Canada's new Finance Minister is taking a hands-off approach to the mortgage market, signalling that, unlike his predecessor, he does not want to interfere in the rate-setting decisions of the banks.
Joe Oliver had been the nation's Finance Minister for one week on Wednesday when Bank of Montreal CEO Bill Downe called to say that BMO was about to bring back its controversial 2.99-per-cent five-year fixed-rate mortgage.
The last time BMO announced that rate – at this time a year ago, just before the all-important spring house-selling season – it raised the ire of then-finance minister Jim Flaherty, who had been taking steps to cool the housing market because of fears about rising mortgage debt and house prices.
Mr. Flaherty had his office take the unusual step of scolding BMO in private, and then publicly told the banks that they needed to be responsible lenders.
His chastising caused Manulife Bank to back away from an announced rate cut, while BMO let its lower rate "expire" after less than a month.
In contrast, when Mr. Oliver spoke to Mr. Downe this week, he told the bank CEO that the government wants to be less involved in the mortgage market, and gave him the tacit go-ahead to cut rates.
Mr. Oliver went so far as to tell reporters in Ottawa Thursday that he would not be concerned if other banks followed suit, suggesting it was a private sector decision.
"There's a market, and the bank made its decision," he said.
"The chief executive officer of the Bank of Montreal informed me about it. 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."
He declined to say whether he would take steps if he became concerned that a housing bubble was going to form.
His stance was applauded by those who thought it was inappropriate for Mr. Flaherty to intervene in banks' pricing strategies.
Finn Poschman, vice-president of research at the C.D. Howe Institute, said that when it comes to the question of whether low rates cause too much credit growth, "it is not clear that regulators have special insight on that possibility and, in its absence, deference to market outcomes is appropriate."
Bank economists say that while house prices could very well fall, the market appears to be in the midst of a so-called "soft landing" in which it gradually loses some steam without crashing.
But risks remain. In fact, BMO changed its rates on the same day that its chief operating officer, Frank Techar, applauded Mr. Flaherty for the steps he took to cool the market.
"I think the moves that have been made to take the edge off the growth in the marketplace ... have been good," Mr. Techar said at an industry conference Wednesday. "It's really helped us keep that balance in place."
"I think it's a possibility but it's a very small possibility that we find ourselves in trouble," he added.
Specific markets, like Toronto's condo market, are still sources of worry for a number of economists, and the market won't truly be tested until after interest rates rise.
Of late, the mortgage market has been sluggish because home sales have been soft through the winter months. Mortgages are the lifeblood of the banks and BMO has long struggled to gain market share in that competitive arena.
Other banks have been competing on mortgages of other lengths – for instance, Toronto-Dominion Bank lowered its four-year rate to 2.97 per cent earlier in March and then last week, shortly after Mr. Flaherty stepped down, Bank of Nova Scotia cut its rates and instituted a special 2.94-per-cent four-year rate. But they had shied away from dropping the key five-year rate below the sensitive 3-per-cent threshold.
There will likely be more rate cuts as the spring market gets under way, but it's not clear that banks will engage in a price war on the five-year rate. At least one, the country's biggest mortgage lender, appears reluctant to do so.
"We are very competitively priced across all of our mortgage products," said Sean Amato-Gauci, senior vice-president of home equity financing at Royal Bank of Canada, which has the biggest share of the market. "Not all products are the same and some competitors have mortgages with very limited features, such as no term choices, or access to lines of credit, or pre-payment options."
Bankers say high consumer debt levels are still something that deserve to be watched.
"We are seeing a slowing consumer lending environment, which frankly is a good thing," RBC CEO Gordon Nixon said about a month ago.
Mr. Oliver noted earlier Thursday that the government has taken actions in the past to stem the growth of both consumer indebtedness and the government's exposure to the housing market, and said he would continue to monitor the market closely.