Rate cut sets table for (another) nutso spring home-buying season

Homebuyers thinking they were about to miss the boat on low mortgage rates need not worry.

Thanks to the Bank of Canada’s surprise interest rate cut last week, that boat will be docked for the long term with plenty of seats available, and the Canadian housing market looks set for another blockbuster spring season.

While Royal Bank of Canada is the only lender to reduce its prime rate, which dictates variable mortgage rates, RBC and TD have both said they’ll cut certain fixed-rate loans, which means the ball has started rolling on an overall drop in rates.

“It’s definitely a lower for longer environment,” says Rob McLister, founder or RateSpy.com. “The spring market is already prime time in the housing market, so it’s going to get some people excited and it’s going to be more people looking for homes.”

The central bank cut comes as government bond yields are already at historic lows, which gives the banks leeway to offer cheaper fixed-rate mortgages.

McLister says he doesn’t expect an “avalanche” of new buying demand, which is in part due to the fact that we’re already trolling record depths for mortgage prices. He pegs the lowest five-year fixed loan on the market at 2.54 per cent, which is a level that would have seemed insane just a decade ago, when discounted mortgages went for just under 6 per cent.

But lower rates mean the banks will be qualifying buyers for higher mortgages, which tends to lure them out the door, particularly when the snow melts and the idea of a back yard instead of a balcony becomes more enticing.

So far, the banks have been playing it safe with this rate cut. However, the longer the central bank rate stays low, the greater the pressure on the banks to match the move.

And even if they resist following the Bank of Canada’s move this time around, there’s a growing sense they may get another kick at the can.

Both TD and BMO predict the central bank will cut rates again over the next few months, which would spark a whole new round of ‘how-low-can-rates-go’ chatter, and almost certainly prompt a cut in variable rates.

All of this is not without risk. BMO Chief Economist Doug Porter made his bank’s rate-cut call through gritted teeth, noting the move should only fuel what’s already a frothy (economist-speak for over-valued and ultimately doomed for a pullback) housing market.

“After four years of scolding Canadians about taking on too much debt, the Bank (of Canada) has pretty much said ‘Oh, never mind, we’ve got your back’, despite the fact that the debt/income ratio is at an all-time high of 163 per cent,” he wrote in a research note.

And while former Finance Minister Jim Flaherty intervened in the mortgage wars two years ago, quietly convincing Manulife to abandon its then-unheard-of low rate of 2.89 percent, current Minister Joe Oliver has indicated he likes to leave this kind of thing up to the market.

With the current rate outlook, the market dictates mortgage prices will go down, and the season of housing bidding wars will soon be upon us.