Lately, the elephant in the room has been the Coronavirus, or COVID-19 for short. I’m not freaking out and I’m also not stock piling non-perishable goods just yet but I have made some precautions just in case it gets out of hand. I’m always carrying hand sanitizer, and if you see me in the next little bit, be prepared for a fist bump instead of a firm handshake since “social distancing” practices are being encouraged.
Did Your Stocks PLUMMET? If you’ve been following this outbreak, you’ll know that the stock markets have tanked and a lot of people have been asking me how the real estate market has been holding up with COVID-19. I’d say that it’s as if nothing has happened. In fact, the market fundamentals have been great and if you watch this month’s market watch episode, one would argue it’s been ridiculously great this year so far.
I don’t know if it’s just me, but I’ve had a lot of non-Canadians call me in the past month asking how to buy real estate in Toronto. I don’t know if there is some exodus of cash that’s coming in the future after the COVID-19 outbreak, but I read that after the SARS outbreak in 2003, there was a stream of cash that came to Toronto. If that happens, then that’s going to add more fuel to the fire and the Toronto real estate market will be even hotter than it is now.
Offsetting the Stock Market Drops – As a result of the impacts with the COVID-19 outbreak, the Bank of Canada followed the US Federal Reserve and dropped their interest rate by 50 basis points or 0.5% to stimulate the tanking stock market. Allow me to illustrate with the graph below.
This is the first rate drop from the Bank of Canada since June 2015. We’ve had a massive increase in real estate prices since that last interest rate drop in 2015, plus a Fair Housing Plan that got put into place. So it’s been a while since our real estate market has had a taste of lower borrowing rates. Even better news is that all trends are pointing to the interest rate being dropped AGAIN at the next interest rate announcement on April 15th.
Adding Fuel to the Hot Fire – Simply put – when the interest rate drops, borrowing money becomes cheaper, however, not all banks follow the Bank of Canada’s overnight rate. Traditionally, some banks don’t follow the overnight interest rate changes; the variable mortgage rates set by the bank’s prime rates don’t drop along with the changes in the overnight interest rate. However, amidst the announcement, immediately almost all schedule A banks have dropped their prime rate by 0.5%, which means that mortgage rates are now 0.5% lower. This will certainly add fuel to the fire (to an already hot real estate market right now). This is exactly why I always suggest going with a variable rate mortgage instead of a fixed rate mortgage – you always win in the long-run with a variable rate product!
Pick Your Product Wisely! Another thing to keep in mind is that as the stock market becomes more stable, there tends to be a push towards the bond market which affects the fixed rate. This means that you should be seeing the fixed interest rate change a bit as well. Some banks have dropped their fixed interest rate by 20 basis points or 0.2%.
If you don’t think money is already cheap enough to borrow right now, then you’re missing out! I’ve had multiple clients tell me that banks are now offering cashback incentives for you to get a mortgage with them. This indicates to me that banks are starving for mortgage business. The key caveat is they will sell you the product with the lowest fixed interest rate possible so that they have you locked in with them for 3-5 years. That may be good if you want consistent amounts of interest payments, but I’ve always been a believer that you can’t plan your life to a tee and we should all expect life changes along the way. As such, having flexibility over that bit of consistency is best for the long haul. Furthermore, the cost to break a fixed interest rate mortgage will be multiples more than the minor amount that you’ll be paying extra each month for 3-5 years. Plus, you will have situations like this COVID-19 outbreak that has led to the drop in variable interest rates.
The Wrap – All of these current external factors make the market even hotter in the coming months. When you factor in CHMC’s new lowered interest rate stress test taking into effect on April 6, 2020, that’s like saying hello! to a raging fire. Will the Toronto real estate average price reach $950,000 at some point this year? You betcha! So if you’re looking to get into the market as quick as possible, then make sure you download my Top 5 Hacks to Buy Your First Home Faster, and call me ASAP to plan your next strategic move.
Until next time,
Your move. Your future.
Zhen
