Spotlight On Mortgages: May 3, 2013

Spotlight on Mortgages

It’s been a tumultuous few years for economic conditions, both in Canada and worldwide. Now, as our nation cautiously experiences an economic uptick, Canada is praised for weathering the financial crisis better than most – and the actions of our monetary policy have been thrust into the spotlight, along with the resulting impact on consumers, investors and markets.

The Lessons Learned In A Financial Crisis

Yesterday, outgoing Bank of Canada Governor Mark Carney spoke to a University of Alberta audience about the lessons policy makers should take to heart “after the fall”. He said that monetary policy must evolve to protect economies from shock, and explored the effects of Canada’s measures to manipulate interest rates and promote price stability.

“Globally, central banks are now being simultaneously accused of being ineffective and too powerful. The goals of monetary policy are being called into question,” Carney stated in his address. “It is also being recognised that how monetary policy interacts with other macro policies, including fiscal and macroprudential policies, can affect its independence and potentially its effectiveness.”

Carney identified key financial lessons imparted by the crisis. Let’s break down how these actions have since affected the Canadian economy, and have led to current housing market conditions.

Monetary Policy Should Be A Last Resort

Carney argued that the burden of a healthy economy can’t land solely on the shoulders of monetary policy and economic manipulation – the first lines of defence should be stability from smart consumer spending and borrowing behaviour, along with responsible lending practices followed by Canada’s banks.

The Impact: As shown by our currently high household debt levels, this hasn’t exactly been the case with Canadian consumers, who have snapped up cheap mortgages and credit. Canadian banks have also seen their ratings cut over the past year for being too vulnerable to volatile consumer-based debt. This has since prompted OSFI to deem six of our largest lenders “too big to fail”, and new limitations have been placed on risk-based assets to minimize their vulnerability in case of another financial shock.

Central Banks Should Take Caution With Stimulus

How low can interest rates really go? When the financial crisis hit, governments, including Canada’s, turned to stimulus efforts to shield their economies such as credit easing, quantitative easing, and record low borrowing costs. Says Carney, “As with any policy action, the effectiveness of unconventional policies requires that they remain credible and consistent with well-anchored inflation expectations.”

The Impact: Access to cheap home financing hasn’t exactly discouraged buyers from taking on additional mortgage debt. This has led to words of caution for those who may have borrowed more than they can handle. Carney has indicated multiple times that the Bank of Canada will increase rates when economic conditions are stronger, which could find many overextended homeowners tapped out on their mortgage payments.

Accessible financing has also contributed to an overvalued housing market, posing a loss on investment to homeowners should the market significantly cool.

The Bank of Canada Is Trying to Reign It In

While Carney acknowledges that the Bank’s actions in the face of financial crisis have contributed to our current debt standing, he defends the measures, indicating that the economy has indeed benefited from the loose-money policy, and could be in far worse standing had the bank not acted.

He then pointed to the current efforts to stem debt levels, such as tightened mortgage rules, which limited borrowing options for some buyers, and promoted responsible lending by banks. They seem to be working – household credit growth decreased to three per cent this year from six per cent in 2011.

The Impact: The housing market has certainly reacted to the new mortgage rules imposed last July, which decreased amortizations to 25 years for government backed financing and limited refinancing to 80 per cent of a home’s loan to value ratio.  The changes meant some buyers, particularly those in the first timer segment, could no longer afford to buy, and were sent back to the savings drawing board. This has led to a slight cooling in some of the most overheated urban markets – but has also prompted lenders to compete for a shrinking buyer pool with record low mortgage rate wars – counterintuitive to Ottawa’s measures. Week In Review

No change across the board this week with the exception of the ever-active five year fixed mortgage rate. After lenders raced each other to the bottom over the past few weeks, the rate has settled to 2.64 per cent for the time being. Will it go even lower? We’ll just wait to wait and see, as both the weather, and buying conditions, heat up for the summer mortgage season.

Related Topics

Mortgage News / Mortgages

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