Canadian housing starts to benefit from lower interest rates

However, this is most likely just a near-term boost, and multiple economic threats remain

Canadian housing starts to benefit from lower interest rates

While the Canadian economy reels from the multiple body blows of the COVID-19 outbreak, lower interest rates will shield national housing starts from the uncertainty brought about by the pandemic – for the time being, at least.

In a “Special Edition” report released on March 19, Altus Group said that the Canadian central bank’s decision to cut short-term rates will serve as a potentially valuable buffer against the worst impacts of the coronavirus.

“The Bank of Canada [chopped] the target for the overnight rate by a cumulative full percentage point in one scheduled and one ‘emergency’ cut in less than 10 days. This has caused a drop in variable mortgage rates of about 70 basis points on average in the past 2 weeks (for a 5-year term),” Altus Group stated.

However, the report hastened to add that “the stimulus from rate cuts may not be as significant as some analysts are suggesting, given that 5-year fixed mortgage rates were and still are more favourable on average than variable rate mortgages, and rates for 5-year fixed mortgages have only moved down about 10 basis points on average over the past 2 weeks (based on the ‘special rate’ offered by the major banks).”

“Our initial analysis is that larger declines in mortgage rates would be needed to help offset the current economic shocks on housing starts.”

“On net, total Canada‚Äźwide housing starts in 2020 are forecast to match last year on the strength of Ontario, Alberta and Saskatchewan. In 2021, expect weakness in Quebec, Manitoba and Atlantic Canada to be offset by gains elsewhere,” Altus Group projected.