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Bank of Canada lowering rates to provide “stability”?

March 9, 2020

Hot Property Question of the Week – March 05, 2020

 

Question from a viewer:

Why would The Bank of Canada (BOC) suggest that lower rates will “provide stability” to markets, like Toronto, in which prices were up 10% last year and there have been absolutely no signs of the virus impacting prices? History repeatedly shows us that lower rates don’t provide “stability,” they simply allow borrowers to borrow more, and sellers to ask for more.

 

The Monster Answer:

The lowering of the overnight interest rate by 50 basis points by the BOC was not due to the COVI-19 alone. Although the virus has disrupted global supply chains significantly, The BOC announced “the first quarter of 2020 will be weaker than the Bank had expected…. business investment does not appear to be recovering as was expected following positive trade policy developments. In addition, rail line blockades, strikes by Ontario teachers, and winter storms in some regions are dampening economic activity.”

 

As for your point about Toronto not requiring stabilization, I don’t disagree with you. The BOC has to provide support for the whole country. In a utopian model, Toronto (GTA) and Vancouver (GVA) should have different and distinct prime rates than the rest of the country. In order to support failing regions, the Bank of Canada drops rates and there is an unintended consequence in GTA. On many occasions in the 18+ years on Hot Property, I have noted that Toronto benefits from the economic disparity across the country.

 

The late Ted Rogers once said, “…Canada has three problems. Too many times zones, language/cultural issues and significant population disparity…. I will only lay cable where there are people.”  The economics didn’t work to support small towns with investment in cable and I think we are seeing the same impact, albeit in reverse, with the interest rate drop by the BOC.

 

Toronto does not need a rate drop. In my humble opinion, Toronto does not have sufficient supply of homes for sale to meet demand and the rate drop will do more harm than good.

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