An expected interest rate cut from the Bank of Canada tomorrow (July 15) could give Vancouver’s already overheated real estate market an unwelcome shot in the arm.
“For Vancouver I don’t think the timing’s particularly [good] because we don’t need stimulus to the housing market,” said Thomas Davidoff, a professor of economics at the University of British Columbia’s Sauder School of Business.
In January, the Bank of Canada cut its overnight lending rate from 1% to 0.75% in response to a slowing economy caused by low oil prices. Economists widely expect a further cut because Canada’s economy shrunk for four months in a row in the first quarter and beginning of the second quarter.
The move would follow a spring real estate season that saw a seller’s market emerge in Metro Vancouver, along with multiple offers and bidding wars in certain neighbourhoods. Metro Vancouver prices increased 9.4% in May, the biggest increase in Canada. The national average price increase was 3.1%.
In a heated market like Vancouver’s, continued low interest rates make it hard to determine how much properties are truly worth, Davidoff said. That’s causing anxiety and uncertainty among homeowners.
“Roughly speaking, the dividend you get from owning a house should be something like the interest rate times the value of the house,” Davidoff said.
“But when interest rates are low you can tolerate a really low rental dividend if you have aggressive beliefs about where house prices are going.”
In a report released this morning, Royal LePage warned a rate cut could lead to a sharp correction for Canadian real estate markets. The real estate company is strongly warning against a further rate cut.
Davidoff called that an “aggressive prediction.”
It’s clear the January rate cut did not provide the hoped-for economic stimulus to the Canadian economy, said Helmut Pastrick, chief economist for Central 1 Credit Union. But he does not believe the country is headed into a recession, as some economists have predicted.
“Much of the weakness we’ve seen in Canada is related to the oil and gas sector, particularly new investment spending is down … what we’re really seeing is more of an industry recession,” Pastrick said.
Canada’s economy has also been weighed down by slowing growth in China and signs of uneven growth in the United States.
Along with other economists, Pastrick expects the Bank of Canada to respond to Canada’s sluggish economy with a rate cut.
“If second quarter GDP numbers are a small positive it’s still well below what the bank was expecting in April,” he said. “The Bank of Canada was expecting 1.8% in Q2, most expect it to come in well below 1%.”