The Bank of Canada Cuts Interest Rate; Effect on Vancouver Real Estate

So, this morning the Bank of Canada announced that it cutting the key overnight lending rate. This time it was “chopped” drastically by 0.75% (the largest single drop since 2002). The overnight lending rate is now at 1.5%, it’s lowest level since 1958…that’d be it’s lowest level in 50 years!

For the first time, the Bank of Canada used the word “recession”. By dropping interest rates, they hope to stimulate the economy by making money cheaper for consumers and businesses. Banks do not necessarily have to follow suit by dropping their own prime lending rate. Each will individually decide based upon their own business whether and by how much to drop their interest rates. This morning, for example, TD Bank announced that they were dropping their prime lending rate not by 0.75% but by 0.5% to 3.5%.

A drop in prime lending rates will help homeowners that have variable rate mortgages that are tied to prime (an incredibly popular mortgage option over the past few years). Whether or not banks will decide to drop their mortgage rates based upon this news is another matter entirely. If they do, it will likely not be for another few weeks. However, it’s unlikely that they will drop that significantly (long-term mortgage rates are actually tied to the bond market and not the prime rate) or at all as Canadian banks are reluctant to take on more mortgage business these days.

With housing prices in Vancouver dropping over the past few months, and prime lending rates dropping (resulting in much lower variable rate mortgages), I do expect that this will have a positive affect on the market. How significant is another matter. However, buying a home in Vancouver is much less expensive this morning than yesterday.

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