{"id":27553,"date":"2015-01-22T21:53:31","date_gmt":"2015-01-23T02:53:31","guid":{"rendered":"http:\/\/prefblog.com\/?p=27553"},"modified":"2015-01-22T21:53:31","modified_gmt":"2015-01-23T02:53:31","slug":"january-22-2015","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=27553","title":{"rendered":"January 22, 2015"},"content":{"rendered":"

So the banks are taking advantage of the anti-competitive Bank Act ownership provisions to increase their mortgage margins<\/a> as well as their margins on Prime:<\/p>\n

But now, all in mortgage-land are waiting and wondering if Canada\u2019s major banks will actually pass along that rate cut. The Globe and Mail\u2019s Streetwise reported Wednesday that TD Canada Trust may not reduce its prime rate. (TD sent me a statement this morning confirming that it is not changing prime rate \u201cat this time.\u201d)
…<\/b>
We\u2019re in a different world this time around. The average home price is 44 per cent higher than 2008, debt levels are at a record, bank revenue is pressured by multi-year lows in mortgage growth, competition has shrunk net interest margins and Ottawa had burdened banks with heaps of regulatory, capital and securitization restrictions. That makes banks and the federal government quite reluctant to see a lower prime rate.<\/p>\n

The housing policy factor cannot be underestimated, not with the Bank of Canada admitting that certain regions\u2019 home values may be up to 30 per cent overvalued. I spoke with one capital markets executive Thursday. He said, \u201cI wouldn\u2019t be surprised if the Bank of Canada called all the major banks and said, \u2018Don\u2019t use this rate cut as fuel to get more debt in consumers\u2019 hands by lowering rates.\u201d<\/p><\/blockquote>\n

Yes, if there were more banks, then the bureaucrats at the BoC and the politicians would have to make more than six calls, which would be too much like work. After all, when you’re busily micro-managing the economy and it turns out you need a two-tier interest rate policy like any other proud member of the third world, you don’t have time to waste talking.<\/p>\n

Regrettably, there still a few members of the private sector who have not yet been re-educated<\/a>:<\/p>\n

Mortgage brokers, however, say it is only a matter of time \u2013 anywhere from a few days to a few weeks \u2013 before banks start slashing their rates, with some predicting that as Government of Canada bond yields plummet below 1 per cent, five-year fixed rates could hit a new record-low 2.5 per cent, reigniting a fierce competition for new borrowers.
…<\/b>
Some small non-bank lenders have already begun cutting their fixed-mortgage offerings, said Drew Donaldson, a mortgage broker and executive vice-president Safebridge Financial Group. Consumers with variable-rate mortgages and preapprovals have been calling Mr. Donaldson\u2019s office in droves looking to find out when their rates might drop.
…<\/b>
Some industry officials say that while banks will inevitably be forced to drop their fixed mortgage rates if bond yields settle at record lows, they may put off dropping their prime rate, which affects variable-rate mortgages along with a host of non-mortgage lending, such as car loans and personal lines of credit, in order to protect their non-mortgage profits and push borrowers toward longer-term fixed rate mortgage contracts.<\/p>\n

Others speculated that federal regulators may be pressuring banks not to lower their rates too drastically by warning that they could introduce tighter lending rules to avoid driving up already high levels of household debt.
…<\/b>
But with the average five-year rate among the major banks now sitting around 195 basis points above five-year government bond yields, well above the historical range of between 150 and 160 basis points, most expect the banks to eventually bow to consumer pressure to slash their rates, sending potential buyers running back into the housing market.<\/p>\n

\u201cYou\u2019ll definitely get more interest in homebuying when you see rates go below 2.5 per cent,\u201d Mr. McLister said.<\/p>\n

\u201cIt\u2019s going to be a huge flood of buyers.\u201d<\/p><\/blockquote>\n

It was another violently mixed day for the Canadian preferred share market, with PerpetualDiscounts up 74bp, FixedResets off 11bp and DeemedRetractibles down 20bp. Yet another lengthy Performance Highlights table is predictably dominated by FixedReset and Floating Rate losers and Straight Perpetual winners. Volume was average.<\/p>\n

For as long as the FixedReset market is so violently unsettled, I\u2019ll keep publishing updates of the more interesting and meaningful series of FixedResets\u2019 Implied Volatilities. This doesn\u2019t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.<\/p>\n

Remember that all rich \/cheap assessments are:<\/p>\n