Many times in the last few months, I have fielded questions about what is driving our housing market, not just in the Lower Mainland but really for all of Canada.

It has been interesting since the beginning of the COVID 19 pandemic to see how particular markets and housing types have played out. To be clear, not every type of home in every area is busy. A South Surrey condo is a heck of a lot harder to sell than a home with a suite in Brookswood, Langley.

But there is one underlying reason that the market is likely more productive than any of us would have imagined.

Mortgage rates.

Before we get into the how let’s first understand the why. Why would mortgage rates be so low in the first place, and why would that make such a difference?

In July 2020, more homes were sold in Canada than any other July in history. Wow. This shows that what we are experiencing in the Lower Mainland is not just limited to our own little pocket. All of Canada is busy with sales, a national trend. The only thing that is going on nationally with the real estate world is ultra-low mortgage rates and our old friend (or emery) COVID 19.

The historical discounted mortgage rates at their lowest point previous to current days were in and around October 2016, where we saw a rate of about 2.09% (thanks to ratehub.ca for the info). Fast forward to January 2019, where we saw a peak of recent times of 3.24%, which was a steady increase of almost 1.15% since then low time. Fast forward to today, the lowest 5 year discounted fixed rate can be found at a whopping 1.74%. Incredible! Who would have thought we would ever see rates this low? (Ask your parents about owning in the ’80s, when rates were above 20%+)

The Bank of Canada has reduced, reduced, reduced the overnight lending rate since the beginning of the pandemic all in hopes of getting the money out of your (and my) wallet during this challenging economic time. At the start of this COVID 19 mess, the economy basically shut down. We stopped going to restaurants, visiting the movies and generally gave up any weekend fun in the name of protecting our neighbours and ourselves. This was not good for business. It put a halt on GDP growth, seeing Canadian GDP drop by its largest amount ever recorded. Needless to say, something needed to be fixed.

In comes the Bank of Canada with a prime rate drop. This puts a little life into the Canadian economy. So why not do another? Over the course or 3 changes starting on March 11 of this year, we have seen the prime rate reduce by 1.5%. This of course begins to have an impact on spending, particularly people buying homes.

So why is buying homes so important? It is one of the few tools the government actually has to really promote the economy and get people spending money again. Curious why? Read on my curious friends!

In a 2017 report published by Altus Group on behalf of the Canadian Real Estate Association, stated  

“Resale housing transactions across Canada generate significant economic activity. The purchase and sale of homes via Canadian Multiple Listing Service® (MLS®) Systems1 generates fees to professionals such as lawyers, appraisers, real estate agents, surveyors, etc. as well as taxes and fees to government. In addition, homebuyers typically purchase new appliances or furnishings and undertake renovations that tailor the new home to specific household requirements.

During the period between 2014 and 2016, for example, it is estimated that a total of $61,600 in ancillary spending (i.e., spending by purchasers on items other than the actual house and land) was generated by the average housing transaction in Canada. Per transaction ancillary spending varied somewhat by region, ranging from $44,150 in Atlantic Canada to $67,800 in British Columbia.

Considering the average of 504,538 home sales processed annually through Canadian MLS® Systems during that period, ancillary spending attributable to moving totalled more than $31 billion per year across Canada – a significant contribution to the total Canadian economy. More than 48% of these spin-off benefits were generated in Ontario alone, where homebuyers contributed $14.9 billion to the economy.

Direct and indirect employment resulting from housing sales is also significant. Some 220,065 jobs are estimated to have been generated each year by average annual MLS® Systems resale housing activity in Canada over the 2014-2016 period. Canada-wide, the finance, insurance, real estate, construction and professional service sectors benefited the most from MLS® Systems home sales”

So there you have it. Low-interest rates lead to people buying homes. People buying homes means they are spending money. Spending money means other people are getting paid. Other people getting paid means they now can spend money. Voila! We have an economy again!

The see the full Altus report click here

Until next time,

 Darin