The typically busy spring homebuying season in Canada could be turbocharged by falling mortgage rates, but also by tweaks to loan stress tests and by monetary policy that is being eased by central banks amid the spread of the new coronavirus.
COVID-19 influenced decisions by the Bank of Canada and the U.S. Federal Reserve to cut their key interest rates this week, and some analysts, brokers and economists are saying lenders either have adjusted or will be adjusting their mortgage rates accordingly as well.
Variable mortgage rates are influenced by the prime rate that banks charge, which have historically been tweaked in the wake of central-bank moves. Royal Bank of Canada and the Bank of Nova Scotia announced Wednesday they were cutting prime rates by 50 basis points, to 3.45 per cent from 3.95 per cent.
Fixed rates are historically more related to bond yields, which have also been falling. The yield on the Government of Canada’s benchmark five-year bond slipped this week below one per cent.
The “slump” in the five-year yield suggests lenders could drop their five-year fixed mortgage rates by around 0.5 percentage points in the coming weeks, according to Stephen Brown, senior Canada economist at Capital Economics.
“That fall, which would effectively raise the price that borrowers can afford by a little over five per cent, means house price inflation is likely to keep rising even if the further spread of the virus weighs on sales and new listings,” Brown wrote in a note published Wednesday.
Sales have been taking off again in the major housing markets of Toronto and Vancouver. The Real Estate Board of Greater Vancouver reported this week that home sales rose to 2,150 in February, a nearly 45 per cent increase compared to a year earlier, but still below the 10-year average for February sales. In the Toronto region sales also rose, increasing almost 46 per cent last month over the 10-year low seen in February 2019.
Stock analysts are accounting for interest-rate cuts in earnings estimates for commercial banks that have been affected by pricing changes forced on the lenders by central banks. A large part of bank revenue still flows from net interest income, the difference between what lenders are charging for loans and paying out to savers.
Following the U.S. Federal Reserve’s emergency rate cut on Tuesday, Citi analyst Maria Semikhatova wrote that their forecasts for Canadian banks’ 2020 assumed net interest margins (a measure of the spread) will be lower by about six basis points, or 0.06 percentage points. Semikhatova wrote this would be “driven by competitive mortgage pricing in Canada and rate cuts implemented in the U.S. over the course of 2019.”
“We note that market is currently pricing in as many as three rate cuts in Canada and four in the U.S. by the end of 2020,” she added.
Spring market typically forces banks to increase their discounting and they have lots of spread to work with
Robert McLister, RateSpy.com
Falling mortgage rates are just one possible source of rocket fuel for the busy spring buying season. Ottawa is preparing to tweak the stress test for both insured and uninsured home loans and the usual pricing games have already begun among lenders. Toronto-Dominion Bank last month lowered its posted five-year fixed rate to 4.99 per cent from 5.34 per cent, a move other big banks have yet to match.
The Bank of Canada’s communications around Wednesday’s rate cut also allowed for the possibility of further action, which could again lower funding costs for lenders and borrowing costs for buyers or owners.
The lowest rate for a conventional, five-year fixed-rate mortgage that is nationally available was 2.79 per cent at the end of 2019, but was 2.49 per cent and falling as of Wednesday, according to Robert McLister, the founder of mortgage-comparison website RateSpy.com.
“Most lenders have been slow to pass through these lower funding costs by way of lower fixed rates, but give it time,” McLister wrote in an email. “Spring market typically forces banks to increase their discounting and they have lots of spread to work with.”
Choppier economic conditions could still delay rate discounts. Lenders are “nervous” about lowering rates too quickly, with most having nudged fixed rates 0.1 percentage points lower on Tuesday or Wednesday, according to Dan Eisner, chief executive of Calgary-headquartered brokerage True North Mortgage Inc.
“The bond market is in turmoil right now so lenders are scared to lower their rates without knowing where bonds yields are going to land,” he said in an email.
Eisner’s bet is that within two weeks rates will be 0.2 percentage points lower than they are right now. Lower costs for new buyers could help push up home prices, but already this year the Toronto mortgage market “has been crazy,” he said.
“Alberta is as slow as ever and Vancouver is busier than last year,” he added.