The Bank of Canada expects that there will be more activity in the country’s real estate market, spurred by the central bank’s latest interest-rate cut and easier mortgage policies set to take effect this weekend.
The bank’s 50-basis-point cut, which reduced interest rates to 3.25 per cent on Wednesday, was its fifth cut since June. The lower interest rates have reduced the cost of borrowing and have helped prospective homebuyers qualify for a mortgage.
As more homebuyers have waded back into the market, sales have been slowly moving up. The most recent national sales data show transactions in October at their highest level in more than two years.
In addition to cheaper home loans, the federal government’s looser mortgage policies will take effect Sunday. The new rules will allow all buyers to put down smaller down payments on homes that cost up to $1.5-million and will allow first-time homebuyers to pay off their loan over a longer period of time.
“There are some mortgage rule changes to come, another 50-basis-point cut. We know housing is very sensitive to interest rates, so we do expect some more pickup,” Bank of Canada senior deputy governor Carolyn Rogers said at a news conference to discuss Wednesday’s interest-rate announcement.
Her view is similar to many in the real estate industry, who expect sales to continue climbing next year.
The lower interest rates and new mortgage rules will be in place before spring, which historically has been the busiest season for real estate sales.
Under the new rules, first-time homebuyers who take out an insured mortgage will be allowed to repay or amortize their loan over 30 years instead of 25 years. That would lower monthly payments because the borrower has more time to pay off the loan.
A homebuyer must pay for mortgage insurance if their down payment is less than 20 per cent of the home’s purchase price. The insurance protects the lender if the borrower defaults on their payment. Because an insured mortgage guarantees that the lender will not lose money, lenders are willing to offer lower interest rates on insured mortgages.
Christopher Alexander, president of Re/Max Canada, said first-time buyers have been waiting for the rule changes. “They have done the math and their affordability jumps dramatically,” he said.
Ms. Rogers has previously warned that steps to reduce a borrower’s short-term cost can increase their long-term costs.
At the Wednesday press conference, Ms. Rogers said it is possible that the federal government’s decision to admit fewer newcomers may act as a “counterbalance” on the easier homebuying conditions.
She also noted that home sales have increased without a corresponding rise in prices. “An increase in activity without an increase in price is a good thing for the Canadian economy right now,” she said.
