CREA News

The Bank of Canada lowered its benchmark overnight lending rate by one quarter of a percentage point to 2.25 per cent at its setting on October 21st. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, declined to 2.5 per cent.

The Bank also lowered its policy interest rate by half a percentage point on October 8th, as part of a coordinated cut in interest rates with other central banks. Combined with the interest rate cut on October 21st, the Bank has cut its overnight lending rate by three quarters of a percentage point since it last met to set its policy interest rate on September 3rd.

The Bank’s decision to cut interest rates aims to support Canadian economic growth. The Bank recognized the impact that the global credit crunch is having on global economic growth, indicating “the global economy appears to be heading into a mild recession, led by a U.S. economy already in recession.”

“Slowing global economic growth continues to reduce demand and prices for energy and other commodities,“ said CREA Chief Economist Gregory Klump. “The Bank now expects core inflation to remain below its target of two per cent until the end of 2010, so it can further cut interest rates without worrying about causing inflation to spiral upward.”

To stabilize credit markets in the aftermath of the U.S. sub-prime mortgage market meltdown, the Bank has cut the overnight lending rate by 2.25 percentage points from December 2007 to October 2008.

The Bank reduced its forecast for Canadian economic growth. When announcing further interest rate cuts, it said, “The Bank expects growth to be sluggish through the first quarter of next year, then to pick up over the rest of 2009 and to accelerate to above-potential growth in 2010 supported by improving credit conditions, the lagged effects of monetary policy actions and stronger global growth. The recent sizeable depreciation of the Canadian dollar will also provide an important offset to the effects of weaker global demand and lower commodity prices. Overall, the Bank projects average annual growth in real GDP of 0.6 per cent in both 2008 and 2009, and 3.4 per cent in 2010.”

The Bank had earlier revised its forecast for economic growth downward in its July Monetary Policy Report. Remarks in its October announcement to cut interest rates suggest that it will likely cut interest rates further when it meets to set its policy interest rate on December 9th.

When the Bank cut interest rates on October 21st, the advertised conventional five-year conventional mortgage rate stood at 7.2 per cent. This is virtually unchanged from where it stood a year ago, and 0.35 per cent above where it stood when the Bank made its previous interest rate announcement on September 3rd. Competition among mortgage lenders remains stiff, but discounts off advertised mortgage interest rates remain small and in some cases have been eliminated due to the U.S. subprime mortgage meltdown and resulting global credit crunch. These continue to elevate banks’ cost of funds.

“National resale housing sales activity continues to ease from its peak last year,” said Klump. “Buyers are taking more time to shop. Unlike the U.S., Canadian homeowners are by and large under no pressure to sell, so many unsold listings are being taken off the market. New listings are coming off their peak, which is stabilizing the Canadian resale housing market.” [CREA 21/10/2008]

The number of properties listed via the MLS® systems of Canada’s major markets was down from its peak in the third quarter of 2008, according to statistics released by The Canadian Real Estate Association (CREA). This caused the balance of sales-to-new-listings in the market for resale homes to tighten on a quarter-over-quarter basis for the first time since the beginning of 2007.

New MLS® residential listings in Canada’s major markets numbered 146,637 units on a seasonally adjusted basis in the third quarter of 2008. This is 3.3 per cent below the highest level on record, set the previous quarter. New listings eased most in Edmonton and Calgary in the third quarter, followed by declines in Vancouver and Montreal.

The balance between sales and new listings has stabilized in many major resale housing markets in recent months. The trend stands out most in Edmonton and Calgary, where a sharp drop in new listings and rising sales activity has firmed up the resale housing market considerably since the beginning of the year.

“Informed buyers and informed sellers look at the facts. And the facts right now indicate the real estate resale market is stabilizing in many markets,” says Calvin Lindberg, the President of The Canadian Real Estate Association.

“There have also been a number of initiatives that will have an impact going forward, including the government’s decision to invest $25 billion in insured mortgage pools, the recent drop in the Bank of Canada rate, and the new rules reducing the maximum amortization to 35 years instead of 40,” the CREA President adds. Those new mortgage rules go into effect October 15th. “The third quarter MLS® statistics and these developments are more factors showing the Canadian market is not following U.S. housing trends.”

Seasonally adjusted MLS® residential home sales in Canada’s major markets edged 1.5 per cent lower on a quarter-over-quarter basis to 76,391 units in the third quarter of 2008. The small decline in activity reflected fewer sales in Vancouver, which more than offset a rebound in activity in Edmonton and Calgary.

Seasonally adjusted transactions rose on a month-over-month basis in the majority of major markets in September 2008. Some 25,680 homes traded hand via the MLS® systems of Canada’s major markets on a seasonally adjusted basis in September, an increase of three per cent from levels recorded in August. The increase may reflect an influx of buyers prior to the elimination of mortgage insurance availability for those with less than a five per cent down payment.

Unadjusted (actual) sales activity was on par with September of last year, but remains below levels one year ago in some of the Canada’s most expensive housing markets. Lower sales activity in higher priced markets pulled the overall major market MLS® residential average price down by 6.2 per cent year-over-year in September, despite year-over-year average price gains in 17 of 25 major markets.

Lower activity in some of Canada’s pricier markets has weighed on the overall average price trend this year due to a decline in their weight in the average price calculation compared to last year. The price trend is similar but less dramatic for the weighted average price, in which the proportion of privately owned housing stock in each market is taken into account.

“Price declines in some of Canada’s more expensive housing markets will outweigh further price gains in other markets and continue pulling the national average price lower over the rest of the year and into 2009,” said CREA Chief Economist Gregory Klump. “Global financial market turmoil and the resulting slowdown in global economic growth will continue weighing on Canadian exports and economic growth.”

“As the Canadian housing market and pricing environment cools, the number of days on market for sales is likely to rise. By and large, Canadian home sellers are under no financial duress to sell, and a number may decide to take their home off the market should it remain unsold when the listing expires. The resulting decline in listings limits the extent to which the balance of sales and new listings will realign. Canadian homebuyers should not expect to see the kind of price correction that’s underway in the U.S., where overly indebted homeowners are selling into a housing market where foreclosures and the number of newly constructed unoccupied homes are increasing. [CREA 15/10/08]

The Bank of Canada, along with the U.S. Federal Reserve, European Central Bank and others, announced an interest rate cut of 50 basis points Wednesday. The Bank of Canada’s benchmark lending rate now stands at 2.5 per cent.

The U.S. Fed cut its benchmark rate by a half point to 1.5 per cent, while the European Central Bank and central banks in the U.K., Sweden and Switzerland are also reducing rates.

The Bank of Canada said deteriorating credit conditions, weaker demand and the drop in commodity prices will “significantly” ease inflation pressures in Canada.  “The intensification of the global financial crisis is having a marked impact on all countries,” the bank said in a statement, saying credit conditions in Canada have tightened significantly in recent weeks, and that slowing consumer spending and business investment will pull economic growth lower.

“Central banks are further lowering forecasts for economic growth and inflation due to intensifying fallout from the global credit crunch,” said CREA Chief Economist Gregory Klump. “Had the U.S. Federal Reserve acted alone in cutting U.S. interest rates, the Canadian dollar would have appreciated. The coordination of a surprise cut in interest rates prevented the Canadian dollar from rising. A higher Canadian dollar would have dragged Canadian exports lower at a time when global demand for them is dropping.”

Japan supported the global effort, but did not cut its benchmark rate, which already stands at 0.5 per cent.

China also announced an interest rate cut, the country’s second in three weeks. Hong Kong cut its rates by 100 basis points. The moves in China and Hong Kong were not part of the officially coordinated effort.

The central bank sets its interest rates with an eye at keeping inflation at 2 per cent. The bank said it would continue to monitor carefully economic and financial developments in determining whether “further action” is necessary.

The Bank of Canada’s decision to join the other central banks in a coordinated rate cut suggests credit conditions in Canada have deteriorated rapidly. In a speech less than two weeks ago in Montreal, the Bank of Canada governor, Mark Carney, said there were “few signs” that Canadian banks were restricting the availability of credit to households.

“There is no evidence at this point that our corporations are facing unusual credit conditions,” he told a business luncheon in Montreal on Sept. 25.

The Bank of Canada’s governors are scheduled to release their next interest rate decision on Oct. 21. [CREA 08/10/08]