BMO mortgage cuts in line with expectations that interest rates will fall
04 Mar 2013 , According to Julian Beltrame, The Canadian Press | The Canadian Press
OTTAWA - Despite ongoing concerns about high levels of debt, interest rates in Canada are going nowhere except perhaps down, say analysts following the latest move by one major bank to shave fixed mortgage rates.
With bond yields trending south and the housing market slowing, the Bank of Montreal over the weekend dropped its posted five-year fixed mortgage rate by 0.10 points to 2.99 per cent in an effort to attract new borrowers.
Others may follow suit, although analysts note that many borrowers had been able to negotiate the new BMO posted rate, and in some cases even lower costs, for some time.
Finance Minister Jim Flaherty responded with a warning to banks not to engage in a "race to the bottom practices that led to a mortgage crisis in the United States."
But analysts said the banks are merely responding to the natural forces in the market given that the Bank of Canada appears rooted to keeping its trendsetting policy rate at one per cent for much longer than was anticipated a few months ago.
Borrowing costs for banks have fallen, said David Madani, chief economist with Capital Economics in Toronto, freeing room for banks to lower their rates. He notes that last week Royal Bank chief executive Gord Nixon noted that the demand for mortgages have also dropped.
"Banks will be banks. It's not the first time the banks have tried to undercut each other in order to prop up their loan growth," Madani said.
And interest rates are unlikely to feel any upward pressure any time soon, said CIBC chief economist Avery Shenfeld.
On Monday, CIBC World Markets extended its forecast for when the central bank would start hiking rates to the third quarter of 2014 — six months longer than it had previously anticipated.
Shenfeld said he would like to see bank governor Mark Carney drop his tightening advisory on Wednesday, the next rate setting meeting, but doubts he will for fear of enticing Canadians to borrow beyond their means.
"I think the bank should drop that rate hike warning to help cool the currency even further to help exports, but I doubt they'll do that," he said.
Lower mortgage costs could revive what has been a slowing housing market, say analysts, but given that household debt is at record highs and income growth has been modest, the inducement may not be as effective as it might have been in previous years.
"Borrowing is slowing anyway, so I don't believe that a modest drop (will make much of a difference)," said Shenfeld. "A modest drop in five-year mortgage rates might induce more people to lock in rather than take a variable mortgage, but I doubt it will have a huge impact on the volume on borrowing."
Scotiabank's Derek Holt also said he was not convinced by the "mortgage wars" scenario, suggesting that the recent sudden loss of momentum in housing had more to do with indebted households than Flaherty's moves to tighten mortgage rules last summer.
"With pretty much all of the run-up in (housing starts and construction) being due to rising condo construction over recent years, what has prompted the cooling may have considerably more to do with a turn in the leveraged investor's math than tighter mortgage rules," Holt said in a note to clients.
Madani, who has long warned that housing is overheated and headed for a sharp correction, said lower mortgage costs won't help, however.
"Some people believe housing prices only go up, so it's now or never," he explained. "Particularly first-time buyers, they look at today's mortgage rates and say, 'If I don't buy today, I'll be priced out.' "