Housing market eyed
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 e-mailed statement today.
Bank of Montreal moved late yesterday to lower its five-year fixed-rate mortgage to 2.99 percent, down from 3.49 percent.
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 noted.
“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.