Mortgage rates shouldn’t be a race to the bottom
OTTAWA — Finance Minister Jim Flaherty is attempting to stop another mortgage war from escalating, warning Canadian banks not to “race to the bottom” end of lending rates in a competition for customers.
“Our government has taken action several times to make sure the housing market remains sound,” the minister said in statement Monday, after the Bank of Montreal cut its five-year fixed-rate mortgages to a low of 2.99% from 3.09%.
A similar move by BMO early last year sparked a rate war as Canada’s housing market was still heating up.
In July, Mr. Flaherty introduced tougher mortgage rules to cool the market, while avoiding a housing crash.
These measures included shortening mortgage amortization to 25 years — compared to a peak of 40 years at one point during with a peak of the boom.
Mr. Flaherty has said the government will consider other measures if the mortgage environment appears to be threatening households.
“As for decisions by individual banks, as I have said repeatedly before, my expectation is that banks will engage in prudent lending — not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States,” Mr. Flaherty said.
Gregory Klump, chief economist with the Canadian Real Estate Association, told the Financial Post that “perhaps there is pressure to lower rates.”
“It remains to be seen how much [the real estate market] is going to slow,” he said.
“The most important thing at this point in the cycle is how confident consumers are of economic prospects going forward.”
Both Mr. Flaherty and Bank of Canada Governor Mark Carney have been warning consumers about loading up on debt at a period of low interest rates, saying lending cost will eventually be going back up and could put a strain on household finances.
Bank of Canada on Mortgage Rates
The Bank of Canada has kept its trendsetting lending rate at a near-record low of 1% since September 2010, encouraging borrowing by consumers and businesses as Canada was coming out of recession.
Much of the cheap money was poured into the housing market, sending sales and prices soaring. The market has since stabilized under Mr. Flaherty’s new rules.
Last month, Canada Mortgage and Housing Corp. said new housing construction is expected to be lower this year due to moderate economic and employment growth in the second half of 2012. The Teranet-National Bank index of Canadian housing prices in January continued to show the effects of a cooling trend that has hovered over the real estate market for more than a year.
John Aiken, an analyst at Barclays Capital, said that for all the talk of a new mortgage war breaking out, the past shows that it’s more likely to be a stalemate than a war.
“While similar concerns arose last year, we note that it had very little impact on the industry,” he said.