This article was all people were talking about yesterday, and there were both critics and supporters.
I’d like to highlight a few key points of this article, and then, of course, hear from the cynics and bears…as usual…
“Flaherty Warns Banks Over Igniting Mortgage War As BMO Cuts Rates”
By: Tara Perkins & Bill Curry
The Globe & Mail
Monday, March 4th, 2013
Finance Minister Jim Flaherty is issuing a warning to the country’s banks, as stiff competition for mortgage customers is prompting lenders to cut rates heading into the key spring home-buying season.
“My expectation is that banks will engage in prudent lending – not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States,” Mr. Flaherty said in a statement to the Globe on Sunday, after Bank of Montreal reduced its price on five-year fixed-rate mortgages to 2.99 per cent from 3.09 per cent.
That was the lowest advertised five-year mortgage rate among the big banks as of Sunday afternoon, although lower rates are available in the market.
BMO sparked controversy when it first introduced this rate, which at the time was a new low, in January of 2012, spurring a price war among lenders. The big banks backed off the ultra-low posted rates after a short period of time last year.
At the same time, Ottawa was urging Canadians to stop taking on too much debt and bidding up prices to unsustainable levels.
The Bank of Canada has been warning that high household debt levels, the bulk of which come from mortgages, are the largest risk facing the country’s economy. Canada’s housing market rebounded quicker than most from the financial crisis, causing some observers to question whether a bubble was forming.
But home sales have been dropping substantially on a year-over-year basis for months now, and with the most important season for those sales now kicking into gear, competition among lenders is heating up. Mortgages are the largest segment of the banks’ core Canadian lending businesses. “There is no question that the Canadian banking industry is facing slightly slower growth as a result of slower mortgage demand,” Gord Nixon, CEO of Royal Bank of Canada, the country’s largest mortgage lender, said on a conference call last week.
Lower rates could entice more buyers into the housing market this spring, and encourage some buyers to take out larger mortgages than they otherwise would, lending support to house prices. That’s not what policy-makers in Ottawa are hoping for.
Mr. Flaherty noted Sunday that he has taken action “to make sure the housing market remains sound.” He tightened the mortgage insurance rules in July, amid concern the market was overheating, making it slightly more difficult for borrowers to obtain mortgages. The changes included cutting the maximum length of an insured mortgage to 25 years from 30. Home sales subsequently fell sharply in the fall, compared to their levels a year earlier, and have not rebounded since. Economists have been debating how much sticking power Mr. Flaherty’s actions will have.
In a press release Ernie Johannson, senior vice-president of personal banking in Canada for BMO, said “BMO’s efforts to encourage Canadians to pay down debt and build equity in their homes have been aligned with Minister Flaherty’s timely and prudent actions to encourage moderation in the housing market.”
With consumer debt at record levels, Mr. Flaherty told the Globe in January that he would be pleased if the market softens further. “I don’t mind prices coming down a bit, too,” he said.
Some mortgage brokers derided BMO’s newly advertised price as a marketing gimmick on Sunday, noting that a number of banks have already begun offering that rate again. Banks’ advertised, or posted, mortgage rates mask the discounts that many if not most customers can obtain by haggling.
“Most banks aren’t advertising 2.99 per cent, but I know if you walk into any branch in the city right now they’ll start off with 2.99 per cent as the starting rate,” said Christopher Molder, a Toronto mortgage broker.
The lowest available five-year fixed rate fell to 2.79 per cent in February, according to Alyssa Richard, CEO and founder of Ratehub.ca. That’s the lowest such rate the site has ever seen, she said. And a couple of major banks have lower posted rates for three-year mortgages.
BMO has been seeking to bolster its mortgage sales since it stopped using mortgage brokers about four years ago. It still has the lowest mortgage market share among the five largest banks, according to Canaccord Genuity analyst Mario Mendonca.
Because borrowers will often place their deposits, credit cards and other products with the bank they have a mortgage with, banks put a large emphasis on getting mortgage customers in the door. During the heat of the mortgage price wars early in 2012 some bankers said they were losing money on new mortgages.
Analysts questioned whether lower rates are really a wise move by banks right now.
“How credit worthy is the marginal mortgage borrower in a market with a debt-to-income ratio at 163 per cent and an all-time high home ownership rate?” asked National Bank analyst Peter Routledge.
Since the banks offload much of their mortgage risk to the government by way of mortgage insurance, mortgages alone are unlikely to heap too much risk onto the lenders, he added. “But if they are cross-selling other products, such as credit cards, maybe they are moving down the credit curve,” he said. “No convincing evidence of credit problems this quarter, but we shall see in the quarters ahead.”
NDP finance critic Peggy Nash said in an interview that she can understand why BMO would lower rates to encourage buying during a sluggish economy.
But “I think it would not be helpful if we got into a mortgage rate war, because that obviously will get more people into the market, some of whom maybe shouldn’t be there,” she added.
I’d like to go over a handful of selected quotes and phrases here, as I think there are some serious points to debate:
“My expectation is that banks will engage in prudent lending – not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.”
When Mr. Flaherty says this, does he actually mean this is his expectation? Like he truly believes that banks will engage in prudent lending? Or is he saying this like a parent tells his or her child, “My expectation is that you will not eat cookies when I step out of the house for five minutes”?
Because to be honest, I don’t believe that banks have any sort of social, moral, or economic responsibility whatsoever, and I don’t think they’re worried about the Canadian economy as a whole; just how much money they can make, and how many mortgages they can sell.
I do applaud Mr. Flaherty, however, for referencing the United States’ “race to the bottom.” Their current problems (or if you’re a Republican, then it’s “their current wicked/cool state of the universe”) are by their own doing, and there are no excuses. I agree with Mr. Flaherty that we should learn from the mistakes.
BMO sparked controversy when it first introduced this rate, which at the time was a new low, in January of 2012, spurring a price war among lenders. The big banks backed off the ultra-low posted rates after a short period of time last year.
Don’t forget that the 2.99%, 5-year, fixed-rate that BMO was offering last year was a “stripped down” mortgage that lacked many of the features you’d expect in a current mortgage.
The difference is: today’s 2.99%, 5-year, fixed-rate mortgages are offering many or most of the features that were removed last year.
This means that rates are far better today than they were this time last year.
Ottawa was urging Canadians to stop taking on too much debt and bidding up prices to unsustainable levels.
I’ve had the same iPod for five years.
I went in to the Apple Store last week to get a new skin/cover/thing, and the girl said, “We don’t really care skins for this model anymore; it’s, like, soooo old.” She looked at me like I was from the moon, and said, “I’ve had, like, four different iPods since this model. LOL. Seriously man, hahaha, like, get with the times!”
I replied, “My iPod plays music, just like every iPod since. And you are a prime example of not only the ignorance and entitlement of today’s youth, but also the problem that Canadians, and the rest of the world, face with consumption and debt.”
She said, “Whaaaat?” And then turned into a pumpkin…
Canadians take on debt because they don’t understand it, because societal pressures force them to, and because many lending practices are predatory. I don’t believe this will ever change.
But home sales have been dropping substantially on a year-over-year basis for months now…
This, of course, refers to the number of sales, not the price of the houses sold.
I wrote an entire blog post on this once, called, “You can make numbers say anything!”
Sales are down, prices are up. Both in Toronto (especially in Toronto), and in terms of the average Canadian house.
In a press release Ernie Johannson, senior vice-president of personal banking in Canada for BMO, said “BMO’s efforts to encourage Canadians to pay down debt and build equity in their homes have been aligned with Minister Flaherty’s timely and prudent actions to encourage moderation in the housing market.”
This is a load of BS.
Any lender wants to make it impossible for borrowers to pay back money.
Watch the documentary “Maxed Out” and see just how predatory some lenders can be.
Because borrowers will often place their deposits, credit cards and other products with the bank they have a mortgage with, banks put a large emphasis on getting mortgage customers in the door.
I could be wrong on this (I’m judging from my own experiences, and that of my clients), but I don’t believe this statement is accurate.
I have had six mortgages on properties I’ve owned, and I couldn’t possibly care less where the mortgage comes from.
I bank with TD Canada Trust, I have one credit card, and it is, and always has been, the TD Travel Platinum card, my investments are with Scotia i-Trade (formerly an independent E-Trade), and my American accounts are with US Bank. I would never think of adding products offered by my mortgage lender, since I don’t care who my mortgage lender is (I use brokers, not banks, remember). The last mortgage I discharged was with MyNext Mortgage, who I’d never heard of before, and who I’m sure doesn’t offer any other products.
I guess when you’re with one of “The Big Five,” they all offer the same credit cards, lines of credit, HELOC’s, etc. But I’m no so sure that consumers will seek out credit cards from their mortgage lender just because they happen to be your mortgage lender…
How credit worthy is the marginal mortgage borrower in a market with a debt-to-income ratio at 163 per cent and an all-time high home ownership rate?
Um, that was rhetorical, right?
“Since the banks offload much of their mortgage risk to the government by way of mortgage insurance, mortgages alone are unlikely to heap too much risk onto the lenders.”
Soooooooo…..as a final thought….
How about privatizing CMHC?
Anybody?
Bueller?
ABB
at 7:36 am
Debt dependency of the uninformed masses is precisely the obsession and objective of the banks.
Trevor
at 8:13 am
As in the words of Garth Turner, this will not end well.
Trevor
at 8:17 am
Good parting question! ask the Banks if they will acquire CMHC and thus be self insured. Odds are that they will not. They will continue making high risk disbursements at absolutely no risk to themselves. The Taxpayer will be on the hook when the meltdown comes. Hurray for Harper the Sharper and his conservative goons!
Geoff
at 9:57 am
@ Trevor – OMG I’m so tired of that expression. It needs to be retired, like ‘hasta la vista, baby’ or ‘all that and a bag of chips.’ He just sounds like that annoying kid who doesn’t get picked to play football at recess, and says ‘well those jocks won’t amount to anything anyway.’ Everything won’t end well – all marriages end (in divorce or death); all life ends (in death); and finally literally all won’t end well when the sun burns out and all life on the planet freezes over.
I’d love to see some more predictions from GT that include timing, like “March 2013 won’t end well’ because he tried that for one post as I recall on July 1, 2011 ‘won’t end well’ and then he stopped (for a reason, I suspect).
Trevor
at 10:09 am
I hear you. I am not referring to real estate housing per se, the banks appear to hand out really risky loans all guaranteed by the CMHC which is in turn a taxpayers liability should defaults start happening.
Geoff
at 12:17 pm
Well let’s explore that a little. So some questions to my smarter friends – let’s say Couple Y buys (with CHMC insurance) House X for $100,000, with a $10,000 downpayment and a $90,000 mortgage. Then for whatever reason, Couple Y stops paying mortgage. Bank assumes property, and sells House X for $50,000. Does Bank get $90,000 (plus interest payments it would have received over the term), or does it get the $40,000 it’s out of pocket on to be made whole again? ($50,000 from sale + $40,000 from CHMC) or some other third option?
Potato
at 6:25 pm
I believe the bank gets $90k less principal payments plus accrued interest, and then the CMHC gets the proceeds of the collateral.
ABB
at 11:39 am
Here’s what Garth Turner wrote recently about that gas-bag Brad Lamb:
http://www.greaterfool.ca/2012/11/30/smart-ass-condo-math/
http://www.greaterfool.ca/2013/03/01/remorse/
Kyle
at 11:52 am
Thank you Geoff! That phrase has become the desperate mating call of the hopeless homeless.
dave
at 9:21 pm
GT has actually had a remarkably accurate track record with his predictions (including timing) over the past 4 years. He called the bottom of the equity markets, the rise in the CAD, the failure in the gold market, the bottom of the oil price and subsequent rise to $100, the stability of bank preferreds, and the rebound in the US housing market.
I think the flaw in his Canadian housing prediction (or timing at least) has been in not giving sufficient consideration to role played by the CMHC in keeping things humming along in the Canadian housing market.
Joe Q.
at 10:23 am
David — Your last comment is the crux of the issue, because the CMHC is what allows banks to lend the way they do, and its policies are therefore a strong driver of the housing market. But beware: advocating for the privatization of the CMHC puts you firmly in the bear / cynic camp!
Paully
at 10:29 am
It is fine for Flaherty to worry about the over-indebtedness of Canadians. He started this crazy housing market bubble with 40 year mortgages!
Now he’s like a kid who was playing with matches calling 911 after the whole house is engulfed in flames and complaining that the fire department didn’t come soon enough!
Devore
at 9:23 pm
“How about privatizing CMHC?”
Nice thought, but impossible. With CMHC portfolio comes the explicit government backing. But CMHC can be spun down, government co-signing of mortgages withdrawn, allowing private insurers to enter the market and compete. Me, I’m not hold my breath. We’ll have a “US-style” health care system before that happens.
buk
at 5:16 am
prices are way up?
TREB numbers show prices in Toronto are actually down YoY for February. That trend will continue into March.
Geoff
at 11:04 am
ummm http://guava.ca/indicators.html
both average and median prices are up yoy on these charts.
dave
at 2:27 pm
416 prices down 0.1%. GTA prices up. Guava shows GTA.
Geoff
at 9:21 am
0.1% down? Little misleading to say that February is down. Yes, on an absolute scale it is, but February last year also had 29 days and this year only 28; that’s an extra day for Feb sales. It seems like if one house had sold for $500 more it would be enough to shift things at least to 0.1% positive.
Kyle
at 10:12 am
Bears will cling to whatever they can in the stats to keep the flames of hope alive, even if it is -0.1%. But looking at chart 5, 8 and 10 below, i don’t think there’s much else for them to celebrate.
http://www.torontorealestateboard.com/market_news/housing_charts/index.htm
Geoff
at 11:43 am
@ Kyle – I’m neither a bear nor a bull. I’m a homeowner who is also a believer that real estate must go down. What I really am though is someone who likes numbers, and hates it when data is twisted to support a point of view (in technical terms, that’s called ‘confirmation bias’). Saying a decline 0.1% is a decline (without saying the 0.1%) is twisting data. A more accurate way to say it is that prices didn’t noticeably increase or decrease.
Ralph Cramdown
at 1:35 pm
It’s -0.3% if you compare the number on last year’s press release to the number on this year’s. Knock off another one percent to account for Canada’s core inflation rate of 1%.
Kyle
at 2:52 pm
Ralph while you may be technically correct. But it would be a bit like me getting excited over the fact that the 2012 Mercedes SLS was $206,900 CAD, and the 2013 model is 207,900 CAD. Virtually no change. So technically, in real dollars it is 1% less. Whopppeee, at the end of the day, i still can’t afford it.
Numbers, data and stats can be made to support any view, if you want to keep reinforcing your own views, despite the much larger picture saying you’re wrong, then by all means enjoying being technically right.
Ralph Cramdown
at 6:34 pm
It would appear, Kyle, that we’re each wagering considerable sums on the future of this real estate market. Best of luck to you! I’ve enjoyed your blogs, by the way.
dave
at 10:17 pm
Geoff, w the avg price at $500k, a $500 increase for all houses equals 0.1%.
So a single house selling for $500 more would not shift things to 0.1% positive. Rather, it would require a $1000 increase for all houses sold.
dave
at 10:21 pm
Kyle, you referenced charts 5,8 and 10. However the link only has 9 charts.
Geoff
at 11:41 pm
Are we really still debating if a decline of 1/10th of one percent is a trend? My main point was that it’s not enough of a change to denote a trend. If you remember that you’d have to subtract out the houses sold on the last day of the month last year (the 29th) my guess is that it would come out about even or possibly even a little higher but I’m not going to dig out data to prove such a minor thing. My point is one month of data does not a trend indicate.
dave
at 9:35 am
???
“Are we really still debating if a decline of 1/10th of one percent is a trend?”
-I didn’t say it was a trend.
-The OP had said prices were down YOY.
-You pointed to Guava that prices were UP YOY.
-I pointed out that Toronto proper were down 0.1%.
-You then said that it “seems like a singe house selling for $500 more would be enough to shift things positive”, which is mathematically incorrect and very much so.
-You’ve said, in this thread “What I really am though is someone who likes numbers, and hates it when data is twisted to support a point of view”
– And so I corrected your mathematical error. I thought you would appreciate that.
You can’t have it both ways. Either you want accurate numbers or you don’t.
ps. I’m an actuary.
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