Mortgage rate discounts to be only ‘temporary relief’: economists

Mortgages may have gone on sale again for the first time in a year, but economists warn those discounts will likely be short lived.

The rush to cut 5-year, fixed mortgages by a half-point to the 2.9-per-cent range started last month with the Bank of Montreal. It has since been matched and slightly beat by a handful of lenders, according to data posted by RateHub.

Scotiabank economist Adrienne Warren says the discounts are the result of a drop in bond yields. That is being passed on to borrowers as an incentive heading into the critical spring home buying season.

Warren calls the current mortgage rate sale “temporary relief” for borrowers, but doesn’t expect a war that will drive rates down further.

In fact, she warns borrowers to “brace for somewhat higher interest rates” later this year, as bond rates rise again and the global economy continues its steady recovery.

“Modestly higher borrowing costs are still on the horizon as global growth picks up,” Warren says.

A different market

Canada’s housing market is also different now than when Bank of Montreal cut its 5-year rate below 3 per cent a year ago, a move that was criticized by then-finance minister Jim Flaherty. He called for “responsible lending,” amid worries that the housing market was heating up too quickly.

New finance minister Joe Oliver has said he wouldn’t intervene in the recent rate sale.

Warren says that’s likely because there’s growing evidence that the market has cooled over the past year.

While the latest data shows national house prices were 10 per cent higher in February versus a year ago, Warren says the number is skewed by high-priced markets such as Vancouver.

In her most recent Global Real Estate Trends report, she estimates “constant quality house price measures” show prices are up 5 per cent year-over-year, "consistent with a market that is fairly well balanced overall.”

She also notes that home sales were up about 1 per cent in the first two months of the year, compared to the same period last year.

"Canada’s housing sector appears to be moving back onto a more sustainable trajectory,” she wrote.

Evidence of a “soft landing”

There was also new housing data released this week showing Canada’s housing market is heading for that “soft landing” being forecast by economists and the Bank of Canada.

Canadian housing starts fell nearly 18 per cent in March, more than expected, while the value of building permits fell almost 12 per cent, according to data released Tuesday.

While the harsh winter in most provinces across Canada are being blamed for part of the pullback, economists also cite a slowdown in home building that was a long time coming.

"The bigger picture is an ongoing cooling of residential construction activity in Canada," BMO Capital Markets senior economist Robert Kavcic wrote in a research note.