Will interest rates drop (again) next week?

In one week the governor of the Bank of Canada (BOC), Stephen Poloz, is due to release the Interest Rate Announcement and Monetary Policy Report. Until a few weeks ago, it seemed unlikely that the rate would be adjusted – but now with Greece teetering on the edge of insolvency, the Chinese stock market collapsing, and strong hints (from Bank of America and TD Economics and others) warning Canada is already in a recession – so it seems possible that the BOC will trim it’s overnight rate again next week.

The BOC last dropped the overnight rate by 0.25% on January 21st 2015. The lenders absorbed some of the rate drop for themselves, passing on a 0.15% variable rate drop on to mortgage borrowers. In order to remain competitive, fixed rate mortgage rates have also dropped – although there is gentle upwards pressure building in the international bond market (which is how fixed rate mortgages are financed).

Of course, there’s only so much money that people can afford to spend on a mortgage – so could another drop in variable mortgage rates really affect Victoria property sales volumes and prices? Are property buyers already “tapped out” and cannot afford any more?  What do you think?

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46 thoughts on “Will interest rates drop (again) next week?

  1. Pingback: A drop in the bucket | House Hunt Victoria

  2. It would be quite the turnaround story (from a couple years back) if Victoria places #1 for 2015 Teranets.

    We’ve now pulled into second place for year-to-date 2015:
    Van 5.55%
    Vic 4.13%
    TO 4.03%

    Even if we don’t quite double the 4.13% in the last half of the year, 8% is not too shabby. As Jack posted, we have a lot of catching up to do.

  3. After accounting for inflation, all those properties – except the Fernwood home – have sold for less than they were purchased for …

  4. Calgary experienced one of the highest rates of growth for prices of repeat home sales in June …

    From the same article, “The Teranet — National Bank National Composite House Price Index said prices in Calgary rose by 2.5 per cent month-over-month following a record monthly drop of 3.3 per cent in May”. By my calculation, that would still be 0.8% down from April. Not as rosey as it seems in Calgary …

  5. Just imagine if that interest were compounded! That would be 36% per year and in 5 years a $500K house would be worth a cool $2.3 million. Affordability be damned! 😉

  6. This does seem to be a narrow focused marketplace with some properties increasing and others declining.

    A townhouse in View Royal selling for $35,000 more than it did a decade ago in March 2006.

    A mansion in Garden Gate Estates that sold for 1.1 M in 2008 now sold for 1.2 M

    A 1970’s basement entry home in the Tillicum hood that sold at $526K in May 2009. Re-sold today $568K

    A retirement condo in Central Saanich bought November 2004 at $244K and just re-sold at $248K

    A 1990 Fernwood home bought September 2005 at $373K and re-sold at $525K

    A 2008 condo on Johnson bought March 2011 at $305K. Re-sold at $289K

    A condo at Shutters in the Songhees bought March 2008 at $485K and sold this week at $445K

  7. Agreed David, the neighborhood is aged with open culverts and not like it’s the newest house in an old South Oak Bay neighborhood. That’s also a very congested area to get in and out of. Definitely not worth $700K.

  8. It seems like we might have, may have, or kinda looks like we’ve past the peak in house sales in the core. House sales peaked at 284 sales in the core districts in May. June came in at 261. April was 235.

    But who knows. July tends to a slower month for sales.

    We seem to be averaging about a 25% increase over last year. That would project sales for the core at 250 for July. There have been 79 to date.

    Reported sales tend to lag a couple of days before being entered especially after a weekend. That would be a projected 8 house sales a day in the core municipalities. For the last decade, the last two highest July house sales in the core were in 2007 at 251 and in 2009 at 233.

    Might be a chance for a new high!

  9. For the first eleven days of July, there’s been close to 23 sales/day. I’ve been refining my sales prediction formulas, and now expect that we’ll surpass last years’ sales by about 5%, with total unconditional sales of 713.

  10. The GST on a full price offer for that property would be another $33,495.

    Ouch! Over $700,000 I mean OUCH!

    Little wonder the government doesn’t want this real estate party to end.

  11. I first noticed the property at 924 Snowdrop Avenue in my PCS listings last week. As Google StreetView hasn’t been updated on Snowdrop Avenue since May 2014, it shows the lot before the house was built, complete with the neighbouring subdivision application notice.

    What struck me was that it’s a narrow house on a small-ish lot. With most of the surrounding houses being 30 to 70 years older – it’s the newest house on the street. From the photos, the inside has fairly generic finishing (for a new home) and room sizes are rather small (for a modern design). Surrounding houses are similarly sized, so a potential buyer needs to determine whether it is work paying $150 to $200K for a new home.

  12. I haven’t seen the property. There may be special features about the home that would put it another class. For the size of the home and lot, the price is pretty typical.

    To get $700,000 or more, the standard to semi-custom home has to have more main floor square footage than this one. A family room, large master bedroom, over height ceilings and good quality fixtures

    Builder’s profit can be 20 percent on this type of home, so the builder has more wiggle room than say someone who bought in the last couple of years and now has to sell.

    And there is no rebate for the buyer on this home.

    For anyone who’s interested. Lenders will loan on the market value less any GST rebates. That is bank lending policy. However, market value does not include the GST tax, or the PPT or any other fees like legal..

  13. Just Jack,

    If the builder included GST. Would the total price be over fair market value in your mind?

  14. I can understand that. Canadians are generally nice people. If they’re able to pay and if the property is reasonably priced then they’ll make an offer. They don’t want to offend the seller.

    When the vendor is no longer active in selling the property, such as in an estate, litigation or court order, then Canadians will be a lot more aggressive in their initial bids.

    With the market being so heavily weighted towards the seller it’s a futile gesture to low ball a property in the core districts these days.

    If you want a home today, you have to pay at least a fair market value. If it’s a very nice property you may have to pay over fair market value.

    The best you may be able to get for that property is to have the builder include the GST.

  15. My anecdotal impression of the summer months has always been less showings but the buyers tend to be more serious/ready to buy. The indecesive/not quite ready to pull the trigger usually go on vacation and are distracted by other things during the summer.

  16. Monday, July 13, 2015 8:00am

    MTD July
    2015 2014
    Net Unconditional Sales: 276 681
    New Listings: 506 1,195
    Active Listings: 3,952 4,570

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

  17. Went to the open house at 924 Snowdrop on Sat. I was pretty surprised by how quite the open house was. Does anyone know anything about the developer (JP creations)?

  18. You can certainly exclude Royal Bay, but then you would also have to exclude other neighborhoods in other cities that wouldn’t fit your bias. Maybe too many high end sales in Uplands or too few low end sales in Saxe Point. That’s cherry picking your data to get an outcome that you want.

    Or as Michael implied, the statistical estimates are based on a sample and are therefore subject to sampling variability. Estimates from smaller geographical areas or types of properties will have more variability. When you see a range from $300,000 to 1.3 million over 125 sales, that shows a lot of variation in the data. That could skew the median. It would be better to see how the mode is changing rather than the median or average. You might find that the graph of sales in Colwood is not symetric around a single mode but has two humps.

    Then the interesting point about Colwood would be…

    Why has there been a 100 percent increase in high end sales? Could doubling of the sales in Royal Bay mean that people are selling their expensive homes in the core, and retiring to Colwood? And that’s anecdotal evidence.

  19. There have been 125 house sales in Colwood so far this year. Selling prices ranged from a low of $302,500 for a “fixer upper” to 1.3 million in Royal Bay with panoramic views of the ocean, mountains and city. The median price in the city was $518,000 that bought you a mid 1980s; 2,300 square foot home on an 8,300 square foot lot. 40% of the homes had suites.

    Sales activity is up 24% over last year which seems about the same as every city in the world these days..

    So why are prices up by 11 percent?. Anecdotaly what I’ve been hearing is that retirees in the core districts have been selling and buying in Colwood. They get a paid off home and a couple hundred grand to help them through their golden years. And they never have to commute to downtown.

    But there likely isn’t just one answer.

  20. After close to 50 votes in the poll, I can see that I’m in the minority (20%) who expect a rate decrease but no significant change in sales volumes or prices. I’m expecting the typical summer slowdown. On the other hand, I’m quite prepared to be wrong.

    Looking over the past five years, my various predictions about rate increases/decreases have often been wrong. I feel like I’m in a twelve-step program where I have to accept what I can predict, what I cannot predict and the wisdom to know the difference. 😉

  21. With Colwood being outside or the Victoria “core”, what’s your theory as to why it’s seeing so much growth in prices this year?

  22. So how well has the market performed for the first half of the year compared to last year?

    It depends on where you live.

    The city with the biggest year over year increase in prices was Colwood at 10.7 percent.

    And despite low inventory prices fell in..
    Vic West by 3.9%
    Metchosin by 3.9%
    Highlands by 0.2%

    Not surprisingly it’s middle income households that are driving prices up
    Saanich East up 7.1%
    Victoria up 5.0%
    View Royal up 3.7%
    Langford up 3.1%

    The uber riche of Oak Bay came in at 5.6%
    While Esquimalt and Saanich West dribbled in at 1.6 and 2.0 percent respectively.

  23. Anyone old enough to remember this skit…

    “What if Da Bears were all 14 inches tall, you know, about so high? Now, what’s your score of today’s game?”
    “Bears 18, Giants 10. And that would finally be a good game.”

  24. True, still not looking too rosy for the country as a whole. However, Canada’s drain will be BC’s gain, as people will eventually uproot for better prospects. I’m excited about reliving a late 80s-like cycle, where following a very similar resource crash, everyone headed for BC‘s coast. The nifty thing about this time is BC’s two most valuable natural resources are doing well; one because the US housing cycle is taking off again, and the other because forward-looking companies are starting to invest billions preparing for the next energy cycle (LNG). The Okanagan should do okay this time too. Boomers also seem to like it as a retirement haven, the heat-loving ones that is.

  25. This has been an absolute disaster spring/summer for bears. Must be completely depressing.

  26. The employment trend definitely looks positive for BC! I expect that there are people moving “back to BC” (particularly form Alberta), but as most people don’t uproot easily – I’m not convinced about your predictions for future growth.

    The labour participation rate for Canada is looking less positive, with more people leaving the work force. (That 0.2% drop translates into 38,000 people.)

  27. The jobs numbers out for June are telling.

    Full-time employment:
    BC added 36,300 jobs.
    AB lost 2,800 jobs.
    SK lost 3,900
    MB lost 2,100

    Now it makes more sense why sales and prices are rising. As I posted above I think we will reach 3-plus % population growth in the coming years (2.5X what our govt is forecasting), as the migrational shift back from prairies to coast continues to strengthen.

  28. With this increase in sales activity across Canada, if not the world, where is the money coming from for the mortgages?

    Banks have to get their money from somewhere. Domestic savings from Canadian deposits isn’t enough. The banks have to go to wholesale lenders to acquire funds. If the Chinese stock market means less resources are bought from BC will that make wholesale lenders more cautious in their lending? A possible credit crunch? And if there is less credit available will house prices begin to fall?

    Last time we had a credit crunch, CMHC stepped in and bought up bank mortgages. Could this happen again?

    How about the deteriorating bank accounts of the Chinese limiting their ability to buy properties or finance construction projects in Canada. The higher prices in cities like Vancouver and Toronto rely on a steady injection of new capital. Without that injection the market falls to the level of local investors desiring a reasonable rate of return.

    How about our natural resources. With less demand from China will there be a glut of resources and over employment in the mining and forestry industries. Leading to lower prices and higher unemployment?

    Will lower material costs for construction cause builders to chop prices to move inventory? Maybe cancel projects and lay off employees?

  29. Certain types of properties in specific locations are near the extreme of a sellers market. That causes some buyers to bid irrationally. With potentially large losses if these buyers have to re-sell when the market returns to being in balance.

    That’s not a good market to be buying into these days. You will overpay for the property. That over bid money you will never get back. It’s gone.

    If you were a private lender, lending your own money, this would make you more conservative in what you would or would not lend on. You would probably want a stronger covenant on the property, a bigger down payment, and additional collateral backing the loan to compensate for the higher risk.

    This makes lending on any detached home where the spectrum of buyer/balance/seller market is at the extreme end, such as in the neighborhoods of Fairfield and Oak Bay, very risky ventures today. Those markets are under a lot of stress, eventually something has to give. In the past it was the buyers moving up in price. This time the buyers aren’t able to finance to a higher price.

  30. It’s called government intervention and short covering. Next leg down will really be painful.

  31. Scary stuff to see that many people going to private lenders. If this is not the same as US style predatory lending in the 2000’s then I don’t know what is. People with no business being in the market. This will not end well at all.

    “Mortgage broker Lou Perrotta said that in terms of volume, 20 per cent to 30 per cent of the mortgages he puts together are now privately financed, typically because borrowers are declined for a bank loan for reasons like a low credit rating or unsteady income. That represents about $4 million to $5 million of the $20 million of mortgage business he does annually, he said.”

  32. I was reading the other day that 6000 recently unemployed Albertans from the oil fields left for Ontario. Can’t find the article but will post it if I do. Not everyone is flocking to the most expensive province in the country when it’s now in a recession and they don’t have a job.

  33. Yes sir, I agree the monthly job numbers are always interesting.

    Curious if anyone else has been interested in migration trends lately. The province that attracts the most people going forward should undoubtedly have the best economy, and strongest housing market. As far as projections go, I think the BCStats projection is much too conservative. I think there’s a good chance we could mirror something like the late 80s for migration trends, mostly because I believe all the people BC lost (esp. young) over the past ten years to the prairie provinces will now move back home, and possibly much more once you account for retiring boomers. My bet is we could reach a 3.0% plus growth rate by 2018, whereas you can see BCStats is only projecting 1.3%.

  34. As BC exports a lot to the US, the health of the US economy affects us more than some other provinces. The US is moving toward a solid recovery (although negative Q1).

    The June job numbers are due out tomorrow. I’m am curious to see how BC fares against Alberta and Ontario …

  35. CBC News: IMF slashes outlook for Canadian economy
    The recent data points now have seven of 24 economists surveyed by Bloomberg forecasting an interest rate cut. The Bank of Canada will make its next decision to cut, hike or hold on July 15. The bank has one more data point to weigh Friday when Statistics Canada reports June jobs numbers.

  36. I predict that everyone will continue focussing on nominal interest rates, perpetually being confused by interest rates.

    http://www.cbc.ca/news/canada/british-columbia/china-stock-market-crisis-could-lead-to-more-real-estate-investment-in-b-c-1.3144146
    “An expert in Sino-Canadian economic relations says the current stock market crash in China will drive more investments into Canada, including B.C.’s red-hot real estate market.”

    Then again, the Shanghai was up 5.7% last night…

  37. The rate drop in January was ever so small that I would never have guessed it would create such an increase in sales. I wonder if the rate cut was also accompanied by a lowering of lending requirements in order to stimulate first time home purchases?

    With such an increase in sales activity over the last 5 months across Canada, I wonder if CMHC is near its liability limit of $600,000,000,000?

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