Will the Bank of Canada lower its interest rate again?

The Bank of Canada tries to bolster the economy by lowering interest, thereby stimulating an already inflated housing market. Then the housing market crashes as everyone over-borrows and the economy goes into a tailspin. It’s enough to make you lose sleep.

With many economists already saying home prices, particularly in Toronto and Vancouver, are bloated and an adjustment is imminent, it would seem that lowering the Bank of Canada interest rate even further would just exacerbate a potential problem, but the Bank of America is nevertheless forecasting the Bank of Canada will lower its benchmark rate even earlier than its original January prediction.

On Business Day AM, Bank of America Merrill Lynch Canada and U.S. economist Emanuella Enenajor recently called the housing sector collateral damage in “the midst of an oil price drop, in the midst of declining commodity prices.” The Bank of Canada must, she says, do what it takes to avoid disinflation and stimulate growth.

We could see interest rates drop further as early as next month but more likely at the Bank’s Oct. 21st meeting; despite the election on the 19th, Enenajor says it will be a response strictly to their mandate to avoid disinflation, as growth has deteriorated relative to their earlier optimism.

As a result of it all, the housing market will continue its robust growth, at least for a while. Of course, there’s another school of thought that predicts the Bank will raise interest rates instead. You pays your money and you takes your chances.

If you’re thinking of buying and don’t have a crystal ball, what the heck do you do? I think interest rates will indeed go down again before they go up, and the election could have an effect on buyers. If Trudeau gets in and does indeed cut taxes for the middle class, it will help with affordability. If Harper is reelected, he’s likely to change mortgage rules to make it a little harder to buy, especially for first-time buyers, which will cool down the housing market a bit (but he also wants to raise the RRSP withdrawal for first-time buyers from $25,000 to $35,000).

Some happy Opus Homes purchasers. Best piece of advice: Buy when and what you can afford!

It all seems a bit less predictable than a game of roulette at the moment, but the advice I gave last week — to buy what you can afford when you can afford it — is never a gamble. Of course, it doesn’t help if you’re itching to get into the housing market right this minute.

If that’s the case, I would offer a few more words of advice, with the very explicit caveat that I am not an economist nor a lawyer — just think of me as your well-intended uncle. I have your best interests in mind but I don’t know any more than anyone else, and my powers of clairvoyance are no better than yours.

If you have a good job with growth likely, a sufficient down payment and reasonable expectations, this might be a good time. In the GTA, Durham Region remains reasonable, especially some of the outlying bits, like Bowmanville. Builders are catching on to some underdeveloped areas to the east, and even if prices dip for a while, they will recover. If you’re ready to settle down and wait it out — say, you’ve got a kid just starting school and want some stability — you can do quite nicely for well under $300,000 and still be a stone’s throw from the GO train.

If you are an entrepreneur who doesn’t need to be in the core very often, this might be a good time. If you’re an entrepreneur looking to provide a local service, like an auto mechanic for example, this might be a good time. Provided you can conduct most of your business online or on the phone, or you can draw customers wherever you set up shop, you could consider a move to say Barrie, Hamilton or Orillia — communities that are large enough to have their own economies but still offer reasonable prices.

If you are a first-time buyer willing to live small for the next few years, this might be a good time. Invest in a condo in a downtown neighbourhood where there are likely to be students (say, the Canary District with George Brown nearby, to name one), where you live in a few hundred square feet while you pay down your low-interest mortgage for a while. By the time prices come down, you’d have paid off enough that your mortgage won’t be less than your condo value, and when it comes time to have kids or you’re yearning for a lawn, you might be able to keep the condo as a rental investment and buy elsewhere, even if you rent in a cheaper part of town for a few years and save up another down payment while the condo pays for itself.

Take the long view. If interest rates do come down and you play it smart, you won’t need to be an economist to come through the next few years in good financial health.

Feature image: Oakvillage launch in Oakville by Branthaven and Minto