoC

FP Posted: April 21, 2009, 10:16 PM by Alia McMullen

With interest rates now at a record low 0.25%, the Bank of Canada has provided definitions of quantitative easing and credit easing on its website. 

What happens when the policy interest rate approaches zero?
"The traditional monetary policy instrument used by central banks to stabilize the economy and maintain price stability is the policy interest rate. When the policy rate moves towards zero, a central bank may consider using other tools to provide stimulus to the economy and achieve its inflation objective. This can include consideration of so-called 'unconventional' monetary measures such as quantitative easing and credit easing."

What is quantitative easing?
"Quantitative easing is the purchase by a central bank of financial assets through creation of central bank reserves. As a result, the price of the purchased assets (which can include government securities or private assets) rises and the yield on the assets falls. The expansion of reserves available to commercial banks also encourages them to increase the supply of credit to households and businesses.
In economic terminology, quantitative easing uses 'unsterilized' funding; in other words, the reserves of the central bank are increased to finance asset purchases."

What is credit easing?
"Credit easing is the targeted purchase by a central bank of private sector assets in certain credit markets which are important to the functioning of the financial system. The goal of credit easing is to reduce risk premiums and improve liquidity and trading activity in specific markets so that credit will flow and demand in the economy will expand.
Credit easing can be done on a 'sterilized' basis; in other words, there is no need to increase central bank reserves in order to undertake credit easing. If undertaken on an unsterilized basis, this amounts to combining credit easing with quantitative easing."

 Home sales in March 2009 returned to levels witnessed at the beginning of the decade, with 2,265 sales recorded across Metro Vancouver for the month, a 53 per cent increase over February but a 24.4 per cent decrease over March 2008, when 2,997 sales were recorded.

 Since 1999, March sales have increased 31 per cent, on average, over the month of February. March 2009 marks the second consecutive month that sales have outperformed the ten-year average for this month-over-month comparison.

 "There's more confidence in the housing market today than we were seeing late last year. Sales activity is rising to more typical levels given the season, and the number of homes being listed for sale is levelling off," said Scott Russell, president of the Real Estate Board of Greater Vancouver (REBGV).

 New residential listings on the MLS® declined 22 per cent in March 2009 to 4,385 compared to March 2008. This is the fifth month in a row that new listings have decreased year-over-year and the third consecutive month where those declines exceeded 20 per cent.

 Despite these trends, total active listings at the end of March 2009 had still reached14,579, a 19 per cent increase compared to the end of March 2008.

 "REALTORS® are seeing an increasing level of interest from first-time buyers who are attracted to low interest rates, good supply of housing, greater affordability, and a considerably lower overall cost of servicing a mortgage compared to recent years," Russell said.

 Sales of detached properties in March 2009 declined 19.6 per cent to 897 from the 1,116 units sold during the same period in 2008. The benchmark price, as calculated by the MLSLink Housing Price Index®, for detached properties declined 15.1 per cent from March 2008 to $649,342.

 Sales of apartment properties declined 28.8 per cent last month to 976, compared to the 1,370 sales in March 2008. The benchmark price of an apartment property declined 13.5 per cent from March 2008 to $337,099.

 Attached property sales in March 2009 decreased 23.3 per cent to 392, compared with the 511 sales during the same month in 2008. The benchmark price of an attached unit declined 11.2 per cent between March 2008 and 2009 to $420,563.

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