TD Lowers Posted Mortgage Rate to 4.99%

Latest News Kim Stenberg 11 Feb

Market interest rates have fallen sharply since the coronavirus-led investor flight to the safety of government bonds. The 5-year government bond yield–a harbinger of conventional mortgage rates–now stands at 1.34%, down sharply from the 1.60+% range it was trading in before the virus became global news (see chart below).

This morning, one of the Big-Six banks finally reacted. TD cut its posted 5-year fixed rate to 4.99%. TD’s posted rate had previously been at 5.34%, making this a 36 basis point cut. Other banks had lowered their qualifying rate to 5.19% last July, leading the Bank of Canada to cut its 5-year conventional mortgage rate to 5.19%. This is the qualifying rate under the B-20 rule introduced on January 1, 2018.

Even the regulators have been questioning the efficacy and fairness of using the big-bank posted rate as a qualifying rate for mortgage stress testing.

On January 24, the Assistant Superintendent of OSFI’s Regulation Sector, Ben Gully, gave a speech at the C.D. Howe Institute suggesting that the B-20 qualifying mortgage rate historically would be no more than 200 basis points above contract rates. He said that OSFI chose the “best available rate at the time.”

He went on to say that for many years, the difference between the benchmark rate and the average contract rate was 200 bps. However, this gap “has been widening more recently, suggesting that the benchmark is less responsive to market changes than when it was first proposed. We are reviewing this aspect of our qualifying rate, as the posted rate is not playing the role that we intended. As always, we will share our results with our federal partners. This will help to inform the advice OSFI might provide to the Minister, as requested in the mandate letter to him.”

By keeping posted rates too high, the Big-Six banks have inflated the qualifying rate, making it more difficult than necessary to pass the stress test to get a mortgage.

While TD’s rate cut is welcome news, its posted rate is still too high by historical standards. Given today’s average contract rates, the posted rate should be at least 20 bps lower still.

Banks have a strong incentive to inflate their posted mortgage rate. For one thing, they are the basis for the calculation of big-bank mortgage penalties. Also, they are the minimum qualifying rate.

The posted rate does not appropriately reflect the state of the mortgage market as few borrowers would pay this rate. Interestingly, banks often move this rate in lock-step, or close to it, reflecting their dominant oligopolistic position in the marketplace.

If a couple of the other big banks follow TD’s lead, the Bank of Canada benchmark rate will be below 5% for the first time since January 2018 when the new B-20 rules were adopted. Lowering the stress test rate by 20 bps from 5.19% to 4.99% would require roughly 1.8% less income to qualify for a mortgage on the average Canadian home price (assuming a 20% downpayment), increasing buying power by 2%. This doesn’t sound like much, but it can have a meaningful psychological impact on already improving housing markets. The latest CREA data shows that the national average home price surged 9.6% year-over-year in December. A lower stress test rate would make a busy spring housing market even more active.

Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

Bank of Canada Rate Announcement – Sept 4/19

Latest News Kim Stenberg 4 Sep

The Bank of Canada held the target overnight rate at steady at 1.75% for the seventh consecutive decision date but will monitor closely the impact of the US-China trade war on economic activity around the world and in Canada. The second-quarter growth–posted at 3.7%–exceeded the Bank’s forecast in the July Monetary Policy Report (MPR), but the Bank expects the economy to slow from that pace in the second half of the year.

Q2 was boosted by stronger energy production and robust export growth, both recovering from a weak Q1 performance. But evidence suggests that export growth slowed in July and could weaken further as the global economy slows. Canada bears the brunt of Chinese trade restrictions on Canadian agricultural imports. Housing activity also boosted the expansion in the second quarter as resales and housing starts picked up. Falling longer-term interest rates have driven down mortgage rates. The Bank asserted that “this could add to already-high household debt levels, although mortgage underwriting rules should help to contain the buildup of vulnerabilities.”

Wages picked up further last quarter, boosting labour income, yet consumption spending was unexpectedly soft. Canadian consumer confidence recorded its most significant monthly drop this year in August amid growing concerns about the global economic outlook. The setback reflects waning optimism about Canada’s economy and effectively reverses the pick-up in sentiment earlier this summer.

The deterioration in confidence coincides with the escalation of the U.S.-China trade war. Many Canadians increasingly worried they’ll soon feel a bigger impact. Consumers aren’t the only ones feeling the uncertainty as business investment weakened sharply in the second quarter. Trade tensions have hit farmers and manufacturers hardest. The U.S. implemented additional tariffs on China September 1 and have slated more on December 15. These include duties on clothing and electronics, will pinch US consumers where it hurts, in the pocketbooks. These moves will sideswipe Canada.

Despite all of this gloom, the central bank held off from signalling explicitly any immediate need to cut interest rates. While growth has been stronger than expected, inflation has remained on target.

“In sum, Canada’s economy is operating close to potential and inflation is on target. However, escalating trade conflicts and related uncertainty are taking a toll on the global and Canadian economies,” the central bank said in its statement. “In this context, the current degree of monetary policy stimulus remains appropriate.”

Market Interest Rates Are Tumbling

The Bank prefers to wait for more concrete evidence that the economy is in need of additional stimulus. Despite this, market interest rates have fallen to record lows in Canada and elsewhere and the yield curve is inverted. Government of Canada 5-year yields have slid from 1.85% to 1.15% this year, an incredible 38% decline. Ten-year returns are down from 1.92% to 1.13% (lower than the 5-year yield), and the 30-year bond yield has plunged from 2.13% to 1.40%.

Short-term interest rates are higher than longer-term yields. The overnight rate, controlled by the Bank of Canada, is 1.75%–well above all of these long-term yields. The 3-month bill rate is at 1.62%, almost 50 basis points higher than the 5-year yield.

The posted mortgage rate is the qualifying rate for mortgage borrowers. It has barely moved this year, down only 15 basis points to 5.19%. Its stickiness at elevated levels has prevented many borrowers from taking advantage of today’s low contract mortgage rates.

Mortgage Rates Have Fallen Even More Than Bond Yields

According to Rate Spy, the best high-ratio 5-year fixed mortgage rate is at 2.25%, down 94 basis points from the 3.24% rate posted at the beginning of the year. Conventional high-ratio 5-year fixed mortgage rates are down 95 bps and refinance 5-year fixed rates have fallen 118 bps. Much of this phenomenon might be lenders playing catch-up as they were slow to cut fixed rates when interest rates began to fall at the end of last year.

 

Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres

Bank of Canada Maintains Overnight Rate and Raises 2019 Forecast

Latest News Kim Stenberg 10 Jul

The Bank of Canada held the target overnight rate at 1.75% for the sixth consecutive decision and showed little willingness to ease monetary policy, as stronger domestic growth offsets the risk of mounting global trade tensions. There has been ongoing speculation that the Bank of Canada would be pushed into cutting interest rates by the Fed. I do not believe the Bank will let the US dictate monetary policy when the Canadian economy is clearly on the mend. To be sure, trade tensions have slowed the global economic outlook, especially in curbing manufacturing activity, business investment, and lowering commodity prices. But the Bank as already incorporated these effects in previous Monetary Policy Reports (MPR) and today’s forecast has made further adjustments in light of weaker sentiment and activity in other major economies.

The Governing Council stated in today’s press release that central banks in the US and Europe have signalled their readiness to cut interest rates and further policy stimulus has been implemented in China. Thus, global financial conditions have eased substantially. The Bank now expects global GDP to grow by 3% in 2019 and to strengthen to 3.25% in 2020 and 2021, with the US slowing to a pace near its potential of around 2%. Escalation of trade tensions remains the most significant downside risk to the global and Canadian outlooks.

The Bank of Canada released the July MPR today, showing that following temporary weakness in late 2018 and early 2019, Canada’s economy is returning to growth around potential, as they have expected. Growth in the second quarter is stronger than earlier predicted, mostly due to some temporary factors, including the reversal of weather-related slowdowns in the first quarter and a surge in oil production. Consumption has strengthened, supported by a healthy labour market. At the national level, the housing market is stabilizing, although there remain significant adjustments underway in BC. A meaningful decline in longer-term mortgage rates is supporting housing activity. The Bank now expects real GDP growth to average 1.3% in 2019 and about 2% in 2020 and 2021.

Inflation remains at roughly the 2% target, with some upward pressure from higher food and auto prices. Core measures of inflation are also close to 2%. CPI inflation will likely dip this year because of the dynamics of gasoline prices and some other temporary factors. As slack in the economy is absorbed, and these temporary effects wane, inflation is expected to return sustainably to 2% by mid-2020.

Bottom Line: The Canadian economy is returning to potential growth. “As the Governing Council continues to monitor incoming data, it will pay particular attention to developments in the energy sector and the impact of trade conflicts on the prospects for Canadian growth and inflation.” With this statement, Governor Poloz puts Canadian rates firmly on hold as Fed Chair Jerome Powell signals openness to a rate cut as uncertainty dims the US outlook.

The Canadian central bank is in no hurry to move interest rates in either direction and has signalled it will remain on hold indefinitely, barring an unexpected exogenous shock.

 

By Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres

Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

March 6, 2019: Bank of Canada Reduces Prospects of a Rate Hike

Latest News Kim Stenberg 6 Mar

In a very dovish statement, the Bank of Canada acknowledged this morning that the slowdown in the Canadian economy has been deeper and more broadly based than it had expected earlier this year. The Bank had forecast weak exports and investment in the energy sector and a decline in consumer spending in the oil-producing provinces in the January Monetary Policy Report. However, as indicated by the mere 0.1% quarterly growth in GDP in the fourth quarter, the deceleration in activity was far more troubling. Consumer spending, especially for durable goods, and the housing market were soft despite strong jobs growth. Both exports and business investment were also disappointing. Today’s Bank of Canada statement said, “after growing at a pace of 1.8 per cent in 2018, it now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January.”

As was unanimously expected, the Bank maintained its target for the overnight rate at 1-3/4% for the third consecutive time and dropped its earlier reference for the need to raise the overnight rate in the future to a neutral level, estimated at roughly 2-1/2%. The Bank also added an assertion that borrowing costs will remain below neutral for now and “given the mixed picture that the data present, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook. With increased uncertainty about the timing of future rate increases, the Governing Council will be watching closely developments in household spending, oil markets, and global trade policy.”

At the same time, Governor Poloz seems reluctant to abandon entirely the idea that the next step is likely higher — making him a bit of an outlier among industrialized economy central bankers.

We are left with the view that the Bank is unlikely to hike interest rates again this year. The global economy has slowed more than expected and central banks in many countries, including the U.S., have moved to the sidelines. Market interest rates have already dropped reflecting this reality.

According to Bloomberg News, “swaps trading suggests investors are giving zero probability that the Bank of Canada will budge rates, either higher or lower, from here. The Canadian dollar extended declines after the decision, falling 0.7 percent to C$1.3438 against the U.S. currency at 10:04 a.m. Yields on government 2-year bond dropped 6 basis points to 1.68 percent.”

February Cold Chills Toronto and Vancouver Housing Markets While Montreal Continues Strong

In separate news, local realtor boards reported this week that recent housing market patterns continued in February. Resale housing activity fell last month to its lowest level for a February since 2009 in both Vancouver and Toronto, while home sales ramped up in Montreal, marking four years of continuous growth.

The month-over-month declines in Vancouver and Toronto were substantial. Home resales dropped by nearly 8% (on a preliminary seasonally-adjusted basis) in Toronto and by more than 7% in Vancouver. Soft demand in Vancouver kept prices under downward pressure in what has been a buyers’ market. Vancouver’s composite MLS House Price Index (HPI) is now down 8% from its June 2018 peak. And the correction probably isn’t over.

In Toronto, the MLS HPI in February was still 2.3% above its level a year ago, though it has decelerated in the past couple of months from 3.0% in December.

Blasts of bad weather can easily exaggerate demand weakness in winter when markets are at their seasonal low point. However, Montrealers certainly seemed impervious to the weather.

Quebec’s real estate broker association reported home sales in metropolitan Montreal rose 8% in February compared with the same month last year. As well, average residential prices increased 4.9% in metro Montreal and 6.1% on the island of Montreal.

More complete housing data will be available mid-month when the Canadian Real Estate Board releases its February report.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drcooper@dominionlending.ca

BANK OF CANADA REMAINS ON HOLD, REVISING DOWN OIL MARKET OUTLOOK

Latest News Kim Stenberg 9 Jan


The Bank of Canada left the overnight benchmark policy rate at 1-3/4%, as expected. In another dovish statement, the Bank of Canada acknowledged a slowdown in global economic activity and highlighted that oil prices are roughly 25% lower than what they had assumed in the October Monetary Policy Report (MPR). The lower prices primarily reflected sustained increases in U.S. oil supply and increased worries about global demand, especially in light of a potential U.S.-China trade war (see oil chart below).

The Bank also commented that these worries had been mirrored in bond and stock markets. Credit spreads off Treasuries have widened, and stock markets have sold off around the world (see chart below). Equity prices and bond yields have declined in the face of market unease over global growth. Volatility has risen, and corporate credit spreads have widened sharply. A tightening of corporate credit conditions is particularly evident in the North American energy sector reflecting the decline in oil prices.

Weak oil prices negatively impact the Canadian economic outlook and “transportation constraints and rising production have combined to push up oil inventories in the west and exert even more downward pressure on Canadian benchmark prices. While price differentials have narrowed in recent weeks following announced mandatory production cuts in Alberta, investment in Canada’s oil sector is projected to weaken further.”

The Bank acknowledged that the economy is running close to potential, unemployment is at a 40-year low and trade will likely improve with the weak dollar, the trade deal with Mexico and the U.S. (now dubbed “CUSMA”) and federal tax measures to target investment. Nevertheless, consumer spending and housing investment “have been weaker than expected as housing markets adjust to to municipal and provincial measures, changes to mortgage guidelines, and higher interest rates. Household spending will be dampened further by slow growth in oil-producing provinces.”

The contribution to average annual real economic growth from housing investment has been revised down to -0.1% this year from the +0.1% forecast in October.

The Bank of Canada revised down its forecast for real GDP growth in 2019 to 1.7%–0.4 percentage points lower than the October outlook. According to the Bank, “This will open up a modest amount of excess capacity, primarily in oil-producing regions. Nevertheless, indicators of demand should start to show renewed momentum in early 2019, leading to above-potential growth of 2.1% in 2020.”

Inflation remains close to 2%, the central bank’s target, having fallen to 1.7% in November, due to lower gasoline prices. While low gasoline prices will depress inflation this year, the weak Canadian dollar will have an offsetting impact on the CPI. On balance, the bank sees inflation returning to around 2% by late this year.

Considering all of these factors, the Governing Council continues to judge that the benchmark policy rate will need to rise over time to a neutral range to achieve the inflation target. “The appropriate pace of rate increases will depend on how the outlook evolves, with a particular focus on developments in oil markets, the Canadian housing market, and global trade policy.”

Bottom Line: The Bank of Canada for the first time admits in today’s MPR that the slowdown in the housing market has been more dramatic than the Bank’s staff had expected. The January MPR states, “provincial and municipal housing market policies, the tighter mortgage finance guidelines and higher mortgage rates continue to weigh on housing activity. Slowing of activity in some markets has been associated with less speculative activity. As a result, it is difficult to evaluate the sensitivity of non-speculative demand to the various policy changes. Monthly indicators have signalled that spending on housing likely contracted again in the fourth quarter. Weaker-than-expected housing activity in recent months and staff analysis suggest that the combined effect of tighter mortgage guidelines and higher interest rates has been larger than previously estimated. The Bank will continue to monitor developments in housing markets to assess how construction is adjusting to the shift in demand toward lower-value units.”

The Bank see less urgency to raise interest rates as the economy copes with slumping oil prices and weak housing markets. The five interest rate hikes since mid-2017 are having a more substantial impact on spending than the Bank expected. A short-term pause in rate hikes is now likely. The economy slowed considerably in the fourth quarter of last year, which will continue in the first quarter of this year owing to the decline in oil prices and the Alberta government’s implemented oil production cuts.

While it is unlikely that the Bank is finished its tightening this cycle, expect rates to remain steady until we see solid evidence of a rebound in the oil sector and in housing as interest-rate sensitivity of Canadians is at historical highs.


Written by,

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drcooper@dominionlending.ca

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