Interest Rate Heats Up GTA Real Estate Market

[ehomz Realty]

Real Estate Market Across GTA is Booming ! Following the drop in the price of crude oil (less than $50 (U.S.) per barrel) the Bank of Canada cut
the overnight interest rate by a 0.25 per cent to 0.75% (The overnight rate is the interest percentage is used by banks and other lending institutions to lend money to each other on a daily basis). As of today, Thursday, July 23, 2015 the overnight rate has dropped to 0.5%. The prime interest rate (the interest rate at which banks lent to prime customers) in major banks is now dropped from 3% to 2.85% and now to 2.7% (July 23, 2015). The Canadian dollar ended the day at its lowest level in more than a decade for 76.7 U.S cents. Interestingly, it is not the end yet!
How does it affect the housing market? We expect to see stronger housing market across the GTA in next few months and the average price will most likely increase as the demand raises. Now the question is “How long this recession will last?”
According to the senior foreign-exchange strategist- Mazan Issa : “The economy is in a technical recession and as the data continued to unfold, it became increasingly obvious the economy is continuing to struggle with an oil shock that is much deeper and much more prolonged than previously anticipated.”
The investors who rely on income from bank-issued guaranteed investment certificates will not be certainly happy about the interest cut and will look for safer investment in real estate. Reducing the prime rate by major banks makes investor more worried about the overheated housing markets in Vancouver and Toronto.
The current Canada’s overnight rate is still double the U.S. Federal Reserve’s policy rate which creates opportunities in real estate investment at this low rate environment.
The booming areas in Oshawa, Caledon, Hamilton, Aurora, Brampton andRichmond Hill can be potentially hot spots for home buyers to take advantage of low energy prices.

 

[Matt Crowley]

Actually this is untrue: "The investors who rely on income from bank-issued guaranteed investment certificates will not be certainly happy about the interest cut and will look for safer investment in real estate."

Investors who owned bonds prior the interest rate cut will see an INCREASE in the value of their portfolio. This is because the market now expects a lower guaranteed return then they had previously invested at. Sounds a bit counterintuitive, but imagine you invested $100,000 at 5% risk-free a year ago. You paid $100,000 and would be paid $5,000 per annum for the next 20 years (with the $100,000 returned in 20 years). Now, the market interest rate is 3% but you will still receive the $5,000 every single year for the next 19 years. So, your investment value has actually increased. You still receive the $5,000 each year but the market only expects $3,000 per year. So, the value of your investment has increased and you will be able to sell the investment for more than $100,000.

This is also incorrect: "The current Canada’s overnight rate is still double the U.S. Federal Reserve’s policy rate which creates opportunities in real estate investment at this low rate environment."

This is an extremely complicated issue and should not be lightly approached without some serious understanding in international finance. A few of the factors you must consider here before reaching this conclusion:

• interest rate parity
• currency futures and the zero sum game
• balance of payments & trade surplus
• Expectations of GDP growth

This sentence is a university level course in itself, and this is after making the assumption of an efficient market economy...which is likely not perfectly true.

In short this is what you should know:
- there is no "guaranteed, risk-free" way to make money by shorting Canadian dollars and buying USD
- the changes in the Federal Reserve's policy rate and Bank of Canada's rate are completely absorbed by the market within (fractions) of a second after the market release of information and reflected in the currency exchange rates (all of them!). By completely absorbed, this means there is zero chance of making a risk-free return using currency futures, interest rate futures, short or long positions in bonds, stocks, ETFs, or otherwise