June 17, 2019 | Cracked

Well, it’s happening. The first bank – and the biggest – has dipped its key mortgage rate, which is a shot across Ottawa’s bow. On the weekend RBC trimmed the posted number for its five-year home loan by about a fifth of a point.

Big deal? You bet. The cut is small, but it’s the first time since the stress test came into effect that one of the big boys has done this. By dropping its posted rate the Royal is challenging other banks to follow, which will reduce the hurdle borrowers have to jump.

The move comes literally days after OSFI (the bank cop) and CMHC’s feisty boss argued for the stress test to remain intact, keeping those pesky and house-horny moisters at bay. It also comes just days before the US Fed – which more or less sets interest rates for the entire planet – is due to announce its direction. Given Tariff Man’s unpredictability, Iran, Brexit, the grid in South America, Putin, Kim and a long-in-the-tooth recovery, the odds are fair that cuts will be in the air. Maybe on Wednesday. Maybe not. But soon.

Here’s why. The yield on five-year Canadian government bonds has cratered to the 1.3% level from close to 2% last winter. Despite that plunge (in the bond world, this is epic) posted mortgage rates – and the stress test qualifying rate of 5.34% as a result – have not budged. This is despite the fact on-the-street mortgage costs have dropped to 3% or lower for fivers and down to 1.99% for shorter terms at some crazed credit unions.

The trip down: 5-year gov't bond yield

So the RBC move signals a break, a sign, a harbinger that the entire rate environment is moving south as economic conditions soften and uncertainty rises. Besides, the lenders have been suffering as much as borrowers. The high stress test straddle has sucked the oxygen out of the mortgage business over the past year as consumers qualify to borrow lese or not at all.

If a couple more banks join the Royal (no doubt) then the stress test rate will automatically be reduced – at least by a little. Borrowers will qualify for more debt and in Canada (of course) the bigger the loan, the more you can buy and the richer you are!

A lower posted rate also means a reduced break penalty if you discharge your mortgage early. And, naturally, it will be welcomed by realtors who have been living in the back seats of their Audis, under bridges, for months now. Ironically, real estate in markets like the GTA may be stabilizing a bit, just as economy softens. At least the Raptors can take your mind off that. If not, there’s always that clown called Drake.

Stay tuned Wednesday for the main event from Washington. After nine interest rate increases, we’ve hit the ceiling. As analyst Ed Pennock wrote to clients today:

“Do they cut or Not? Should it be an Insurance Cut, then OK. They should let the Market know that it’s coming in July. If they don’t it’s a huge “Risk Off”. If the economy is weaker than most think then it’s a Big “Whoops”. It can’t even have the Aroma of a FOLD to the Tweets from 45. Going forward, is the Economy really weak or Not? If it isn’t really then We can’t believe that (Fed boss) Powell will Ruin his Credibility by Folding.”

Yes, this Fed meeting will be a critical one. Like the RBC move, it’s a deep indication of what’s coming. Plus it will be a response to Trump, who has been pushing hard for rate cuts in order to compensate for the damage his tariffs are causing. The central bankers don’t want to be pushed around by a politician. But they have to act properly to keep the economy out of the ditch. A rate cut will signal weakness. No cut might look like they don’t get it. Much depends on the words to come, two sleeps from now.

Meanwhile the stress test just cracked. Draw your own conclusion

Garth Turner June 17th, 2019

Posted In: The Greater Fool

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