What the Bank of Canada rate cut means for mortgages
Remember the Bank of Canada’s anxiety over worrisome consumer debt loads and housing imbalances? So much for that.
The bank slashed Canada’s No. 1 interest rate today by 50 basis points, and it’s probably not the last cut.
For Canada’s housing market, it sure as sheep didn’t need this stimulus. Not only are there bidding wars galore in hot housing markets, double-digit price gains and 12-year-low housing inventories, but just ahead is one of the most stimulative mortgage rule changes in years: The stress test is easing.
That policy change is scheduled for April 6. Although, in the back of my mind, I’m wondering whether regulators will defer it to later this year.
If the banking regulator changes the stress test as planned and rates stay where they are, the minimum rate that borrowers will have to prove they can afford could dive by up to 50 basis points. That would boost the mortgage amount people could qualify for by up to 5 per cent to 7 per cent.
With real estate’s engine already running hot, that kind of buying power boost – and the bullish psychology that goes with it – could potentially lead to 15-per-cent-plus price gains in some markets this year, or more.
That is, if the economy’s bottom doesn’t fall out and banks don’t slash mortgage discounts.
Why would banks make mortgage shoppers pay more if bond yields, which normally guide fixed rates, are plunging?
Because banks get funding from the fixed income market. If investors fear mounting mortgage defaults because of rising unemployment, banks are forced to pay more for their funds.
Back in 2008, the spread between posted five-year fixed rates and Canada’s five-year government yield soared to an ungodly 500-plus basis points. That led to some borrowers having to pay 100 to 150 basis points more than normal for a mortgage, despite plunging bond yields.
I don’t expect the same carnage this time around. But borrowers should not expect banks to pass through full discounts either – at least not until they understand the full fallout from this potential pandemic.
More mortgage predictions
A scattering of quick thoughts on what to expect after Wednesday’s rate cut:
- The Bank of Canada almost never cuts just once. Expect more.
- Given Wednesday’s rate cut, which is bullish for real estate, even more prospective home buyers may try to buy ahead of the stress test easing, scheduled for April 6.
- In talking with realtors, a small but meaningful minority of sellers are waiting until April to list and sell into strength.
- March and April could break volume records at lenders. We called one bank advertising ultralow five-year fixed rates on Wednesday and waited on hold 47 minutes.
- If the economy gets ugly, lower-income and/or higher-risk borrowers will pay markedly higher rates, relative to well-qualified borrowers.
- Rate predictions are futile, but if you’re trying to divine rate direction anyway, don’t waste your time trying to parse coronavirus headlines. Keep an eye on bond yields because they’ll do it for you.
- The more bond yields drop, the more they signal a worsening economy. If the outbreak leads to recession, odds are good the United States will cut its key lending rate to zero. Canada would be not far behind.
All this said, there’s no economic apocalypse on our doorstep yet. With some positive coronavirus news, which will come, today’s panic will eventually morph into relief and rates will bottom out. Now, if you ask me when that will all happen, you’ll hear a whole bunch of crickets.
reprinted from ROBERT MCLISTER SPECIAL TO THE GLOBE AND MAIL PUBLISHED MARCH 4, 2020