After starting his career in banking at 19, Kyle Green quickly made the shift to mortgage brokering. He started his own business even more quickly after that at just 21 years old. Now Kyle runs his own brokerage – The Green Mortgage Team – in addition to a team of 9 people that work for him.
When we last spoke with Kyle he left us with a sage piece of advice “Don’t wait to invest in real estate. Invest in real estate and wait.” Today he’s offering his thoughts on the current market conditions, dropping interest rates, and what this means for real estate investing.
Kyle, what happened last week?
On Sunday, the US federal reserve declared an emergency and dropped their rates from 1% to 0%. The US Fed also called for a $700 billion injection of liquidity into the market with Quantitative Easing (they are printing money). This came after Canada dropped rates by 0.5% on Friday, now 1% lower than they were just two weeks ago.
On Friday afternoon, a major bank gave no notice and raised their variable rates from Prime -0.65% to just PRIME (Prime +0.25% for rental properties!). This may be setting a precedent for others to do the same.
The last time we saw variable rates in the prime or prime + was during the sub-prime crisis in 2008. Although bond yields and the prime rate were dropping, the cost of funds actually went up, increasing spreads on the offered rates. I see a lot of similarities in that marketplace to what we are seeing now. Our advice back then was for our clients to jump into a variable rate, ride the wave down, and then either lock in or stay variable.
What do you think will happen next?
Markets are extremely volatile right now. The US fed dropping rates to 0% could either push bond yields up or down – we have seen both happen before. Given that the market rallied Friday, my thoughts are that the bond yields will drop again; however, this time fixed rates may not follow with the volatility, increasing the spreads the bank’s price in.
If this will be a trend (which I fully expect it will be, based on the massive increase to variable rates with the one bank on Friday), then there may be a very small window to be able to take a discounted variable rate.
The expectation now is that the Bank of Canada may continue to drop further. The overnight rate is 0.75%, and the lowest is likely at 0.25%. This would mean another 0.5% drop. This is not taking into account that banks have not yet reacted to Friday’s 0.5% emergency cut (I would be surprised if they fell the full 0.5% and instead just dropped 0.25%).
What would you say to those interested in real estate investing?
Given that many sellers will be reluctant to allow buyers to view their homes, and many buyers will also be reluctant to go view homes, we expect home sales to slow considerably. As an investor, this may be an opportunity to find a seller who is extremely motivated to sell. If the market of buyers has dried up, then a seller who NEEDS to sell may be more willing to negotiate on price.
Our advice is as an investor, keep your eyes open, but don’t rush into anything. There may be some deals to be had in the next few months so keep looking!