Canada’s major banks are heading into a renewed mortgage price war in the wake of the Bank of Canada’s surprise decision to cut interest rates.

Mortgage brokers reported that Royal Bank of Canada dropped its five-year fixed rate for qualified borrowers to 2.84 per cent over the weekend. While smaller, non-bank lenders have started offering even cheaper rates, RBC’s rate cut is likely a record for a major bank, said Drew Donaldson, executive vice-president of Safebridge Financial Group. The bank also slashed its posted 10-year fixed rate to 3.84 per cent, the lowest nationally advertised rate in the country, said Robert McLister, founder of Ratespy.com.

RBC spokesman Wojtek Dabrowski said the bank continues to “review the impact of the Bank of Canada’s rate decision,” and that the company’s “individual product lines continue to make pricing adjustments in the regular course of business to ensure we provide competitive rates in the marketplace.”

Bank of Nova Scotia and National Bank of Canada have also cut fixed rates on broker-originated mortgages by 10 to 20 basis points in recent days. Toronto-Dominion Bank said it was dropping its posted 5-year fixed rate on Tuesday to 3.09 per cent, down from 3.29 per cent.

Mortgage officials said RBC was among the last of the major banks to introduce new rate specials.

“National Bank already offers competitive rates over the mortgage rate spectrum as we moved early over the past weeks,” bank spokesman Claude Breton said.

A battle in the mortgage market seemed inevitable given that Government of Canada bond yields have plummeted in recent weeks, falling 57 basis points in the past month to historic lows. Brokers had predicted that falling bond yields were almost certain to drive down the fixed-rate mortgage pricing ahead of the competitive spring housing market even as banks have largely kept their prime rates, which govern variable-rate mortgages along with other types of loans, unchanged. All the major banks will soon be forced to follow the Bank of Canada and cut their prime rates 25 basis points to 2.75 per cent, Mr. Donaldson said. “We expect more cuts to come from all lenders,” he said.

Even ahead of the Bank of Canada’s unexpected rate cut last week, the country’s major banks already seemed poised for a new round of rate cuts this year. Earlier this month, Bank of Montreal chief executive officer Bill Downe told an industry conference the bank was expecting to “again have a fresh offer that is appealing to customers” in the spring. The bank drew the ire of former finance minister Jim Flaherty in 2013 after it dropped its five-year fixed mortgage rate to 2.99 per cent in what Mr. Flaherty called a “race to the bottom.”

The renewed price war is raising concerns that the central bank’s rate cut will add fuel to the country’s overheated housing market even as Canadians struggle under the burden of rising household debt. Canadian Imperial Bank of Commerce deputy chief economist Benjamin Tal warned last week that falling mortgage rates could lead to “a monstrous spring in the real estate market.”

Others argue that low rates may not be enough to kick start a housing market that had already begun to slow toward the end of this year as oil prices plunged. Even as they predicted that Canada’s central bank will cut interest rates a second time later this year, TD economists said Monday they expect Canada’s real estate market to fare poorly this year as cheap crude and sky-high house prices in major cities are making it difficult for new buyers to afford to jump into the market despite low mortgage rates. “The housing market is … projected to be a drag on growth, with changes in existing home sales and prices, as well as housing starts, forecast to tilt into negative territory,” the bank said.

Source: Tamsin McMahon, The Globe and Mail

Derek Petridis, a 39-year-old chief financial officer at Shikatani Lacroix Design Inc. in Toronto, has loaded up on seven condominium rental properties over the past decade.

It may seem like he’s got an extreme bet on the housing sector, but a new survey shows he is far from alone, with about one in 20 Canadian households owning some type of rental property.

The study from Altus Group, which relies on research from the Financial Industry Research Monitor, considered highly accurate on a national basis, shows that among households earning more than $100,000, the rate on rental property ownership is about 10%.

Rental property ownership tends to be higher for households with residents under age 50, which the study’s authors think may be driven by basement apartments and flats that homeowners are using to pay down their mortgages.

Home ownership rates in Canada are among the highest in the world with the 2011 census from Statistics Canada showing the trend to own continuing to climb and reaching 69%.

The other strength of the market has been people like Mr. Petridis, who have seen the benefit of owning investment properties. A Canada Mortgage and Housing report? last year of the Toronto and Vancouver markets found about 17% of condominium owners were investors.

“I fretted over the first purchase for weeks, but then I just started going from there. Once you are over the first one you fall in love with the cash flow, the model,” said Mr. Petridis, who has cooled his heels on the sector a bit and not purchased a new unit since 2011.

Peter Norman, chief economist with Altus Group, said the quarterly FIRM survey didn’t break down rental property ownership versus people simply renting out a piece of their principal residence, but there is some older data from Statistics Canada that addresses both aspects.

Renting out secondary suites or basement apartments seem to grow in tough times, as people use them as a way to cover their home ownership costs. “When times are tough, more renters choose that [way to live] because it’s cheaper and more homeowners find they need to supplement their income,” Mr. Norman said. “It does come and go and acts like a pressure valve in the housing market.”

Lately the valve has been left open as the number of secondary suites grows slightly. The census found there were 330,000 in 1996, 310,000 in 2001, 370,000 in 2006 and 390,000 in 2011. Builders have even been constructing new homes with roughed-in apartment suites with separate entrances and kitchens, Mr. Norman said.

Don Campbell, a real estate expert and author, said he started by renting out a basement apartment so he could buy a larger home than he might have otherwise been able to afford, and eventually moved on to larger real estate investments that didn’t involve his principal residence.

“Once they figure they can get a yield on their investment, they do,” said Mr. Campbell, adding Canadians are looking to get better income than they might achieve elsewhere like the stock market.

He thinks the basement suites are probably a large driver of the trend toward owning rental property. “That just might be the only way some people can afford to live in the neighborhood they want to,” said Mr. Campbell.

Source: Garry Marr, Financial Post

Already ranked as one of the most unaffordable cities in the world, Vancouver’s heated real estate market could get a further push, after the Bank of Canada cut the overnight lending interest rate to 0.75 per cent.

The rate had been at one per cent since September 2010 and the cut shocked markets on Wednesday. It will likely result in lower interest rates for variable rate mortgages, lines of credit and other loans that float with prime rates.

“That should provide a nice little potential boost for the housing market, not just in Vancouver but the rest of British Columbia as well,” said Bryan Yu, senior economist with Central 1 Credit Union.

But it depends how lenders respond to the Bank of Canada’s surprise interest rate drop with changes to mortgage rates, said Yu.

He expects the rate cut will put “mild downward pressure” on fixed and variable mortgage rates, but not make big waves on the housing market.

“This doesn’t change our outlook for Vancouver’s housing market significantly,” said Yu.

The credit union’s recent B.C. housing outlook forecast the median detached house price would climb by four per cent in greater Vancouver — continuing to outpace growth in condo prices.

Vancouver mortgage broker Michelle Byman said if lenders cut their rates, a quarter point change won’t make a big difference.

“It will help people that are buying,” said Byman. “But I don’t think that’s going to fuel anything more than what’s already going on in the market.”

On a $100,000, 25-year mortgage, lowering the rate from 3 per cent to 2.75 per cent would only cut someone’s $473.23 monthly payment by $13, said Byman.

Even on a $500,000 mortgage, a quarter point drop would only mean paying $63 less per month, she said.

Byman said 2010 federal policy changes intended to turn down the heat on Canada’s housing market affect the buyers she deals with.

In particular, the government requirement that borrowers qualify for the posted rate for a fixed five-year mortgage — even if that’s higher than the rate they’ll pay — limits how far buyers can extend themselves, said Byman.

Source: Lisa Johnson, CBC News

Bank of Canada Governor Stephen Poloz will remain in interest-rate hibernation for another year as plunging oil prices raise concerns the nation’s economic growth is in jeopardy, economists say.

Poloz, who delivers the central bank’s next rate decision tomorrow, will hold off raising borrowing costs until 2016, according to the median forecast in a Bloomberg monthly survey, which previously predicted the governor would lift rates later this year. Economists also cut two-year yield forecasts by the most on record.

The central bank hasn’t raised its benchmark interest rate since 2010 as it awaits an economic recovery that’s in danger of fading. Crude oil, Canada’s biggest export, is trading below $50 a barrel, from $107 in the summer. The slump is already crimping exports, weakening investment and playing havoc with prairie housing markets. The last thing the economy needs is higher interest rates.

“Markets are doing the dirty work for the Bank of Canada,” Emanuella Enenajor, senior Canada economist at Bank of America, said Jan. 15 by phone from New York. “We are still going to see the Bank of Canada holding on to their assertion that the recovery is proceeding, perhaps it’s just proceeding a bit slower than they thought.”

“They are definitely going to have to acknowledge that there is a large downside risk from falling oil prices,” in the new economic forecast, Enenajor said. Last week she pushed her rate-increase forecast to the third quarter of 2016 from the first quarter.

The Bank of Canada has kept its benchmark rate at 1 percent since September 2010, predating Poloz taking the governor job, and is the longest stretch since World War II.

Bets are increasing that Poloz will cut rates, rather than raise them, with swaps trading signaling about a one in three chance of a reduction to 0.75 percent by December.

Homes sales in the nation’s oil hub – Calgary – and Alberta’s largest city plummeted 24.6 percent in December from the previous month, the Canadian Real Estate Association said last week. That was the worst drop since the 2008 bankruptcy of Lehman Brothers Holdings Inc. sparked the global credit crunch.

Source (edited): Greg Quinn and Catarina Saraiva, Bloomberg News

Buy a house. Don’t buy a house. Soft landing. Crash landing. As we start the new year, the question on everyone’s mind is: What can we expect from Canada’s housing market?

Once again, experts agree that housing affordability is stretched, historically low interest rates will rise, and housing prices will drop. Rewind 365 days and you could be reading a forecast for 2014. But this time the experts agree: prices really will fall and it’s got everything to do with the recovery of the global economy.

Now, if the global economy were a ballgame we wouldn’t be in the World Series. Oil prices are depressed and Europe is still struggling with its credit crunch. But things are slowly improving in the U.S. and within Canada, and the important teams are still in the game: our employment rate is stable, oil prices are not (yet) low enough to cause real concern, and exports have picked up as the value of our dollar has dropped. All this leads most economists to believe we’ll see slightly higher bond and mortgage rates and a nation-wide cooling of the housing market over the next couple of years.

Robert Hogue, senior economist with RBC Bank, says he believes the coming year will be “a moderating phase for the market with a soft landing in 2016.” Hogue predicts national home prices will actually rise 1% or maybe 1.5% in 2015, as buyers race to get in the market before mortgage rates increase, after which prices will fall later in the year. “It’s one of the reasons why 2014 was such a strong year.”

But he cautions home owners: “Canada’s real estate market really is a multi-headed beast. It’s essentially very strong in Toronto, Vancouver and Calgary, but it’s balanced or soft in the majority of other markets.” As such, he predicts we’ll see a cooling of the three biggest markets by the end of the year in response to small mortgage rate hikes starting mid-year.

Now, if the prime rate were to climb from its current 3% level to 5% or 6% over the next year or two, many Canadians could find themselves in deep trouble, says Hogue. But he isn’t sure we’ll see rates shooting up that fast any time soon. Until recently, analysts and policy makers considered 5% to be the neutral or natural interest rate. It was the rate that allowed full employment, a stable inflation rate, and a sustainable growing economy. But Hogue, along with economists from Morgan Stanley and analysts from the C.D. Howe Institute, believe that the “new neutral rate” has actually dropped.

The primary reason is the impact baby boomers continue to have on the national economy. As boomers continue to age and leave the workforce, Canada can expect a slowing of the labour market, which will depress productivity growth, limit the economy, and suppress potential inflation, explains Hogue. “If the new normal is markedly below what we’re used to, then we won’t see as much downward pressure on housing prices,” he says.

The impact of demographics doesn’t stop there. According to a new report by Benjamin Tal, deputy chief economist with CIBC, analysts have been seriously underestimating the number of new immigrants in Canada. New immigrants account for 70% of the country’s population growth and about half are between the ages of 25 and 44—the key demographic that leads to household formations. According to Tal the under-estimated increase in the number of home-buying immigrants in Canada will help to offset a slowing economy, created by the boomer generation. “Immigration, itself, won’t be able to change this trajectory, but it will help to offset it,” explains Tal.

But David Madani from Capital Economics isn’t convinced. “Every good economist knows that immigration always fluctuates and it’s never prevented a housing cycle in the past.” He’s also not convinced that builders are out of the weeds when it comes to supply and demand. While he agrees that absorption rates are close to historical long-term averages, he’s confident that the market will suffer. “There are too many one-bedroom condo units being built when demand shows a need for family accommodation.”

So what’s a regular home buyer to do? The best advice is prepare for the worst, but if you’re ready to jump in and you can afford it, waiting for prices to fall might not be the best idea. Ted Rechtshaffen, president and CEO at TriDelta Financial, advises against trying to time the market in general. “It’s not about prices or the mortgage rate, it’s whether you can truly afford to own the home.” This means calculating whether or not you could still afford your monthly payments even if mortgage rates increased to 4% or 5% a few years from now. It also means deciding whether or not you can stomach a housing price drop. While many economists are predicting a 10% drop, the correction could be as great as 30% in some Canadian markets.

Of course, your home is more then equity and capital. It’s the place you spend time with friends and family, and the place you build memories. “Life and lifestyle is just as important,” says Rechtshaffen, so as long as you can afford your payments, “don’t be too concerned about the correction.”

Source: Romana King, MoneySense