04 Mar 2020

Ahhh-chooo!!

Not since 2008 have we seen a unilateral world-wide response to a global issue affecting our economy. Yesterday the Federal Reserve lowered rates by 1/2 in the US. Today, the Bank of Canada did what many thought there would be no chance of happening in 2020; Also cut rates by 1/2%. Here is what the Bank of Canada said today when discussing the WHY behind the rate cut. Of course, Coronavirus or #COVID19 leads the headlines, but many other important factors such as the rail blockades, teachers strikes, and weather, were a contributing factor. So, what does this mean for YOU, the borrower?

One of two things.

  1. This means that we are now entering – once again – cheap money times. When rates go down this fast, this much, borrowing power increases and people feel richer. Don’t be that person. When rates go down it’s a GREAT time to lock your mortgage in, but also a really really great time to INCREASE your mortgage payment because more money goes to principal (and you’ll pay your debt off faster).
  2. The bad side to all of this is: this means the economy is slowing. This could mean less income growth, job losses, less hours available, etc., this could mean now is the time to hunker down and be smart with your borrowing. Don’t over-extend when money is cheap.
I want to reassert the following point. This only (may) affect variable rate pricing. This does not mean an automatic drop in FIXED rates.
Variable rates: priced by Bank of Canada.
Fixed rates: priced by the bond market (more on that in a moment).
I’ve always believed that our housing market is fuelled by two things:
1. Consumer confidence.
1. Rates.
(In no certain order)
When the Bank of Canada is dropping rates, this means our economy isn’t doing great. This is bad news for Canadians. Yet, our economy isn’t doing that bad, and so – as you have seen the first 8+ weeks of 2020, people are feeling very confident. People are buying (like crazy). Sales are UP. 2020 started off very much like 2017: Low supply, tons of sales, new price records. The party was BACK.
With rates coming down, I don’t see that party stopping. Not unless confidence gets zapped by two factors: 1.  A sudden shift in economy, job losses, etc. and 2. Public anxiety over #COVID19. Either one could happen. (What’s interesting to me is that in 2017 we started off on the same foot – rates were low, and I thought “well 2020 is different. NOTHING is stopping this train”. Nothing, it seems, except a virus. Ugh!
Going back to fixed rates. Fixed rates are priced by the 5 year bond yield (for 5 year rates, for example).. And if you like to ski, you should check out this chart:
That’s where #fixedrates are headed in the near term. The problem is, like oil prices in correlation to gas prices, lenders take FOREVER to drop rates but they INCREASE rates the minute they can. So, being patient will really really help in this case.
The last time the bond market his this yield, rates were around 2.29%. Right now, 5 year rates are 2.49-2.89%.
FAST.
Now here’s the catch. When Bank of Canada drops its prime rate, it does not always mean the Banks (RBC, BMO Etc) will follow suit. TD bank started this trend of NOT following in line with the Bank of Canada a long time ago. Sure enough, other lenders realized Canadians are financially apathetic and don’t really care, and didn’t take to the streets. So, I expect a 30 basis point cut out of 50 which means the big 5 are way out of whack with the actual PRIME pricing.
This is good news for:
  • borrowers
  • buyers
  • investors
  • refinance clients
  • people whose mortgages are renewing
  • people who want a lower rate
  • the housing market
This is bad news for:
  • the economy
So, let’s not celebrate this rate cut. In a micro-view of things, yes. This is GOOD news. In a macro-view, I don’t celebrate when banks have to do this because I know they do not WANT to. This also means SMART planning of your borrowing (and buying). Low rates won’t be here forever and the last thing you want to do is over-extend yourself at a time like this.
Thanks for reading and shoot me a line with any questions, anytime!

Leave your thought