On Friday, Manulife Bank posted its lowest rate ever on a 5-year fixed mortgage, 2.89%. It lasted for four days.
When our big brothers at the Department of Finance (DoF) caught wind of it, they dialed up Manulife and swayed the bank into raising its rate back to 3.09%.
“We don’t want a race to the bottom on mortgage rates by our financial institutions…,” said Finance Minister Jim Flaherty, as quoted by Bloomberg. “I had one of my staff call (Manulife) and indicate my displeasure.”
Manulife responded today by saying: "After consulting with the Department of Finance, Manulife Bank has withdrawn the (2.89%) promotional campaign and reverted to our previous posted rate." So now we have Manulife, the 10th largest bank by assets, being told by bureaucrats how to price its mortgages. Two weeks ago, BMO got the same call. Where does this end? The DoF seems set on breaking the knees of home prices, one way or another. With it so intent on regulating real estate transactions, will the next round of headlines read: "Ottawa Legislates Price Ceilings on the Sale of New Homes?" (Yes, this is an exaggeration...I think.) The Political Reaction In an interview with Canadian Press, NDP Leader Tom Mulcair called Flaherty’s actions "Banana Republic behaviour,” saying the minister has no right to interfere with a free marketplace (somewhat ironic commentary from the NDP, but that’s another matter). "Either we have a market or we don't," Mulcair added. "The banks have huge profits. The idea that they shouldn't be able to give a break to consumers is ridiculous and the idea that the Minister of Finance would basically be trying to create some kind of a cartel among the banks and the financial institutions as to what they can offer consumers by way of interest rates is I think completely inappropriate, completely wrong..." Liberal interim leader Bob Rae expressed similar sentiments, calling the minister’s actions “ridiculous.” The DoF is now asking banks to use their rates as tools to regulate the housing market. That’s not their role. Banks, as private sector entities, have an obligation to legally maximize profit. It's their job to set rates as high or as low as may be required to achieve that goal. Banks have every right to compete as hard for mortgages as the myriad of other lenders currently advertising 2.89% or less. One might argue that banks benefit from selling government-backed insured mortgages, and that they should therefore defer to the Finance Minister’s wishes. But all lenders sell insured mortgages. Why single out just the banks by compelling them (and only them) to advertise artificially high rates? Moreover, what if rates continue lower and stay low for years? Or what if home prices dive after the spring market? In these cases, governmental rate tampering would prove pointless, with the sole effect of taking money from borrowers' wallets (through higher interest) and transferring it to bank coffers. Prudence Misdefined Each time banks advertise sub-3% five-year fixed mortgages, Flaherty exhorts that lenders be “prudent.” But lowering rates (to match one’s competitors and reflect market-wide improvements in funding costs) is not “imprudent.” Lending to borrowers who don’t qualify for a mortgage is imprudent. There’s a difference. Some suggest that when big banks advertise low rates, it fuels excess home demand. But few people see 3.09% and say “I can’t afford a house” and then see 2.99% and say “Hey, I can afford a house.” A one-tenth of a percentage point rate reduction lets someone qualify for less than a 1% higher purchase price (based on standard debt ratio calculations). That is far from bubble-inducing. Behind the Hype When banks advertise rates that are already widely available, they’re not triggering a “race to the bottom” as the minister suggests. Rates are driven lower by market forces—which currently include shrinking mortgage volumes, narrowing spreads and falling funding costs. Micro-pricing adjustments by individual banks, however large those banks may be, barely impact market demand—and only in the short-term. If anything, it is Flaherty’s own public crusade against rate promotions that is raising the profile of low rates. It’s sparking more consumer mortgage interest than any bank advertising could. Indeed, if it weren’t for all the media attention Flaherty has caused, sub-3% rates would just blow over. But instead, a small number of buyers may now actually rush to get a mortgage “before the government bans 2.89%,” as one of our worried readers expressed today. Patience… Mr. Flaherty doesn't want spiralling home prices to lead to a real estate collapse. And that’s completely understandable. But a few tenths of a percent off rates will not trump market fundamentals in determining where home prices go from here. At this stage, the real estate market needs time to digest all of the mortgage restrictions from 2012 and find its own equilibrium. And we’re already seeing signs of that with inventories building for the last three quarters and sales down sharply. If the market doesn’t self-correct, the DoF, in its quest to moderate home prices, has the ability to tighten lending regs further. At least in that case, market-wide regulation would apply to all mortgage providers equally, and not just handicap the banks. As I wrote in the Globe & Mail yesterday (story link), consumers are the losers here. If a bank customer pays one-tenth of a percentage point more as a result of Flaherty’s actions, that’s $1,200 more interest over five years on a $250,000 mortgage. So far, the other bank on Flaherty’s radar, BMO, hasn’t caved to the pressure and is still advertising a 2.99% five-year rate. It’s refreshing to know that some bankers are brave enough to give consumers a fair shake and do what they're paid to do: sell mortgages. Rob McLister, CMT