More hot air for housing market

Why rock-bottom mortgage rates could spell trouble

Canadian lenders are hoping a return to rock-bottom mortgage rates will reignite a cooling housing market that threatens to take a bite out of their income.

The Bank of Montreal recently shaved its advertised five-year fixed rate to 2.99 per cent for the second time in less than a year, prompting federal Finance Minister Jim Flaherty to reiterate an earlier warning of the need to avoid “the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.”

Analysts say the falling rates are a predictable response to Canada’s sluggish economic growth, just 0.6 per cent during the fourth quarter, as well as to expectations the Bank of Canada may not hike its trendsetting rate, stuck at one per cent, until 2014.

But the falling mortgage rates also threaten to undo Flaherty’s controversial efforts last summer to gradually let the hot air out of the housing market by tightening rules for government-backed mortgages, reducing the maximum amortization period to 25 years from 30. That, in turn, could push home prices farther into the stratosphere—at a time when debt rating agency Fitch argues they are 20 per cent overvalued—while adding more debt to Canadians’ creaking balance sheets.

A short-term boost, to be sure, but it’s the hangover we should be worried about.