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The BoC, Home Prices & Mortgage Rules

No rate cut surprises to report today.

Canada’s key lending rate “remains appropriate,” said the Bank of Canada this morning. That’ll keep prime rate at 2.85% for now.

The BoC’s economic commentary today was both grim and hopeful. The economy “stalled” in the first quarter, it admitted—thanks in part to the “oil-price shock.”

Looking further down the road, however, we got more of the same brand of optimism we’ve come to expect from the Bank—i.e., that the economy will get back to “full capacity” in a few years or less. In the meantime, the Bank says our cheapened loonie and widening output gap will “offset each other,” keeping inflation near 2% on a “sustained basis.”

What does sustained mean, you ask?

Well, barring some out-of-left-field inflation catalyst, the Bank’s assessment portends little probability of rate hikes in 2015. And financial markets agree. OIS traders are pricing in a 44% chance of a rate cut by year-end, according to Bloomberg.

As a result, “interest rate relief” will continue to provide a “cash flow…buffer” for indebted consumers, said Governor Stephen Poloz in today’s press conference. That is particularly true for variable-rate mortgagors.

“On the surface, lower interest rates would be expected to promote more borrowing, which would increase this vulnerability,” Poloz noted in his prepared remarks. “However, in the near term, lower borrowing rates will actually mitigate this risk, by reducing payments for mortgage holders and giving us more economic growth and employment gains. “

That’s all good, but with Toronto/Vancouver home prices on a Saturn V rocket trajectory, mortgage policy-makers have to be wondering if and when they should apply the housing brakes.


CAAMP CEO Jim Murphy believes Ottawa better not jump the gun just yet. “Canada is now two housing markets. One, Vancouver and Toronto, and two, the rest of the country,” says Murphy. “In recent visits to Ottawa and in discussions with government officials, CAAMP has highlighted the [existence of these] two housing markets…Any further changes would impact markets that are not seeing house price appreciation or, in some cases, actual price declines.”

OK, but what about two sets of mortgage rules—one for richly valued markets and one for weaker markets?

“It’s a very interesting question,” says Murphy. “The same issue has been raised with the Bank of Canada about regional interest rates—higher in a region with a strong economy and lower elsewhere. I’m not sure that is possible.”

“For mortgage rules, it may be possible, but it’s still difficult. For, example, do mortgage rules apply to the City of Toronto or to the GTA?”

For now, it looks like the status quo may prevail. “The federal government continually monitors the housing market and consults with stakeholders like CAAMP to gauge opinions on the market. Our sense is that changes are not imminent and are unlikely before the October federal election.”

Barring significant mortgage rule tightening, it may take an economic downturn or improbably large rate hikes to derail single-family price momentum (national numbers are being skewed predominately by single-family home sales in Toronto/Vancouver). And neither seem imminent.

That said, the “data never go in a straight line,” Poloz remarked earlier, and we have no way of knowing what’s around the corner. Will the U.S. Federal Reserve finally jack up rates and pressure the BoC to follow? Will oil prices rebound or fall to new lows? Will a U.S. recovery and hobbled loonie boost demand for Canadian exports? Will EU stimulus work, or backfire? Is another financial crisis waiting in the wings? Fill in your own ‘what if’ here _____________. Any of these possibilities could play on rates in the year to come.

Meanwhile, we’re just a stone’s throw from a new record low for Canadian bond yields. Our most important fixed mortgage rate driver, the 5-year bond yield, rose 3 basis points on today’s news. But if we break below 0.55% and hold there, look out. Five-year mortgages near 1.99% could rocket Toronto/Vancouver prices from the stratosphere to the exosphere.


Sidebar: Here’s the full text of today’s BoC’s statement: Link. The next Bank of Canada interest rate pow wow is May 27, 2015.