Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Top Business Stories

Relax, BMO's 2.99% mortgage won't spark a housing crisis Add to ...

These are stories Report on Business is following Tuesday, March 5, 2013.

Follow Michael Babad and the Globe’s top business stories on Twitter.

Angst over mortgages
I’m no apologist for the banks, but the angst over Bank of Montreal’s cut-rate mortgage seems over the top.

Politicians of every stripe are putting up a rare united front in criticizing the bank for cutting its five-year, fixed-rate mortgage by 10 basis points.

That’s 10 one-hundredths of a percentage point.

The suggestion is that BMO is somehow putting Canada’s housing market at risk of U.S.-style ruin, and enticing borrowers to build up debt at a time when policy makers are urging them to do just the opposite.

As The Globe and Mail’s Tara Perkins reports, BMO on the weekend cut the key rate to 2.99 per cent, from 3.09 per cent, sparking fears of a mortgage rate war and prompting warnings from Finance Minister Jim Flaherty and members of the other political parties.

Relax.

What BMO is doing is offering homebuyers significant longer-term savings of almost $2,400 in interest over the five years, but on a daily basis savings that are well below the price of a cup of coffee.

Hardly an inducement.

It’s true that Canadians are juggling a record household debt burden, but, since Mr. Flaherty’s mortgage restrictions of last summer, the housing market has cooled rapidly. And credit growth has slowed markedly.

The residential real estate market is expected to continue cooling regardless of 10 basis points.

What BMO may do is attract a small number of borrowers – to BMO – who were looking to buy anyway. What it’s not going to do is cause a bubble that wouldn’t otherwise have been there.

Consider the last time BMO did this, a year ago, with the same cut-rate offer. As The Globe and Mail’s Grant Robertson writes, that price war won BMO a gain in market share of just 0.31 per cent, and overall mortgage volumes didn’t change all that much.

And anyway, as Ms. Perkins and Mr. Robertson report, there’s been a price war in effect for some time.

True, you can look at this with the suggestion that BMO is going against the spirit of what Mr. Flaherty is trying to do, which is engineer a soft-landing in the real estate market.

Or you can look at it as a break for people who were probably going to buy regardless.

Homebuyers will look at what they can handle on a monthly basis. On that front, the difference on a $500,000, five-year, fixed-rate mortgage with 25-year amortization is $25.72 .

Or 86 cents a day.

Despite how odd it may sound, put it in its simplest terms. That’s far less than the $2.15 you’d pay at my neighbourhood Starbucks for a grande blonde, medium or dark roast cup of coffee. Or the $1.71 at Tim Hortons for a similar-size coffee without a fancy name.

We attack our banks when we believe their rates are usurious. Then we attack them when we think they’re too low.

So let’s put this in perspective: If you drink two coffees a day, you’d save the same amount (2 cents more, actually) by simply switching from Starbucks to Tim Hortons.

This does not a bubble make.

Toronto sales sink
The Toronto housing market continues to sink along with Vancouver's.

As Ms. Perkins reports today, home in the greater Toronto are slipped 15 per cent in February from a year earlier, while the average price climbed 2 per cent.

Of course, last year was a leap year so there was an extra day.

Dow tops record
Markets climbed today, buoyed by optimistic outlooks from China and elsewhere, leaving the Dow Jones industrial average at a record high at the close.

As The Globe and Mail's Darcy Keith reports, the Dow hit its highest level ever as investors bet that economies are strong enough to keep supporting the bull market.

"There are few new catalysts, but they point to evidence that while the U.S. has embraced greater fiscal drag through sequestration cuts, Europe is going the other way," Derek Holt of Bank of Nova Scotia said of the market action.

"Further, despite downsides to housing and exports, China's leadership reaffirmed its commitment to achieving 7.5-per-cent GDP growth this year and that buoyed Shanghai with positive spillover effects elsewhere."

Scotiabank boosts dividend
Bank of Nova Scotia became Canada's fourth bank to boost its dividend in the current round of earnings reports.

Scotiabank hiked the dividend by 3 cents as it posted a 13-per-cent gain in first-quarter profit, helped along by its international businesses and its acquisition of ING Direct Canada, The Globe and Mail's Mr. Robertson reports.

Scotiabank earned $1.63-billion or $1.25 a share, compared to $1.44-billion or $1.20 a year earlier.

Revenue climbed by 12 per cent to $5.18-billion.

China sets targets
China's outgoing premier buoyed markets today with an outlook for economic growth and spending, Carolynne Wheeler reports from Beijing.

Wen Jiabao spoke for 100 minutes to the National People's Congress, outlining a growth target of 7.5 per cent, similar to last year, and plans to hike spending with the result of a deficit of some 2 per cent of gross domestic product.

Inflation is pegged at 3.5 per cent, down from 4 per cent.

Just sayin’
Marriott International Inc. and the parent of IKEA are teaming up to launch a discount European hotel chain.

I wonder if meatballs will be on the menu?

Streetwise (for subscribers)

Economy Lab

ROB Insight (for subscribers)

Personal Finance

Business ticker

 
  • DJIA-I
  • TSX-I
  • SPX-I
  • BMO-T
  • BNS-T
Live Discussion of DJIA on StockTwits
More Discussion on DJIA-I
Live Discussion of TSX on StockTwits
More Discussion on TSX-I
Live Discussion of SPX on StockTwits
More Discussion on SPX-I
Live Discussion of BMO on StockTwits
More Discussion on BMO-T
Live Discussion of BNS on StockTwits
More Discussion on BNS-T

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories