Marc-André Knot – Immeubles Gloria
The Bank of Canada's interest rate filters down into the economy by impacting the rate that people and businesses get from retail banks on things like savings accounts and mortgages. (David Kawai/Bloomberg)

Bank of Canada holds interest rate steady, keeps other stimulus taps fully open for now

Rate kept at 0.25% and central bank says it has no plans to slow down bond buying program. 

The Bank of Canada kept its trend-setting interest rate at the record low of 0.25 per cent on Wednesday, and signalled it plans to continue to do everything it can to stimulate the economy even as there are signs the recovery from COVID-19 is going better than expected.

The bank’s benchmark interest rate, known as the target for the overnight rate, impacts the economy by influencing the rates that people and businesses get at their banks for things like savings accounts and mortgages. Broadly speaking, the central bank cuts its rate to stimulate the economy by making it cheaper to borrow and invest. When it wants to slow down an overheated economy, the central bank raises its rate.

The bank slashed its rate shortly after the pandemic started in March 2020, cutting it by 1.5 percentage points in a few shorts weeks to give the economy stimulus to weather COVID-19.

The bank signaled a few months ago that it has no plans to raise its rate for another two years, and it reiterated that plan on Wednesday.

“We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 per cent inflation target is sustainably achieved. In the Bank’s January projection, this does not happen until into 2023,” the bank said.

In addition to cutting its rate, the bank also decided to try to stimulate the economy by buying up bonds, in a process known as quantitative easing. Buying bonds helps the economy by increasing the supply of money, as the bank releases cash into the system in exchange for bonds. And buying bonds also has the effect of making borrowing even cheaper, by pushing down the yield on those bonds.

No economists who follow the bank were expecting it to change its interest rate, but there was some speculation that the bank may slow its pace of bond buying from its current rate of $4 billion a week.

But the bank signalled it will keep buying up bonds for now.

“To reinforce this commitment and keep interest rates low across the yield curve, the Bank will continue its QE program until the recovery is well underway,” the bank said.

Royce Mendes with CIBC said the bank’s statement on bond buying makes it clear it wants to stay the course until it has a better picture of how the recovery from COVID-19 is unfolding. 

“The short statement seems to have taken a do no harm approach, kicking the can down the road until April to make any changes to the conditional commitment or pace of bond purchases,” he said. 

 

Other Resources

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on email
Email
Share on print
Print

Be in the Know

Want to get access to exclusive listings?
Receive regular updates on the market?
Access exclusive new content?

Subscribe to our newsletter to be in the know.

Canadian Bond Yields Soar, And It May Be A Drag On The Spring Real Estate Market

Canada’s government bond market is seeing yields surge, and it’s going to be felt in real estate. The Government of Canada‘s (GoC) 5-Year benchmark bond yield jumped yesterday. We know, we already covered rising yields just a few days ago. I promise this is kind of a big deal, and I’m not just harping on it.

Yesterday’s increase is noteworthy due to the sheer size. The daily move was big enough to drop mortgage borrowing power by over a point. Compared to last year’s low, mortgage sizes have rapidly shrunk, largely over the past month. This is likely to act as a cooling measure for the upcoming spring market.

Canadian Government Benchmark Bonds And Fixed Mortgages

If you read the bond article earlier this week, you can probably skip this. For those that didn’t, credit markets compete for the same investors. The yields rise and fall with demand for the instrument. Lower yields mean more demand, and higher yields mean low demand.

In plain english, the more investors want a bond, the less you have to pay them. The less investors want a bond, the more you have to pay them. It’s how the free market self-determines risk. The higher the risk of losing money, the more reward needs to be given to the lender.

It’s important to understand risk isn’t just related to someone’s ability to pay. It’s your ability to make a return. Today we’re looking at GOC bonds, a borrower that’s not likely to stiff you on the payments. However, risk does exist – and in this case, it’s inflation. If you’re making 0.5% on your loan, and inflation is 1%, you’re actually losing 0.5% in real terms. There’s few cases where you would accept a negative real yield, but generally it’s not sought after.

How does this relate to your mortgage rate? Mortgages compete with investors for capital. If the government is a better yield, investors would buy it over riskier products. The GoC 5-year benchmark bond is the example we’re looking at. It’s tied closely to the 5-year fixed rate, with experts estimating a 120 bps spread. It can be higher or lower, depending on what the market determines is appropriate.

Canadian Government Bond Jumps 47% In A Week

The Government of Canada’s 5-year benchmark bond yield made an unusual jump. The yield reached 0.94% on Thursday, increasing 20 bps from just a day before. Yields have now increased 59.15% from last week, more than doubled from a month before. It’s also about 3x where they were at last year’s low in August.

5-Year Government Of Canada Benchmark Bond Yield

The yield of a 5-year Government of Canada (GoC) benchark bond.

Source: Bank of Canada, Better Dwelling

Investors see the most risk since the beginning of the pandemic. Yesterday, yields made the biggest daily increase since March 17. This time is a little different, because in March it was only 6 days after the pandemic. At the time, people were in fear the economy wasn’t doing well. Now they’re most likely worried about too much stimulus and the economy doing too well. In other words, they’re expecting inflation to come fast. Much more than previously expected.

Higher Mortgage Rates Are Likely To Slow Real Estate Price Growth

I know, that has no meaning if you’re not in finance or real estate – so let’s look at an example. Let’s assume the average 120 bps markup applies to mortgage rates. Buyers yesterday will have lost ~2.2% in buying power from the previous day. From last week, it would be a ~3.8% drop, and a ~5.8% drop in borrowing power from a month before. It would also mean a ~7% decline in maximum mortgage borrowing power from the August low. 

In plain english, someone who would qualify for a $1,000,000 mortgage, would qualify for $930,000 after a 7% drop in power. That’s about the median after-tax income of households. Conversely, they got to borrow an extra year of their income on the way down, which helps explain prices.

Generally, borrowing power helps control liquidity. If homebuyers have fewer dollars to spend on a home, it’s harder for them to absorb price increases. Buyers would have to adjust their budgets, or spend more time saving larger down payments. The latter pushes purchases out, meaning fewer near-term buyers. It’s the opposite impact of lowering rates, and pulling purchasing forward. 

How long will this take to get down to the mortgage market? It’s anyone’s guess how long the full movement would take. The industry expects most lenders will increase mortgage rates by the end of today. They tend to do this more gradually than bonds though, increasing the spread over time.

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on email
Email
Share on print
Print

Be in the Know

Want to get access to exclusive listings?
Receive regular updates on the market?
Access exclusive new content?

Subscribe to our newsletter to be in the know.

Rental security deposits are legal, Quebec landlords’ association says

A Quebec landlords’ association announced on Wednesday that it thinks it has found a legal means to seek a security deposit from potential tenants, so long as that deposit is paid in a “free and voluntary” manner. But tenants’ rights advocates are already saying the Corporation des propriétaires immobiliers du Québec (CORPIQ) is simply trying to sidestep the law.

CORPIQ is basing its announcement on a rental board ruling in February that found the Civil Code provision outlawing security deposits could be waived if the would-be tenant freely decided to submit one.

The landlords’ group said it would propose its members include a form with a lease giving potential tenants the option of paying a deposit that would be used to cover unpaid rent or damage to the rental property.

CORPIQ said “the security deposit … would become a legal tool if it was offered as part of the alternatives offered to the tenant,” and that the number of complaints from landlords to the rental board for unpaid rent or property damage would be reduced if security deposits were collected.

However, two major tenants’ groups say CORPIQ has engaged in an “extrapolation” of the rental board decision that is “very worrisome.”

“The law is very clear: security deposits are illegal and they didn’t suddenly become legal overnight,” said Maxime Roy-Allard of the Regroupement des comités logement et associations de locataires du Québec (RCLALQ).

Roy-Allard said many tenants would simply agree to the illegal deposit, knowing that if they refused they would be denied a lease.

The same reaction was offered by the Front d’action populaire en réaménagement urbain (FRAPRU), which said CORPIQ’s interpretation would “incite landlords not only to ask for a security deposit, but even demand it.”

“We’re in a context where tenants are so desperate,” said FRAPRU spokesperson Véronique Laflamme. “Tenants have their backs to the wall at the moment. Many are ready to do anything to sign a lease. … It’s often not voluntary, but tenants have no other choice.”

That situation leads Laflamme to question whether any such consent would be given freely and voluntarily, especially when many tenants have no idea of their rights. She added that access to housing is already difficult, with tenants being discriminated against or simply unable to afford high rents.

Both tenants’ groups are urging the Quebec government to send a clear signal that would avoid a sudden wave of requests for security deposits.

Quebec housing minister Andrée Laforest declined to be interviewed on the subject.

But in a statement issued after CORPIQ’s announcement, the Régie du logement noted that a landlord “cannot solicit, claim or ask” for any money other than rent on the property.

The board acknowledged that the ruling cited by CORPIQ did allow a tenant to waive the ban on paying a security deposit, but that any such renunciation must be “clear, unequivocal and in circumstances where it could not be concluded there was a certain form of demand on the part of the landlord or of fear on the part of the renter.”

– Michel Saba – La Presse canadienne

Other Resources

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on email
Email
Share on print
Print

Be in the Know

Want to get access to exclusive listings?
Receive regular updates on the market?
Access exclusive new content?

Subscribe to our newsletter to be in the know.

Régie du Logement – Understanding the changes

The government adopted Bill 16 in December 2019 aimed to reform the co-ownership sector and the new Tribunal Administratif du Logement (TAL).

The legislative provisions relating to the TAL and the new rules of procedure will take effect on August 31, 2020.

Our collaborators at Therrien Couture Joli-Cœur prepared a document summarizing the main changes in the rules before the TAL.

Share on facebook
Facebook
Share on linkedin
LinkedIn
Share on email
Email
Share on print
Print

Be in the Know

Want to get access to exclusive listings?
Receive regular updates on the market?
Access exclusive new content?

Subscribe to our newsletter to be in the know.

Top