Now that all of Canada's major banks have decided that the chances of anything resembling a real estate meltdown in this country are extremely low – and with no sign of an interest rate spike on the horizon – they can get back to their favourite spring pastime of stealing mortgage market share from each other.
Slicing rates to capitalize on increased demand for housing as the deep chill of winter lifts is a Canadian tradition. And this time, the federal government is likely to remain on the sidelines. Which is the right thing to do.
The banks can make a good case that tightened mortgage standards have reduced the risk of loan losses, that their own long-term financing costs in the bond market have come down slightly and that demand for corporate and personal loans has weakened. That leaves mortgages as one of the few growth opportunities this side of wealth management.
Enter the Bank of Montreal, which has specifically targeted mortgage expansion as a key objective. When BMO slashed its rate Wednesday on five-year fixed mortgages by half a percentage point to 2.99 per cent, it became the first of the financial heavyweights to take five-year rates back below the sensitive marker of 3 per cent. But unlike what happened last March, when the bank made the exact same move, it is bound to have more company this time.
BMO's cut a year ago prompted then-Finance Minister Jim Flaherty to issue a public scolding. Then he went even further, pushing Manulife Bank to reverse an even bolder cut. It was an unprecedented case of government interference that was shocking, not least because it came from a government – and finance minister – supposedly devoted to free market principles.
But Mr. Flaherty had some justification. At the time, the housing market appeared to be overheating, and the minister and the Bank of Canada were deeply worried about high consumer debt levels and potential risks to taxpayers, who provide the ultimate backstop for Canada Mortgage and Housing Corp. to protect home buyers and lenders from their own excesses.
This time around, BMO chief Bill Downe was careful to inform new Finance Minister and Bay Street veteran Joe Oliver of his intentions in advance. The minister's response? "There's a market, and the bank made its decision … I listened to his explanation, his reasons. I reiterated what I just stated, which is the government is gradually reducing its involvement in the mortgage market."
That ought to be as far he goes. After all, Mr. Flaherty had already done a lot of the heavy lifting to ensure the mortgage market remained relatively sound and that borrowers didn't take on far more housing risk than they could manage if rates began rising.
Over the course of four post-Great Recession years, he slapped on various mortgage-tightening measures. These included such sensible changes as requiring all prospective borrowers to meet the standards for five-year loans at fixed rates, even if they were opting for loans at lower variable rates. Later, Ottawa prohibited insured refinancings without at least 20 per cent equity.
And CMHC has made a series of moves to bolster its capital, including another increase in mortgage insurance premiums coming May 1.
A boatload of analysts and investors are convinced the housing market is headed for collapse. But bank executives are increasingly convinced any landing will be a soft one. And as their own futures depend on it, they have a big stake in the outcome.
Even Toronto-Dominion Bank, the most pessimistic of the Big Six, discounts the possibility of a major disaster.
So with more effective safeguards in place – and the Finance Minister watching from the sidelines – why not let the banks play their spring game and provide chilled consumers with a few rays of sunshine?