What happens if the bank rate is cut again?

According to this news article on CBC, the Bank of America in predicting that the Bank of Canada may be forced to make further rate cuts later this year.

“Even as the Fed begins a gradual rate hike cycle this year, we think the Bank of Canada will remain accommodative, and will likely ease by another 25 basis points to 0.5 per cent if growth disappoints, as we expect”.

“Although the C$ will ease, the scope for persistent depreciation is limited given gradually recovering oil prices. In sum, the growth headwinds due to tighter financial conditions will handcuff the Bank of Canada in a state of continued monetary policy easing”.

With fairly low inventory and the prospect of lower rates – will this translate into increased prices and sales volume in Victoria? At what point will the market be “tapped out”?

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31 thoughts on “What happens if the bank rate is cut again?

  1. @Michael. You’re right that the return on the rental is likely better than just investing the $125k. But you’re not considering that the rental investment is actually $125k + the loss of space of the basement + cost and time to run the rental.
    Those factors are more difficult to value and I don’t want to get into another debate about suites, but they are there and need to be accounted for.

  2. You have to think a person spending 125K on a basement is going for HGTV suite, and could probably get $1500 plus per month or 14.5% return.

    Harder to get 7% now that the markets have run so far. I got 9% last year and 12% the year before after fees, however money managers are expecting some leaner years going forward with fixed income portfolios yielding negligible. The Dow for example is only up about 2% so far this year and Jan to May is normally the biggest returns.

  3. It isn’t going to be doing much to help her cost of living as she has to borrow the money for building the suite. The other option would have been to sell the house and invest the money. Unfortunately her idea of investing would likely be a savings account. And that’s why the suite option will probably be the way she’ll go. With rising maintenance and municipal costs, five years from now she’ll be in the same cash flow position as she is now.

  4. $125K in a well managed portfolio should be getting at least a 7% return … and that’s without having to “give up” your basement.

  5. Poverty aside, $125000 invested to make $1000 per month is a smart move. 10% return is much better than 1% in a bank.

  6. What would make you want to list your home?

    For those that have a paid off home or very little mortgage debt – nothing other than illness or moving close to your grand kids would make you want to sell. If you’re 65 and retired in Victoria, the odds are that you’ll likely die within 15 feet of where you are sitting right now.

    For others, it may be an opportunity to take an early retirement by downsizing or rightsizing to the Western Communities and becoming mortgage free a decade sooner than expected. A chance to do some traveling before having to drag an oxygen cylinder behind you. Especially for those Baby Boomers born after March 15, 1958. The boomers that got caught with high home prices and now have to work an additional 2 years than the boomers before them. The opportunity presenting itself is to take an early government retirement, sell the mortgaged Gordon Head home and move to the Western Communities where your grand kids live. Living in a new or newer home with little or no maintenance and without a mortgage, then banking those government pension cheques for the next 30 years.

    I doubt that the price differential will get any larger between the areas of Victoria and the Westshore. Most likely the difference will shrink as more people chose to live and work in their community.

    There aren’t many times in one’s life when you can have your cake and eat it too. This is one of them.

  7. For some the difference between being poor and being penniless is owning a home. For retirees that is likely amplified as they lose the ability to earn income through mental or physical frailty as they age. Their logic being that as long as they own a home, they’ill never be penniless. If the worst were to happen – they could always sell the home.

    But for some, it’s the house which is keeping them in poverty. For example, a 69 year old lady I spoke with last week is considering spending $125,000 on a basement suite in her $650,000 fully paid off home as she needs the extra rent income to pay her bills. Bills that are almost entirely attributed to maintaining the house. This lady has foregone much needed dental work, holidays and car repairs for the last decade.

    She lives in poverty so that she won’t be penniless.

  8. Few listings could be due to the age of the owners in the neighborhoods. Those in their 20’s and 30’s tend to move quite often while retirees stay put. And that seems to be mirrored in the months of inventory. As hoods with a higher average home owner age, like Oak Bay, don’t have the high turn over rate of inventory such as areas like Glandford.

    But home owners don’t live forever and neither do all of them keep their mental and physical health. Eventually they too have to move on to a care facility or to that forgotten urn in a closet beside a set of golf clubs.

    Since only half of the Baby Boomer population will make it into their 80’s the inventory should begin to climb due to estate sales. On my street alone, there have been three retirees that have made that final move up (down) the property ladder in the last 12 months. The ages of the home owners were 65, 69 and 81. Two of the homes still remain vacant and not listed for sale as the estates have yet to be settled.

    My advice is therefore to bike more and eat less fatty foods and you too may someday own a home in Oak Bay. Or compromise a bit and live in Gordon Head.

  9. Active listings are easy to explain….lower new listings with higher sales equals lower active listings.

    However, lower new listings I don’t know to be honest. For years around 2010-2013 HHV bloggers speculated all those that were not able to sell during the very slow market would eventually bring their homes to market flooding the market with inventory. Quite the opposite has happened.

    Reasons could be that there still hasn’t been enough improvement in the market from a pricing perspective for individuals to move up the ladder. A lot of young couples that got into condos are still under water and not going anywhere.

    Interest rates are still dirt cheap and the rental market is very strong; therefore, those with discretionary investment properties aren’t under pressure to unload.

    I had 11 applications for my unit at the ERA and some great applicants and I set the price at $50 higher than what I was hoping for when I bought the pre-sale last year.

  10. As StatsCan publishes the home ownership information every five years, it is hard to find current information through them. The CHMC regularly publishes “Housing Now Victoria CMA” (most recently: http://www.cmhc-schl.gc.ca/odpub/esub/64179/64179_2015_M04.pdf?fr=1432073146462) which is full of relevant data. The semi-annual “Housing Market Outlook” is a good data source.

    Leafing through a few issues of these from a range of years, it seem that the trend is that retirees in their 70’s and 80’s are holding onto their houses longer while more first time buyers in the 25 – 40 range are entering the market. Housing starts have outpaced population growth for quite a few years. This is why I’m wondering about market saturation.

    Interestingly, table 6 on page 30 of the “Housing Now Victoria CMA – March 2015” (link above) shows that in January 2014, the principal and interest payment on $100K of mortgage worked out to $595 per month. This dropped down to $567/month in March 2015 – a 4.7% drop. This clearly shows why housing sales prices jumped as interest rates dropped.


    There are currently 569 houses listed for sale in the Western Communities or nearly 4 Months of Inventory. New listings are being added at the rate of 1.6 for every house that sells. With half of the homes exposed to the market for 45 days before selling. This would be a market that appears to be transitioning from a sellers or bullish market to a balanced market between buyers and sellers with prices stabilizing. Year over year sale volumes are up 61% and the median price is up 9%.

    With 619 active house listings and 272 sold in the last 30 days, new listings being added at 1.46 to every house to sell and the days-on-market at 17, the detached housing market for the core is well into being a sellers or bull market which historically has meant rising prices. Year over year sale volume is up 29% and prices are up only marginally by 3%.

    My opinion is that the core has hit its price ceiling. Despite that the market is deep into a sellers market, median prices are not appreciating at a significant rate in the city districts. The high expense of core district housing has likely lead to a change in preference by prospective purchasers, from the core to the western communities, where house prices are 25 percent less costly. The marketplace is about alternatives and choices with prospective purchases choosing what is in their best economic interests.

    City planners in the Western Communities have indicated that there goal is to achieve more people working in the communities that they live in rather than commuting to downtown Victoria. They’ll achieve this by re-zoning and encouraging businesses and government offices to re-located to the western communities while discouraging commuter road expansion. And it’s working. BC Assessment has moved its boardroom facilities outside of the core as it is too difficult for their employees to arrive at meetings when they are stuck in traffic grid lock.

  12. Dave3 btw… I will stop signing as people can refer to the kitty avatar to distinguish me from the other Daves.

  13. Tuesday, May 19, 2015 8:00am

    MTD May
    2015 2014
    Net Unconditional Sales: 486 714
    New Listings: 898 1,509
    Active Listings: 4,046 4,672

    Please Note
    Left Column: stats so far this month
    Right Column: stats for the entire month from last year

  14. I believe the rise in ownership rates from 62% in 1981 to 69% in 2011 is mainly related to the median age rising from late 20s in 1981 to now above 40? It seems to make sense that a higher percent would naturally rent in their 20s, than would once they are in their 40s. Victoria’s 2011 reading was a 65% ownership rate.

  15. A concept that intrigues me (and I have no data to support any conclusion) is what is the “saturation point” for real estate sales in Victoria. At what point does the percentage of people who own (rather than rent) reach a maximum?

    Over the past ten or so years, the rate of ownership has been steadily increasing. Low interest rates have helped, as have low amounts of available listings. Both these factors lead to increased prices. At what point are potential buyers “tapped out”, deciding to forgo ownership?

  16. Even with seasonal bond variations, Canadian banks will have to follow suite with the US Banks, and the Federal Reserve in the US is hinting about a pending rate increase in the summer or fall. Thus, I expect that the traditional difference between the variable and fixed mortgage rate to “reappear”, as currently there is minimal difference.

  17. I’m not sure it matters which way bank rates go, before or after the election. From my studies on the subject, house prices typically increase with an accelerating economy and bank rates are intentionally held below price inflation to foster growth. That is until inflation were to get out of control like a 1980 scenario, which is nowhere on the horizon today.

    Greater Victoria’s real gross domestic product (the value of all goods and services produced) is set to rise by 2.1 per cent this year, the report said. It will be the first time growth is higher than two per cent since 2007, the year prior to the global financial crisis and start of the recession…The capital region’s economic growth is forecast to continue expanding into 2016, by 2.3 per cent, the report said.

  18. Although decisions by the Bank of Canada are supposed to be independent from the federal politics, I expect that it is very unlikely that an increase in the prime rate (affecting variable rate mortgages and HELOCs) will occur until after the October federal election. With pressure to increase the interest on fixed rate mortgages from the bond market, the variable rate mortgage may seem more attractive again.

  19. It’s confusing how US prices bottomed with bond yields in mid 2012. In fact at the same 0.6% as Canadian yields did in January of this year. Sort of miraculous that from mid 2012 to Sept 2013 bond yields in the US climbed 120 basis points from 0.6% to 1.8% and prices not only didn’t falter, they shot higher.
    I enjoyed reading v1.0, thanks for keeping it alive.

  20. “Complicating Canada’s economic picture is a high current account deficit, high consumer debt and an increasing yield spread between Canadian and U.S. bonds.

    Bond yields are already rising in Canada, with five-year Government of Canada bond yields up about 40 basis points in the last month. That could raise mortgage rates eventually, even as the central bank is forced to trim its benchmark rate, a move the Bank of America believes could come in October.”

    Nice new look, it was overdue for an upgrade.

    As the article states, expect mortgage rates to go up in Canada regardless of BOC’s lowering. This will dampen the bulls in a hurry as the banks will see this coming and tighten their lending rules without broadcasting it.

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