Low mortgage rates contribute to housing affordability

The move by the Bank of Canada to lower its trend-setting bank rate by 0.25 percentage points is a boost to housing affordability, according to industry experts.

“The Bank of Canada signalled that interest rates will remain very low for possibly well into next year,” said Sal Guatieri, senior economist for BMO Bank of Montreal. “With interest rates at historic lows, housing affordability should remain highly attractive for a very long time.”

The Bank of Canada lowered its benchmark overnight lending rate by one quarter of a percentage point to 0.25 per cent at its setting on April 21. The trend-setting bank rate, which is set 0.25 percentage points above the overnight lending rate, declined to 0.5 per cent.

“This new round of rate cuts presents a great opportunity for those looking to purchase a home," said John Turner, director of Mortgages for BMO Bank of Montreal. 

The Bank of Canada has repeatedly lowered its policy interest rate to support economic growth. Since December 2007, the bank has cut its overnight lending rate a total of 4.25 per cent. Major Canadian chartered banks lowered their prime lending rate in lockstep with the Bank of Canada’s most recent interest rate cuts.

“Resale housing activity began stabilizing in the first quarter of 2009, thanks to improving affordability,” said CREA chief economist Gregory Klump. “Lower prices and an extended stretch of low interest rates will further support sales activity this year and next. 

“In the economic recessions of the early 1980s and 1990s, resale housing activity bottomed out before the overall economy did. As then, home buyers this year will continue being drawn to market by improving affordability,” he added.

The Bank of Canada acknowledged the global economic recession had intensified, especially in manufacturing-reliant Eastern Canada, since publishing its previous economic forecast in January. 

“In an environment of continued high uncertainty, the global recession has intensified and become more synchronous since the bank’s January Monetary Policy Report Update, with weaker-than-expected activity in all major economies,” said the bank when it again lowered interest rates on April 21.

In its announcement, the bank indicated that it was done cutting rates now that its benchmark overnight lending rate has been dropped to what it described as “the effective lower bound for that rate.” 

In a departure from the status quo, it did not lower the deposit rate, which is the rate of interest paid on deposits held by financial institutions at the Bank of Canada. Leaving the deposit rate unchanged at a quarter of a per cent further adds much needed liquidity into the financial system.

“The bank was unusually explicit in its language about holding its key interest rate at its rock bottom, now that it further downgraded its inflation outlook,” said Klump. 

“By saying ‘the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target,’ the bank has removed any guesswork for projections as to how long it will be before interest rates can be expected to begin rising.”

The bank revised its forecast downward for economic growth in 2009 and 2010. It also extended its forecast as to how long Canada would remain in an economic recession. According to the Bank of Canada, the Canadian economy is projected to contract by three per cent in 2009, while the economy is projected to grow by 2.5 per cent in 2010 and 4.7 per cent in 2011, and to reach its production capacity in the third quarter of 2011. 

“For the second time this year, the bank revised its economic forecast downward, making it more downbeat than the most bearish of private-sector economic forecasts,” said Klump. “The bank economic growth forecast for 2010 was also cut, but it remains rosier than the current consensus.”

While many Canadian cities will experience negative economic growth, a recent Conference Board of Canada report said Winnipeg's economy will be among the few with positive growth.

The Ottawa-based think tank forecasts the Winnipeg Census Metropolitan Area (CMA) will have real GDP growth of 1.1 per cent this year, according to its Spring 2009 Metropolitan Outlook report.

On the other hand, seven of the 13 cities covered by the report will experience negative growth.

The Bank of Canada’s Monetary Policy Report  to be published later this week will lay out the framework for additional monetary policy tools it may use to further inject liquidity into the financial system in its ongoing attack against the continuing credit crunch.

When the Bank of Canada cut interest rates on April 21, the advertised five-year conventional mortgage rate stood at 5.45 per cent, according to CREA. This is down 1.54 per cent from one year earlier, and 0.34 per cent below where it stood when the bank made its previous interest rate announcement on March 3.

After the recent announcement, some mortgage lenders announced 0.25 per cent reductions in their three- and five-year variable mortgage rates.

The ongoing credit crunch has led mortgage lenders to reduce discounts on advertised mortgage interest rates, and in some cases these have been completely eliminated.