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.
BMO is now offering five-year fixed mortgages at 2.99 per cent, slashing its rate from 3.49 per cent. While that’s not the lowest rate in the market, BMO is the first big bank to move below the sensitive 3-per-cent threshold.
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.
Asked whether Mr. Flaherty’s departure had anything to do with the bank’s decision, 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.
Joe Oliver, Mr. Flaherty’s successor as Finance Minister, could not be reached for comment.
BMO’s rate cut comes after Toronto-Dominion Bank lowered its four-year rate to 2.97 per cent earlier in March. Last week, shortly after Mr. Flaherty stepped down, Bank of Nova Scotia also slashed its mortgage rates, and instituted a special 2.94-per-cent four-year rate.
At least one credit union also moved its five-year rate to 2.99 per cent in February.
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.
Their comments came one after the other at a bank conference on Wednesday.
“Do we see a major disaster in the housing sector? We don’t think so,” said Bharat Masrani, incoming chief executive officer at Toronto-Dominion Bank. In recent years, TD was one of the banks most concerned about a major price correction.
The bank CEOs and executives who spoke at the conference cited 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, said David Williamson, head of retail banking at Canadian Imperial Bank of Commerce.
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.
Indeed, many experts say 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.
It’s at that point that the real impact of Canada’s high consumer debt levels will become known. Canadians appear to be heeding warnings about piling on too much debt, and credit growth is now slowing. Some economists are hopeful that the debt-to-income ratio is near its peak and will start falling.
Even though mortgage lending isn’t a glaring issue, overall levels of consumer debt are still a concern.
“I think the more prudent question is consumer debt and not just housing itself,” TD’s Mr. Masrani said.
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.
“Are we watching this very carefully? Absolutely,” National Bank of Canada CEO Louis Vachon said. “Are Canadians genetically immune to financial crisis? No. We’re not delusional. We’re not arrogant enough to take our eyes off the ball.”