Newly sworn-in Finance Minister Joe Oliver sounds worried about a potential new outbreak of the mortgage rate wars.
Just one week after Jim Flaherty stepped down, Bank of Montreal is shaking up the mortgage market, aggressively cutting its five-year rate to levels that caused the former finance minister to intervene last year. The bank says it will offer a five-year rate of 2.99 per cent, down from 3.49 per cent. Flaherty left his role as finance minister last week after a surprise resignation earlier in the month.
The last time a Canadian bank’s mortgage rates fell this low, in March of 2013, Mr. Flaherty stepped in and publicly called for “responsible lending” because he worried about an overheated housing market, and that that he disapproved of the rate and discouraged other big banks from following its lead.
The Finance Ministry has tightened mortgage rules four times in recent years, in an effort to cool rapidly rising house prices. “Our Government has taken action in the past to reduce consumer indebtedness and the Government’s exposure to the housing market,” Oliver said in an e-mail to the Globe and Mail.
BMO is the first big bank to lower the key rate beneath three per cent, Other Canadian banks have also recently cut their rates — TD Bank reduced its four-year fixed-rate mortgage to 2.97 per cent earlier this month, while Scotiabank lowered its rates across the board while issuing a four-year special rate at 2.94 per cent. At least one credit union also moved its five-year rate to 2.99 per cent in February.
BMO spokesman Paul Deegan wrote in an e-mail that “the timing is driven by the fall in bond yields and that we are in what has traditionally been the busiest season for home buying.” Five-year Government of Canada bond yields have risen slightly over the past two months, but BMO looked back six months to make its decision.
BMO’s decision came the same day that Canada’s biggest banks made it clear they are all but counting out the chance of a major correction in housing prices. Despite doomsday scenarios from investors who are skeptical about the frothy real estate market, bank executives are now speaking with much more confidence about the likelihood that any correction, should one materialize, is likely to be a soft landing. This news comes less than a month after The Bank of Canada announced it will keep its benchmark lending rate unchanged at one per cent again, the same level it has been at for three and a half years. The central bank’s rate, known as the target for the overnight rate, is the benchmark on which many mortgages and savings rates for consumers are based.
There are several reasons for confidence in the housing market: Sales-to-listing ratios aren’t out of whack; federal immigration policies have allowed for record numbers of household formations; unemployment is falling, so homeowners are better able to make their mortgage payments; and there hasn’t been a major uptick in mortgage loan losses at any of the Big Six banks.
Canada’s mortgage underwriting standards are strict, ensuring that people cannot buy houses they can’t afford, but that’s not to say that home prices won’t fall. Many economists believe they will. Merrill Lynch, for instance, estimated that rising interest rates in 2016 could cause house prices to gradually decline 5 to 10 per cent over a couple of years.
The market won’t truly be tested until rates do rise. But even then, while higher rates would immediately crimp affordability for new buyers, it would take years for most homeowners’ mortgages to be renegotiated at the higher levels. The banks, with their immense mortgage businesses, have a natural bias toward the perception that home prices are sustainable. But senior bankers also know that they would be in hot water if they failed to spot a pending housing crisis.
The Canadian economy performed better than the Bank of Canada was expecting in the last part of 2013, and it expects the global economy to strengthen this year and next. But neither of those upbeat developments is enough to compel the bank to raise rates just yet.
“The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks,” the bank said.