Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News Editor's Note: Dave's Monday Morning Interest Rate Update appears on Move Smartly weekly. Check back weekly for analysis that is always ahead of the pack.
The Bank of Canada (BoC) released its latest Monetary Policy Report (MPR) last Wednesday and left its policy rate unchanged at 1%, as was universally expected.
I read the MPR with great interest because it gives us the BoC’s views on the state of the world’s economies and includes projections for where the Bank sees foreign and domestic economic momentum headed over the next several years.
Here is a summary of the latest MPR:
In addition to these summary points, the latest MPR also provided some insightful commentary on the mixed blessing that is our cheaper Loonie.
Like most market watchers I applauded the cheaper Loonie as a source of stimulus for our economy, focusing primarily on its lowering the relative prices of Canadian exports sold in foreign markets. But after surveying affected areas of the business sector, the BoC points out in its latest MPR that “the more immediate and widespread impact” on Canadian businesses over the short term has been on “the rate of increase in their non-labour input costs, mainly through the higher cost of imported intermediate inputs”.
In other words, the most significant impact of the cheaper Loonie thus far has been to push up the cost of the goods that are imported by our export manufacturers. These exporters have thus far been reluctant to pass those cost increases on to foreign consumers because “intense competition continues to exert downward pressure on output prices”. So while the cheaper Loonie should help our exporters to be more competitive over the longer term, it has actually created an additional headwind for them in the form of higher input costs over the nearer term.
Last week the Office of the Superintendent of Financial Institutions (OSFI) also released a draft of its latest changes to the Residential Mortgage Insurance Underwriting Practices and Procedures, which the media has dubbed the B-21 regulation changes. The mortgage world held its collective breath because OSFI’s preceding changes (known as B-20) were sweeping in nature and many inside the industry feared that another round of comprehensive mortgage-credit tightening would be too much too soon. Many industry stakeholders believed that the multiple rounds of previous mortgage-underwriting rule changes had not been given enough time to fully permeate our real estate markets and that further tightening should be delayed until the impact of prior changes could be more fully quantified.
They needn’t have worried. When OSFI released its B-21 draft last Monday, it was basically just a reminder that insurers and lenders should be careful and thorough when underwriting loans. My guess is that B-21’s “six fundamental principles for sound mortgage insurance underwriting” will be cited when OSFI conducts future insurer audits, but as far as policy changes go, B-21 did not break any important new ground.
Five-year Government of Canada bond yields rose by seven basis points last week, closing at 1.72% on Thursday. Five-year fixed mortgage rates are still available in the 2.84% to 2.99% range, and five-year fixed-rate pre-approvals can still be had at rates as low as 3.09%.
Five-year variable-rate mortgages are offered at rates as low as prime minus 0.65%, which works out to 2.35% using today’s prime rate of 3.00%.
The Bottom Line: Last week I wrote that the BoC’s latest rate announcement and the release of its April MPR, combined with the announcement of OSFI’s B-21 guideline changes, meant that the Canadian mortgage landscape might look a lot different by the time the Easter Bunny was hiding eggs on Sunday.
In the end it didn’t.
The BoC basically confirmed that events are unfolding largely as it expected and maintained its steady-as-she-goes approach to interest-rate policy. For its part, OSFI decided that instead of using B-21 to rock the regulatory boat, it would use it to remind high-ratio mortgage insurers to make sure that their existing boats have life jackets and paddles in good working order.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave