Real Estate

Oliver to monitor housing market after BMO mortgage rate cut

‘I will continue to monitor the market closely,’ says Oliver

Finance Minister Joe Oliver says he will keep a close eye on the Canadian housing market after the Bank of Montreal pulled back a key mortgage rate to levels that had left his predecessor feeling uneasy.

“Our government has taken action in the past to reduce consumer indebtedness and the government’s exposure to the housing market,” Oliver said in an emailed statement on Thursday.

“I will continue to monitor the market closely.”

However, in a scrum later in the day with reporters, the finance minister called the bank’s move a private decision and said he was not going to intervene.

Bank of Montreal (TSX:BMO) moved late Wednesday to lower its five-year fixed-rate mortgage to 2.99 per cent, down from 3.49 per cent.

But even if other lenders follow suit as expected, the super-low borrowing rates are expected to be temporary, said David Madani, chief economist of Capital Economics in Canada. Bond yields have dropped in recent months, but with the U.S. economy improving and the Federal Reserve withdrawing quantitative easing, yields are projected to start rising again later this year, which should push up long-term rates.

Economist Ian Lee of the Sprott School of Business said banks are positioning themselves for the spring home-buying season in an attempt to increase market share on mortgages.

Still, Madani said banks are playing a dangerous game and so are homebuyers who jump into the market with home prices at record levels.

“This is short-term thinking,” he said, “but it doesn’t change the long-term situation and that means the correction when it comes is going to be much more pronounced.”

The Bank of Canada and former finance Minister Jim Flaherty have warned for years that Canadians need to prepare themselves for a time when interest rates head north, increasing the carrying costs of holding a mortgage. If home values decrease at the same time, that could have a profound impact on the economy as a whole.

It was this scenario that led Flaherty to publicly chide BMO in March 2013 for lowering the key five-year rate to below three per cent in March 2013, saying that he disapproved of the rate and discouraged other big banks from following its lead.

At the time Flaherty said he believed in “responsible lending,” and that he was concerned such low rates would work against his attempts to slow the momentum in the housing market.

One of his officials also contacted Manulife last year when it announced its own similar cut. A day later Manulife reversed its decision, as did BMO.

Flaherty, who stepped down as finance minister last week, faced criticism at the time for interfering in the functioning of the market, but he remained steadfast.

There may be reasons to believe Oliver won’t be as concerned as his predecessor over the rate cut this time around. Household finances are in better shape today than a year ago, while home prices and sales have moderated.

BMO spokesman Paul Deegan downplayed the timing of the bank’s rate cut and Flaherty’s departure.

“This rate change is driven solely by the fact that bond yields have fallen and we are in what has traditionally been the busiest season for buying a home,” he said.

Other Canadian banks have also recently cut their rates — TD Bank (TSX:TD) reduced its four-year fixed-rate mortgage to 2.97 per cent earlier this month, while Scotiabank (TSX:BNS) lowered its rates across the board while issuing a four-year special rate at 2.94 per cent.

BMO’s five-year rate is currently the lowest among the major banks, although some discounters are offering slightly lower rates.

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