The Bank of Canada’s surprise decision to cut interest rates has triggered a mortgage war amongst Canada’s major banks. Mortgage brokers reported that the Royal Bank of Canada had dropped its five-year fixed rate for qualified borrowers to 2.84% recently, while smaller, non-bank lenders are offering consumers even cheaper deals. That’s not attracting as much attention, though – RBC’s rate cut is probably a record for a major bank, according to Drew Donaldson, executive VP of Safebridge Financial Group. Robert McLister, founder of Ratespy.com, said RBC’s new 3.84% rate for 10-year fixed-rate mortgages was he lowest in the country.
RBC spokesman Wojtek Dabrowski said the bank intended to ‘review the impact of the Bank of Canada’s rate decision,’ and that ‘individual product lines continue to make pricing adjustments in the regular course of business to ensure we provide competitive rates in the marketplace.’
Two other major Canadian banks, Bank of Nova Scotia and National Bank of Canada, also cut their rates in recent days and Toronto-Dominion Bank said it was dropping its posted 5-year fixed rate to 3.09% midweek, cutting 0.2% off the rate.
Part of the pressure on rates comes from falling bond yields. Canada’s government bond yields have fallen to historic lows in recent months. But part of it comes from the pressure on Canadian buyers as falling rates from the central bank meet rising property prices. Every cut to the interest rate a bank can make brings more buyers able to afford credit.
The danger here is that banks leave themselves perilously overextended in the event of a sharp drop in house prices. David Parkinson, economics reporter at Canada’s Globe and Mail, points out that ‘the oil sector has not only been leading the way in Canada’s export recovery, it has also been the big driver in business capital investment… that means the sector has been leading the way in the two key areas that the Bank of Canada has repeatedly identified as critical to sustaining Canada’s recovery.’
If oil is supporting Canada’s economy, and that’s supporting house price growth, what happens to house prices when the bottom drops out of oil prices?
That depends where you look. As a rule of thumb, Canada’s house prices are more affected by oil the closer they are to its production centre, Alberta, as you’d expect. Edmonton and Calgary’s house prices tend to track oil prices pretty closely. Other Canadian cities don’t. Prices in Toronto could actually benefit from lower oil prices, according to some experts, as slashed oil boosts US GDP and fuels both growth and immigration over the border.
The risk to the broader Canadian housing market is a drop in oil prices coupled with a crack in the foundations of the foreign investment and purchase that’s fuelling house prices in Vancouver and Toronto. Absent such an crack, Canada’s banks can fight their mortgage wars in peace.