Bank of Canada cuts interest rates for last time in April

The Bank of Canada lowered its benchmark overnight lending rate by one quarter of a percentage point to 0.25 per cent at its setting on April 21st, 2009. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, declined to 0.5 per cent.

The Bank acknowledged the global economic recession had intensified since publishing its previous economic forecast in January. “In an environment of continued high uncertainty, the global recession has intensified and become more synchronous since the Bank’s January Monetary Policy Report Update, with weaker-than-expected activity in all major economies,” said the Bank when it again lowered interest rates on April 21st.

The Bank has repeatedly lowered its policy interest rate to support economic growth. Since December 2007, the Bank has cut its overnight lending rate by a total of 4.25 per cent. Major Canadian chartered banks lowered their prime lending rate in lockstep with the Bank of Canada’ most recent interest rate cuts.

In its announcement, the Bank indicated that it was done cutting rates now that its benchmark overnight lending rate has been dropped to what it described as “the effective lower bound for that rate.” In a departure from the staus quo, it did not lower the deposit rate, which is the rate of interest paid on deposits held by financial institutions at the Bank of Canada. Leaving the deposit rate unchanged at 1/4 per cent further adds much needed liquidity into the financial system.

“The Bank was unusually explicit in its language about holding its key interest rate at its rock bottom, now that it further downgraded its inflation outlook,” said CREA Chief Economist Gregory Klump. “By saying ‘the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target,’ the Bank has removed any guesswork for projections as to how long it will be before interest rates can be expected to begin rising.”

The Bank downwardly revised its forecast for economic growth in 2009 and 2010. It also extended its forecast as to how long Canada would remain mired in an economic recession.

It also pushed the goalposts out to the third quarter of 2011 as to when it expects inflation to climb back to the two per cent midpoint of its target range between one and three per cent. The Bank targets the core rate of inflation at two per cent.

“For the second time this year, the Bank revised its economic forecast downward, making it more downbeat than the most bearish of private sector economic forecasts,” said Klump. “The Bank economic growth forecast for 2010 was also cut, but it remains rosier than the current consensus.”

The Bank’s Monetary Policy Report to be published on April 23rd will lay out the framework for additional monetary policy tools it may use to further inject liquidity into the financial system in its ongoing attack against the continuing credit crunch.

When the Bank cut interest rates on April 21st, the advertised five-year conventional mortgage rate stood at 5.45 per cent. This is down 1.54 per cent from one year earlier, and 0.34 per cent below where it stood when the Bank made its previous interest rate announcement on March 3rd.

The ongoing credit crunch has led mortgage lenders to reduce discounts on advertised mortgage interest rates, and in some cases these have been completely eliminated.

“Resale housing activity began stabilizing in the first quarter of 2009, thanks to improving affordability,” said Klump. “Lower prices and an extended stretch of low interest rates will further support sales activity this year and next. In the economic recessions of the early 1980s and 1990s, resale housing activity bottomed out before the overall economy did. As then, homebuyers this year will continue being drawn to market by improving affordability.” (CREA 21/04/2009)

MLS® resale housing market stabilizes further in March

Existing MLS® home sales activity increased for the second month in a row in March 2009, according to statistics released by The Canadian Real Estate Association (CREA). The number of new listings also continued trending lower in March, which firmed up the balance of supply to demand.

A seasonally adjusted total of 31,135 homes traded hands nationally via the Multiple Listing Service® (MLS®) in March 2009. This is an increase of seven per cent from the previous month, and builds on the 10.3 per cent activity gain in February. The number of transactions in March 2009 stands 18 per cent above levels reported in

January 2009, when activity sank to the lowest level in a decade.

The monthly increase in activity was largest in British Columbia (13.6 per cent), and Ontario (10.5 per cent). Sales were also up from February levels in Manitoba, Quebec, and Newfoundland & Labrador.

Actual (not seasonally adjusted) transactions numbered 35,225 units in March 2009. While this remains 13.7 per cent below levels reported in March 2008, it is the smallest year-over-year decline in six months.

The national average price for home sales via the MLS® remains below levels reached one year earlier, but year-over-year declines are shrinking. The MLS® average residential price for homes sold in March 2009 was $288,641, down 7.7 per cent from March 2008. This is the smallest year-over-year decline in six months.

The average price for homes sold via the MLS® set a new record in March 2009 in Manitoba, and remained above year-ago levels in Saskatchewan, Quebec, New Brunswick, Prince Edward Island, and Newfoundland & Labrador.

The national average price continues to be skewed downward by lower activity in some of Canada’s more expensive housing markets and by fewer transactions at the higher end of the price spectrum. British Columbia, Alberta and Ontario, where homes are more expensive, are significant contributors to the current downward trend in national average price. MLS® home sales activity in these provinces accounted for 69 per cent of national activity in March 2008, compared to 67 per cent in March 2009.

The price trend is less dramatic for the weighted national MLS® average price, which compensates for changes in provincial sales activity by taking into account provincial proportions of privately owned housing stock. The weighted national MLS® average sale price was down 4.7 per cent year-over-year in March, compared to a 5.1 per cent decline in February.

“Housing markets are starting to show signs of buyer interest because of lower prices and interest rates,” says Dale Ripplinger, President of The Canadian Real Estate Association. “We expect April sales activity will feel some effects from the federal government incentives announced in the last budget, including the increase in the maximum withdrawal allowed under the Home Buyers’ Plan, and the First Time Buyer Tax Credit.”

Q1 2009 Results
Seasonally MLS® adjusted MLS® sales activity in the first quarter of 2009 was little changed compared to the fourth quarter of 2008, declining by less than one-tenth of a per cent.

The number of homes for sale remains high, but continues trending downward. Seasonally adjusted national MLS® residential new listings numbered 208,755 units in the first quarter of 2009. This is down 6.4 per cent from the previous quarter, and represents the third consecutive quarter-over-quarter decline. On a seasonally adjusted basis, the number of MLS® residential new listings has dropped 11.9 per cent from the peak reached in the second quarter of 2008.

With sales activity increasing and new listings trending lower, the balance between supply and demand is firming up in British Columbia, Alberta, Ontario, and Quebec. These provinces have the largest influence on the national housing picture, so a firming housing market balance there in March 2009 caused the national housing market balance to tighten for the fourth time in as many months.

“A number of major housing markets are stabilizing, as buyers respond to improving affordability,” said CREA Chief Economist Gregory Klump. “Looking back to economic recessions in the early 1980s and 1990s, national resale housing activity bottomed out before the job market or economy did,” said Klump. “It will take time for ample supplies of new and existing homes to be drawn down, but demand appears to be stabilizing.”

PLEASE NOTE: The information contained in this news release combines both major market and national MLS® sales information from the previous month. The Canadian Real Estate Association has previously released these separately.

CREA cautions that average price information can be useful in establishing trends over time, but does not indicate actual prices in centres comprised of widely divergent neighborhoods or account for price differential between geographic areas. Statistical information contained in this report includes all housing types.

MLS® is a co-operative marketing system used only by Canada’s real estate Boards to ensure maximum exposure of properties listed for sale.

The Canadian Real Estate Association (CREA) is one of Canada’s largest single-industry trade associations, representing more than 98,000 REALTORS® working through more than 100 real estate Boards and Associations. Further information can be found at www.crea.ca.