“You might be interested,” said a dude in Australia, “at how the news is being reported down here.” I was.
When the Poloz poodles at the B of C nibbled a quarter point off rates yesterday it not only shocked markets and stunned economists (more than usual), it was noticed around the world as something weird. That’s because just a few months ago it was widely reported that our central bankers thought Canadian real estate was overvalued by up to 30%. Danger, they hinted. Debt binge.
“So what gives?” the roo-jumper asked me in an email Thursday morning. “Are your bankers trying to chill the housing market, or turn it into the same bloody disaster that we have?” (The median house price in Sydney is C$844,000 while the median income is $67,000. Ouch. Anything actually habitable is above a million.)
Good question. Here’s the Reuters wire story most Aussies read:
(Reuters) – A surprise move by the Bank of Canada to cut interest rates on Wednesday could reignite Canada’s housing market and renew fears of a bubble, just as the market had finally begun to cool after a five-year run to record prices… “This means everyone is going to get back in the saddle and we’re going off to the races again,” said Toronto real estate agent Steven Fudge. “It creates a sense of relief that we haven’t seen the top of the market.”
Canada’s housing market paused in 2009 but didn’t collapse as it did in the United States, and prices have risen as low interest rates helped Canadians boost their borrowing to buy ever more expensive homes.
“The real estate market has nine lives. Every time it’s supposed to slow down, something keeps the party going,” said Benjamin Tal, senior economist at CIBC World Markets. “With the debt situation relatively elevated, cutting interest rates and adding fuel to the fire is not exactly the best thing for this situation,” Tal said.
James Laird, President of CanWise Financial residential mortgage brokerage, said the rate cut will have an immediate effect on the demand for mortgages, pushing people back into cheaper variable rates from higher fixed-rate products. “The Bank signaling that costs will be lower, even declining, should mean another year of growth for housing and real estate. We shouldn’t be surprised that when money is cheap people take more of it.”
Well, Zoocasa – one of the online house-porn sites for moist Millennials – said its traffic jumped by a fifth after the poodles did their thing. A realtor buddy of mine in Toronto called and chortled. “My phone is making love to me today,” he said. I looked at mine and felt quickly inadequate. “These guys sure know how to rescue a bad situation.” Back in November he’d been moaning weekly about listings over $1.5 million growing more frigid by the week.
So, you can see what the immediate emotional response was to this move. Lots of people think it means cheaper mortgages, the ability of people to therefore borrow more money, enhanced housing sales and (of course) higher prices.
Said one mortgage broker: “Those buyers who were capped at $800,000, this will allow them to go to the $850,000 that they really need to go to today, that tipping point in this housing market that makes the difference in a bidding war.” There ya go. Add $50,000 more devalued, depreciating loonies to the pile. The only trouble is incomes are not rising while rates are falling.
But one day after this boneheaded move, it’s becoming more apparent rates – at least mortgage rates – may not be moving at all.
The Bank of Canada does not impact fixed-rate home loans. The cost of those is set in the bond market and then filtered through the major lenders, the banks. And while bond prices have spiked and yields dropped over recent months as investors sought safety, these mortgages have yet moved little, if at all. The bankers are acutely aware of the fact bonds are at unsustainably low levels with yields liable to quickly back up. They also know loaning money at, say, 2% so people can buy houses at higher prices is going to bite us all in the butt years down the road when rates normalize. Is that the kind of risk you’d want your bank taking?
But the central bank rate does usually affect the prime rates at the Big Five and the cost of variable-rate mortgages. Except this time. The banks have not dropped their primes to 2.75%. In fact brave TD came out and said it wouldn’t. So, today, no VRMs have been nipped. No wonder. The banks are operating on thin margins these days with a big regulatory burden and new requirements to be richly capitalized. Once again, it’s all about risk, and keeping shareholders happy.
As the editor of Canadian Mortgage Trends points out, if competition forces the banks to drop VRMs, they’ll likely just reduce the discounts they now offer from prime. So, effectively, no change.
In other words, nobody with an existing fixed-term mortgage will pay less. No new borrowers taking out five-year loans will get a break. No existing variable-rate mortgage customers will see a discount. Not even an existing line of credit or business loan has been reduced.
This could change. Or not. Or stay confusing.
Regardless, in their haste and folly, the poodles have telegraphed to the world that Canada embraces debt and house lust as its economic salvation. To that end, we’re happy to sacrifice the dollar, starve the savers, enslave the kids and beggar the future. At least until the election.