By Phil Soper
On March 4, Bank of Canada joined other central banks in cutting its target interest rate, an appropriate step that it believes will mitigate the damage caused by the coronavirus. This new health scare has impacted families in many countries around the world and in the process has introduced new risks to our economies. While Canadians have been largely spared the full brunt of this health crisis to date, the global community is coming together to address this international challenge.
I have previously spoken to the paradox that interest rate cuts, made in response to economic weakness, can bolster housing markets. Many of our major cities are enduring structurally persistent housing shortages. This excess of demand for housing compared to the supply of homes available, be it for rent or for purchase, puts constant and often unhealthy upward pressure on prices.
Interest rate cuts provide buyers with more purchasing power and increase the number of potential buyers who can qualify for a mortgage. While COVID-19 may dampen economic performance and by extension, consumer confidence, we believe that on balance, the move will trigger additional sales activity. This may be further amplified by the recent announcement that beginning on April 6, the qualification hurdle presented by the federal mortgage stress test will be eased, inviting yet more buyers into the market.
These moves will be welcomed in markets that are struggling with inconsistent growth, such as in Calgary or St. John’s, and potentially spurn uncomfortably high home-price inflation in our hottest markets, such as Montreal and Toronto.
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