Interest rate cut should benefit real estate


Wednesday, January 21, 2015
Real estate is positioned prominently among industries likely to benefit from the Bank of Canada’s interest rate cut announced with today’s release of the quarterly Monetary Policy Report. The unexpected 0.25 per cent reduction trims the overnight interest rate to 0.75 per cent in an effort to counter major hits in the resources sector and the slide of the Canadian dollar.
“Although the interest rate cut largely reflects the deterioration of Canadian economic fundamentals due to the recent plunge in oil prices, lower interest rates are broadly supportive for values in interest-rate sensitive sectors like real estate,” observes Carl Gomez, senior vice president and chief economist with Bentall Kennedy.
Bank of Canada Governor Stephen Poloz calls the move insurance against deflation and financial instability. Meanwhile, premised on assumed oil prices of US $60 per barrel, the Monetary Policy Report forecasts the Canadian economy will strengthen in the second half of 2015 with real GDP growth averaging 2.1 per cent this year and 2.4 per cent in 2016.
“While it is true that a lower profile for interest rates may exacerbate household imbalances at the margin by encouraging more borrowing, the far more important effect will be to mitigate those imbalances by cushioning the decline in income and employment caused by lower oil prices,” Poloz said at a press conference Wednesday morning.
From an investment perspective, real estate analysts say the drop in bond yields seen immediately upon the Bank of Canada’s announcement should further solidify real estate’s status.
“Real estate cap rate spreads over bond yields had already widened recently. The bond yield has been dropping, but cap rates have held relatively firm,” says Chris Langstaff, senior vice president, research and strategy, with LaSalle Investment Management. “Now the spread has widened even more so it will just continue to make real estate look very attractive on a spread basis.”