How Low Interest Rates Benefit Us All

2020-07-20 | 08:14:19

Happy Monday everyone!!

 

Whether you’re returning back to work or, continuing your holidays, I hope you had a great weekend doing fun things with the ones you love.

 

Looking back at last week’s news, one of the biggest stories centred on the July 15 statements from the recently appointed Governor of the Bank of Canada, Tiff Macklem.

 

The other big story, if you are someone waiting for the bottom to drop on home prices, is centred on how resilient the real estate market continues to be during this period of our provincial government’s strategic reopening of our economy.

 

Let’s begin first with the news coming from the chief of the Bank of Canada.

 

Following July 15 meetings to discuss interest rates, a not surprising decision to leave the overnight rate at .25% was declared.

 

There have been discussions and speculation that the rate may drop to 0% or even negative interest rate but, Tiff Macklem, confirmed the “effective lower bound” to remain at .25%.

 

The highlights are as follows:

• The Bank says, "global economic activity is picking up. This return to growth reflects the relaxation of necessary containment measures put in place to slow the spread of COVID, combined with extraordinary fiscal and monetary policy support. As a result, financial conditions have improved."
• "The Canadian economy is starting to recover... With economic activity in Q2 estimated to have been 15% below its level at end of 2019, this is the deepest decline in economic activity since the Great Depression, but considerably less severe than worst scenarios presented in April."
• The Bank projects “real GDP declines by 7.8% in 2020 and resumes with growth of 5.1% in 2021 and 3.7% in 2022.”
• “The Bank expects economic slack to persist as the recovery in demand lags that of supply, creating significant disinflationary pressures."
• "Decisive and necessary fiscal and monetary policy actions have supported incomes and kept credit flowing, cushioning the fall and laying the foundation for recovery. Since early June, the government has announced additional support programs, and extended others."
• "There are early signs that the reopening of businesses and pent-up demand are leading to an initial bounce-back in employment and output. In the central scenario, roughly 40 percent of the collapse in the first half of the year is made up in the third quarter."
• "Subsequently, the Bank expects the economy’s recuperation to slow as the pandemic continues to affect confidence and consumer behaviour and as the economy works through structural challenges."
• "CPI inflation is close to zero, pulled down by sharp declines in components such as gasoline and travel services. The Bank’s core measures of inflation have drifted down, although by much less than the CPI, and are now between 1.4 and 1.9%."
• The Canadian Economy "will continue to require extraordinary monetary policy support. The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved."

What does all of the above mean?

 

What is the message all Canadians want to know?

 

“Interest rates are very low and they are going to be there for a long time,” Macklem said. “Canadians and Canadian businesses are facing an unusual amount of uncertainty, so we have been unusually clear about the future path of interest rates.”

 

“Based on the Bank’s new forecasts, this implies it has no intention of raising policy rates for several years,” wrote economist Stephen Brown of Capital Economics.

 

Let’s now turn to the other part of this discussion which focuses on what we are seeing happening in real estate.

 

Ainsley Smith, of Toronto Storeys writes,“on a national level, Canada’s major metropolitan areas have shown market resiliency following a significant pause during the COVID-19 pandemic.”

 

And yes, everyone knows that sales and listing activity has slowed over the last few months beginning in Mid March but, pent up demand, low inventory and rock bottom interest rates has cemented that we remain in a seller’s market.

 

CMHC has predicts home prices dropping between 8 and 18% over the next 6 to 12 months.

Many experts say that when Government programs come to a halt, coupled with the end of mortgage deferrals, that is when the true nature of how bad things look will reveal itself.

 

No one can guarantee how bad things will get.  Personally, I find it disappointing that focusing on the worst is for many, a natural instinct.

 

But this unfortunate pandemic has seen different results for different people.

 

Author, David Chilton, correctly states you cannot blanket COVID-19 for everyone.

 

It is true that the hospitality, travel and leisure sectors have suffered and will continue to suffer great pains, not only in the short term but, for the coming years ahead.

 

But other businesses have been able to thrive and do extremely well during this period. Businesses adapting to the “new normal”, even in those worst affected industries, has meant surviving today and securing their tomorrow.

 

The government has pledged to continue to do whatever is necessary to assist those most in need. Wage subsidies have been extended into the Fall as businesses and their employees deal with restrictions that hold back their capacity to fully open to pre COVID conditions.

 

At the same time, the effect of the partial reopening of the economy has shown positive results.

 

People not being able to travel outside the country are booking closer to home.  Staycation is the new buzz term for at least this summer and rest of the year.

 

Have you tried booking anywhere in cottage country?  Slim pickings even at motels 30 minutes drive to the beach!!

 

Speaking of cottage country, the amount of sales activity, especially in the higher priced market, has been phenomenal.

 

Others have focused on renovating their homes during this period of not being able to get away. In doing so, renovations are making people fall back in love with their homes. 

 

“Are you gonna love it or, are you gonna list it?”  We all know who wins most of the time on that show.

 

Others who now accept a “work from home” policy are either moving to locales further from the city or, modifying their current property to allow for a safer, more comfortable and more suitable space where they will now work from.

 

The “new normal” has resulted in 4 month waiting periods to install a pool in the backyard. Most will now have to wait for their new pool sometime next Spring.

 

On and on I can go. The moral of the story – thankfully – is that slowly but surely, we will all get through this.

 

Statements such as that made from the Governor of the Bank of Canada to me says, we will continue to help those who need financial support.  To me it also confirms that those in society who have not been negatively impacted by this pandemic can and will enjoy extremely low interest rates to support an economy that requires those who can spend, to continue to do so.

 

Some say this is only leading to more household debt.

 

Is there an alternative? If there is, please let us all know!!

 

We are told to shop local, tip bigger, support mom and pop shops.  On a macro level, is this not what our government is doing for our country at large?

 

The growth and health of any economy is fundamentally based on the debt load carried by its citizens. The adverse economic impact if everyone stopped purchasing and started saving would be even worse than what we see today.

 

This is not to say that it is easy to get money.

 

It is definitely not.

 

I believe what people should focus on, knowing that interest rates will be low for a very long time, is how this will benefit them.

 

Now might be the right time to purchase your first home, or add an investment property or, cottage to the ones you own.

 

Now might be the time to harness in your debt and consolidate that debt with a lower rate than the one you are currently paying.

 

Now might be the right time to renovate or add value to your existing home as you find solutions to improving your life in the home you love or, to update your home in a red hot market to capitalize at top dollar and then move away to quieter areas outside the city.

 

Whatever your reasons, take the opportunity to investigate how this moment in time is when you were able to adjust and pivot your life for the better.

 

Please feel free to contact me to discuss what your options are.

 

It may be that waiting a few more months to see what effects unemployment, lack of immigration and the limits of government relief measures look like for you this coming Fall. If the effects are negative, this is when CMHC is predicting property prices will begin to drop because people will be forced to sell.

 

So far, thankfully, the stats are not as bad as many experts predicted.

 

But each and every one of us has our own custom profile.

 

Again, please feel free to contact me to chat about what can be done to improve your financial picture during what will be an extended period of low interest rates.

 

Looking forward to your calls and comments, I wish you all a great week wherever you are and whatever you’re doing.

 

Continue to stay safe and heed to the warnings we continue to live with.

 

With kindest regards,

 

Marco