The Bank of Canada maintained its overnight rate at 0.25 per cent this morning, a level it considers its effective lower bound. The Bank reiterated what it calls "extraordinary forward guidance" in committing to leaving the overnight rate at 0.25 per cent until slack in the economy is absorbed and inflation sustainably returns to its 2 per cent target. The  Bank projects that will not occur until 2023.

The Bank is also continuing its quantitative easing (QE) program, purchasing at least $4 billion of Government of Canada bonds per week. In the statement accompanying the decision, the bank noted that while the near-term outlook for growth is strong, there remains considerable slack in the economy and employment is still well below its pre-COVID levels.  Inflation is expected to move modestly higher, largely reflecting base-year effects and deep price declines in some goods and services at the start of the pandemic.

The Bank of Canada was anticipating a second wave induced contraction of the economy in the first quarter of this year  and so  finds itself somewhat caught off guard by a vastly improved economic outlook and rising long-term bond yields.  The massive $1.9 trillion COVID-19 relief package, the American Rescue Plan, recently passed by the US Congress and good news on the speed of US vaccinations has prompted a re-set of expectations in financial markets as higher economic growth and inflation gets priced into bond yields.

While the Bank has continued its quantitative easing program aimed at holding Canadian long-term interest rates down, there is little it can do to combat the pressure on the Canadian yield curve from rising US long-term interest rates.  Recognizing the much brighter economic outlook,  the Bank may announce a tapering of its QE at its next meeting in April but will stick to its commitment to keep its policy rate on hold until 2023.  That would mean a widening gap between fixed and variable mortgage rates over the next year as fixed mortgage rates rise alongside long-term interest rates.

Copyright British Columbia Real Estate Association. Reprinted with permission.

Check out this informative Feb 2021 video:

The Canadian economy expanded at a 9.6 per cent annual rate in the fourth quarter of 2020. Growth was led by increased government spending, business investment and investment in new home construction and renovations as well as a large change in business inventories as large drawdowns of inventory from previous quarters reversed.  For 2020 as a whole, the Canadian economy shrank 5.4 per cent, the steepest decline since quarterly GDP data were first recorded in 1961.

Interestingly, the households savings rate registered 12.7 per cent, the third consecutive quarter of double digit saving rate.  Remarkably, total household savings in 2020 matched the cumulative savings of the previous seven years combined. That accumulated savings, and how it gets spent over the next year, will be a key component of what we expect to be a robust economic recovery in 2021. 

Following an unprecedented 2020, we expect the Canadian economy will enjoy two years of very strong growth with the economy expanding by 5 per cent this year and a 4.3 per cent in 2022.  An expected acceleration of vaccinations appears to be on the immediate horizon. As that roll-out progresses, we expect pent-up spending throughout the economy to be unleashed, driving a strong economic recovery.

While the Bank of Canada has not changed its commitment to keeping its overnight rate unchanged until 2023, there has been substantial upward pressure on long-term Canadian interest rates as markets price in a faster than expected recovery along with the impact of the $1.9 trillion US COVID-19 relief package.  As 5-year government  bond yields move higher,  5-year fixed mortgage rates have also started to rise from a record low average of 1.8 per cent to a still very low level of 1.95 per cent.  For context, the average 5-year fixed rate prior to the onset of the COVID-19 pandemic was about 2.9 per cent.

Copyright British Columbia Real Estate Association. Reprinted with permission.

Competition amongst home buyers is putting upward pressure on home prices across Metro Vancouver’s* housing market:

The Real Estate Board of Greater Vancouver (REBGV) reports that residential home sales in the region totalled 3,727 in February 2021, a 73.3 per cent increase from the 2,150 sales recorded in February 2020, and a 56 per cent increase from the 2,389 homes sold in January 2021. 

Last month’s sales were 42.8 per cent above the 10-year February sales average. “Metro Vancouver’s housing market is experiencing seller’s market conditions. The supply of listings for sale isn’t keeping up with the demand we’re seeing,” Colette Gerber, REBGV Chair said. “Competition amongst home buyers is causing multiple offer situations and upward pressure on prices.

“This is particularly true in the townhome market where demand is outstripping the available supply. Conditions differ depending on location and property type so it’s important to work with your local REALTOR® to develop strategies to meet your needs.” 

There were 5,048 detached, attached and apartment homes newly listed for sale on the Multiple Listing Service® (MLS®) in Metro Vancouver in February 2021. This represents a 26.1 per cent increase compared to the 4,002 homes listed in February 2020 and a 12.7 per cent increase compared to January 2021 when 4,480 homes were listed. 

The total number of homes currently listed for sale on the MLS® system in Metro Vancouver is 8,358, a 9.1 per cent decrease compared to February 2020 (9,195) and a 0.6 per cent increase compared to January 2021 (8,306). This is 21.2 per cent below the February 10-year average for new listings. 

For all property types, the sales-to-active listings ratio for February 2021 is 44.6 per cent. By property type, the ratio is 41.8 per cent for detached homes, 61.8 per cent for townhomes, and 41.7 per cent for apartments. Generally, analysts say downward pressure on home prices occurs when the ratio dips below 12 per cent for a sustained period, while home prices often experience upward pressure when it surpasses 20 per cent over several months. 

“Low interest rates remain a key driver in today’s market. We’re seeing steady numbers of first-time home buyers and move-up buyers entering the market,” Gerber said. The MLS® Home Price Index composite benchmark price for all residential properties in Metro Vancouver is currently $1,084,000. This represents a 6.8 per cent increase over February 2020 and a 2.6 per cent increase compared to January 2021. 

Less populated communities within the region continue to experience the largest year-over-year price increases across all property types. Examples, according to the MLS HPI®. include Bowen Island (34.4 per cent increase), the Sunshine Coast (32.7 per cent increase), West Vancouver (16.1 per cent increase) Maple Ridge (14.8 per cent increase) and Ladner (13.7 per cent increase). 

Sales of detached homes in Metro Vancouver reached 1,231 in February 2021, a 79.7 per cent increase from the 685 detached sales recorded in February 2020. The benchmark price for a detached home is $1,621,200. This represents a 13.7 per cent increase from February 2020 and a 2.8 per cent increase compared to January 2021.

Sales of apartment homes reached 1,759 in February 2021, a 65.8 per cent increase compared to the 1,061 sales in February 2020. The benchmark price of an apartment is $697,500. This represents a 2.5 per cent increase from February 2020 and a 2.5 per cent increase compared to January 2021. 

Attached home sales in February 2021 totalled 737, an 82.4 per cent increase compared to the 404 sales in February 2020. The benchmark price of an attached home is $839,800. This represents a 7.2 per cent increase from February 2020 and a 2.9 per cent increase compared to January 2021. 

* Areas covered by the Real Estate Board of Greater Vancouver include: Burnaby, Coquitlam, Maple Ridge, New Westminster, North Vancouver, Pitt Meadows, Port Coquitlam, Port Moody, Richmond, South Delta, Squamish, Sunshine Coast, Vancouver, West Vancouver, and Whistler.

Copyright British Columbia Real Estate Association. Reprinted with permission.