Royal Bank cuts 5-year fixed mortgage rate, others likely to follow suit

Biggest bank cuts benchmark rate by 15 basis points

Canada's biggest bank has cut its five-year fixed-term mortgage rate, a move that other banks are likely to try to match in short order.

Royal Bank edged the rate on its five-year "special offer" mortgage down to  3.74 per cent, a cut of 0.15 percentage points.

Though subtle, the move is likely to prompt similar actions by other major Canadian banks in the coming days, and it's actually overdue based on what's happening in the bond market, says Rob McLister, founder of mortgage comparison website

Banks finance mortgages for consumers by borrowing money from bond investors, and then lending it out to mortgage holders at higher rates. Those borrowing costs to the bank started falling precipitously in the fall, a development that has yet to filter down to customers.

In November, a five-year government of Canada bond was yielding just shy of 2.5 per cent. A few days ago, that had fallen as low as 1.75 per cent, a drop of 75 basis points.
Bond yields fell in the latter part of 2018
The yield on a five-year Government of Canada bond dipped by 75 points in a matter of weeks — a huge drop in the staid world of bonds.

RBC's cut is only 15 basis points, so with that spread still being wide by historical standard, more could be in the offing.

"Banks could've cut fixed rates weeks ago," McLister said. "The reason they held out is because they can."

Alternative lenders have already cut their rates, but since the big banks control about 90 per cent of the market, they can hold out longer.

"When people see materially better rates from non-banks online, it puts more pressure on the Big 6 to act," McLister said.

hey're also cutting now because of the time of the year. December and January are the "deadest" period for home buying, McLister notes, so RBC could be trying to drum up business while things are slow.

When asked what prompted the rate drop, an RBC spokesperson said a number of factors have impacted the Toronto-based bank's cost of funds.

RBC says that includes the rate the bank pays in the bond market, increasing regulatory costs and market volatility.

he impact on consumers will be small, but could grow if it's the start of a trend.

James Laird, president of mortgage brokerage Canwise Financial, calculates a $400,000 mortgage at the old five-year fixed rate of 3.89 per cent would cost a homeowner about $2,080 a month. At the new rate, that monthly mortgage payment would drop to $2,048 — $32 a month cheaper or an extra $384 per year.

"RBC is the largest mortgage lender in Canada, so whenever they move their mortgage rates, we can expect that the other four banks will follow suit," Laird said.

The trend downward in fixed mortgages is even more interesting considering what's happening in the variable market, which is more pegged to the Bank of Canada's rate than the bond market.

Because variable rate mortgages are inching higher.

RBC nudged the rate for its five-year variable mortgage to 3.55 per cent on Wednesday, up from 3.30 per cent.

"The current stable interest rate environment is causing lenders to reduce the discounts being offered on variable rate mortgages," Laird said.

Pete Evans · CBC News · Posted: Jan 17, 2019 9:13 AM

Canadian Home Prices See Healthy Gains in the Fourth Quarter as Market Begins Recovery from the Most Significant Housing Correction in a Decade

  • National home prices rose 4 per cent in the fourth quarter of 2018 compared to previous year
  • Secondary cities outperform larger cities led by Windsor, Kingston, and Moncton
  • Greater Montreal Area continues to lead the Greater Toronto Area and Greater Vancouver in price appreciation
  • Toronto recovery led by strong price gains in condominiums

TORONTO, January 11, 2019 – According to the Royal LePage House Price Survey[1] released today, year-over-year home prices made healthy gains in many regions across Canada in the fourth quarter of 2018, continuing the recovery from the most significant housing correction since the financial crisis. Once again, the Greater Montreal Area saw the highest year-over-year home price appreciation rate of the three largest Canadian metropolitan areas studied.

The Royal LePage National House Price Composite[2], compiled from proprietary property data in 63 of the nation’s largest real estate markets, showed that the price of a home in Canada increased 4.0 per cent year-over-year to $631,223 in the fourth quarter of 2018. When broken out by housing type, the median price of a two-storey home rose 3.9 per cent year-over-year to $745,007, while the median price of a bungalow climbed 1.5 per cent to $516,950. Condominiums continued to see the highest rate of appreciation nationally when compared to the detached segment, rising 7.2 per cent year-over-year to $447,915.

Royal LePage projected modest home price appreciation in 2019 in its recent forecast, expecting the aggregate price of a home in Canada to rise 1.2 per cent in Canada over the next year.

“The invisible hand that guides our complex economy hit the real estate reset button in 2018 and that is a good thing,” said Phil Soper, president and CEO, Royal LePage. “Major market home price inflation through much of the decade had led to dangerous overheating in our most populous regions. Government regulatory intervention and rising interest rates, when combined with property price overshooting, triggered the correctional cycle we find ourselves working through today.”

On January 9th, the Bank of Canada decided to maintain its target for the overnight rate and reduced its forecast for annual GDP growth from 2.1 per cent to 1.7 per cent.

“While some economists are adjusting their forecast for the economy as a whole, Canada’s real estate market is beginning to emerge from the correction that began a year ago. The national real estate market is stable and should see modest price gains by the end of the 2019,” said Soper.

The Canadian economy is performing well overall, with pockets of uncertainty. Persistently weak oil prices driven by domestic market access bottlenecks and global supply gluts have hit Western Canada hard, and trade tensions between China and the U.S. in particular are impacting consumer confidence across the continent.

“House prices and home sales volumes were soft and slow last year; expect modestly better results in 2019,” said Soper. “That said, the underlying Canadian economy, and employment in particular, continues to impress. Job creation is beating expectations handily. The unemployment rate of 5.6 per cent is a 43-year low.

“A silver lining in this cloud of uncertainty is the opportunity for young families to enter the market,” Soper continued.

The unemployment rate is about half of where it was during the financial crisis. It is also important to note that actual retail-market rates for a five year fixed term mortgage, the most popular offering in Canada, sit at approximately 3.5 per cent today versus approximately 5.9 per cent a decade ago; a full forty per cent lower.[3]

“Employment is high, rates are low, and home prices are essentially flat. 2019 is shaping up to be a year of rare opportunities,” Soper concluded.

Tight rental markets, record levels of immigration, and a wave of Millennials looking to buy their first homes are putting pressure on limited housing stock in many of Canada’s metropolitan regions.

“Despite the price corrections and low sales activity we saw in 2018, it is important that policymakers don’t take their eye off the ball when it comes to housing supply. That would be a huge mistake,” added Soper. “In down markets, construction tends to slow, exasperating our housing shortage problems. From there it is simple supply and demand; if we don’t build more homes, we risk another housing crisis and a return to runaway prices in our major markets.”

During the fourth quarter, buyers in Ontario continued to look beyond the GTA in search of affordability. Despite some price relief in the suburbs surrounding Toronto, buyers from the region are still venturing out to other Southern Ontario cities where price points are significantly lower.

Of the regions studied in the Royal LePage National House Price Composite, Windsor and Kingston saw the highest appreciation rates in Ontario, rising 14.7 and 13.8 per cent year-over-year, respectively. Meanwhile, regions including Ottawa, Kitchener/Waterloo/Cambridge, and London saw strong aggregate price gains of 9.3 per cent, 9.0 per cent, and 8.9 per cent, respectively.

The GTA was a story of contrasts. The City of Toronto experienced a strong rebound in the fourth quarter, while the surrounding areas remained relatively weak year-over-year. Prices in Toronto saw sizable increases, rising 8.8 per cent compared to 3.4 per cent gains for the GTA more broadly. Some of the surrounding suburbs, which saw rapid price increases in recent years, continued to slow, with declines in areas like Markham, Pickering, and Richmond Hill of 7.1 per cent, 5.6 per cent, and 4.9 per cent, respectively.

“The market correction in the suburbs of Toronto has been more significant than elsewhere in the country, because price increases in recent years were more extreme,” said Soper. “Even as prices in the core of the nation’s largest city begin to rise again, we expect prices in the region known as the ‘905’ to remain soft, providing new families with an unexpected entry opportunity into some of the most sought-after communities in southern Ontario.”

In Quebec, the Greater Montreal Area’s real estate market continues to set the pace among Canada’s largest metropolitans, supported by continued high demand, healthy household income and population growth. Despite positive economic fundamentals, price appreciation for real estate in most of the province’s regions outside of the GMA still continue to be dampened by worker shortages as small businesses struggle to attract workers to their communities. On the other hand, worker shortages tend to put upward pressure on salaries, which could improve affordability.

In the fourth quarter, the aggregate price of a home in the Greater Montreal Area passed the $400,000 mark, rising to $407,230, an increase of 4.1 per cent from the same period last year.  This represents a higher rate of appreciation than that seen in both the GTA and Greater Vancouver, and above the national aggregate percentage increase. During this period, the median price of a two-storey home in the Greater Montreal Area rose 3.5 per cent year-over-year to $517,190, after surpassing the half-million-dollar mark for the first time in the third quarter. The condominium market in the area continued its solid performance this quarter compared to last year, rising 4.9 per cent to $328,254.

British Columbia has been an economic outperformer in recent years, but economists are beginning to forecast slowing growth because of the cooling housing market. The relative unaffordability of major markets and the implementation of mortgage stress tests and provincial tax policies have dampened price growth in the province. Home price appreciation in Greater Vancouver grew at a modest pace rising 2.1 per cent in the fourth quarter from the year before, to an aggregate price of $1,274,831. More affordable suburbs like Langley, Surrey, and Coquitlam that had seen double digit price growth in previous quarters grew at a more modest pace rising 2.4 per cent, 2.3 per cent, and 0.4 per cent respectively.

Despite weak oil prices and uncertainty in the energy industry, all cities studied in Alberta posted year-over-year price increases, with the exception of Fort McMurray, which saw a 9.4 per cent decline. The aggregate price of a home in Calgary and Edmonton rose 1.3 per cent and 1.6 per cent, respectively, to $484,462 and $385,550.

Saskatchewan’s housing market was negatively affected by the weakness in the natural resources sector in the fourth quarter. The aggregate home price in Regina increased 0.1 per cent year-over-year, while the aggregate home price in Saskatoon decreased 1.7 per cent year-over-year. This represents a quarter-over-quarter decrease of 1.9 per cent and 0.5 per cent, respectively.

Atlantic Canada remained strong, posting some of the largest price gains in the country in the fourth quarter. Moncton and Charlottetown posted the highest home price growth in the region, rising 12.6 per cent and 7.1 per cent, respectively, year-over-year. St. John’s was notably weak, with prices falling 2.6 per cent from the year before.

Aggregated regions and the Royal LePage National House Price Composite* (.PDF)

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