Rate cut by Canada's central bank fuels housing bubble fears
Last Updated: August 04, 2015
Canada's central bank has reduced its overnight lending rate to 0.5%, from 0.75%, to counterbalance slumping oil prices. In response, several Canadian banks have cut their prime rates.
Toronto-Dominion Bank has cut its prime lending rate by 10 basis points to 2.75%. Royal Bank of Canada, TD Bank, Bank of Montreal, Bank of Nova Scotia and Canadian Imperial Bank of Commerce have cut also their prime lending rates by 15 basis points.
The rate cut has come at a time when real estate markets in Canada are already overheating. The cut will lead to increased borrowing, which will result in faster property price growth.
This is the second lending rate cut by the Bank of Canada this year. The central bank surprised economists in January when it reduced the rate to 0.75%.
These interest rate cuts were followed by the highest number of monthly sales for several years in May and June, according to the Canadian Real Estate Association (CREA). there were 56,839 transactions by CREA members in June, up 11% from the same month last year.
Home prices in Toronto and Vancouver continue to surge. The average cost of purchasing a condo, townhouse or low-rise property in Toronto has jumped 38% during the five years to June, according to the Canadian Real Estate Association.
Credit agency Fitch Rating, however, says that the decision by the central bank to reduce its overnight lending rate by 25 basis points will not have much impact on borrowing.
“Given the current rate environment, which has been at near-record lows for several years, Fitch does not expect the rate cut to have much impact on market mortgage rates, or on affordability for current borrowers,” the company said in a release.
Despite this, Fitch says it believes the Canadian housing market is still 20% overvalued, with what it described as “modest variation” across provinces.
“However, a number of positive market factors are expected to moderate any negative price pressure. Most importantly, the Canadian mortgage market does not have significant exposure to riskier mortgage products that would be at high risk of default,” said Fitch.
“Expect a soft landing nationally, where the price growth that has characterized the country’s housing markets for more than a decade will abate, with modest declines to follow,” the company said.