Drop in Bank of Canada rate means 'inflation bogeyman is under control'

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In a long-awaited move, the Bank of Canada reduced its target for the overnight lending rate on Wednesday by 25 basis points to 4.75%.

Phil Soper, President and CEO of Royal LePage, one of the country’s largest real estate brokers, says that’s very welcome news for potential homebuyers in the short term.

“It’s the first time in over four years Canadians have experienced a policy-driven rate cut, a drop in the cost of borrowing that was driven by policy makers as opposed to bond markets that can impact mortgage rates, so it’s a big deal,” said Soper.

“This is a clear direction from the Bank of Canada that the inflation bogeyman is under control and we can focus on growing the economy again which is going to positively impact consumer confidence. And I believe even a small rate cut like this will have an impact on the material number of homes trading hands, the volume of transactions. And when volume picks up and more people are in market it does put up pressure on prices.”

In fact, Soper predicts house prices in the GTA will appreciate three times the amount that of Vancouver by the end of the year.

“It’s been really slow in Greater Toronto, not so in places like Vancouver and Calgary,” he said. “We anticipate home prices in Toronto will appreciate by about three times the rate of Vancouver. By the end of the year we expect home prices in Toronto to eclipse those in Vancouver for the first time in decades, probably 40 years.”

According to a recent Royal LePage survey, more than half of Canadians (51%, approximately 2.4 million people) who put their home buying plans on hold in the last two years said they would return to the market when the Bank of Canada reduces its key lending rate.

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“In Toronto, by the end of the year, we expect homes prices to have risen 10% year over year, that’s not great,” said Soper.

“But wages and salaries have grown, inflation is down. If you take out mortgage costs, inflation is down 1%, so overall costs are being managed quite well in the economy. And home prices had been relatively flat for two and a half years. So it has been an opportunity for buyers to find a window into the market. And I think that’s what we’ll see this summer. That (increase in home prices) will sort of take away some of the joy of borrowing costs but not immediately.”

Soper says Royal Lepage predicted at the end of the first quarter that Vancouver homes will appreciate by 3% at the end of the year.