Mortgage rates still high as big banks predict recession

news analysis

Canada’s big banks dominate the mortgage market and are not helping homebuyers or lowering mortgage rates for the foreseeable future. Analysts point to Canada’s banking oligopoly as a key factor in the uncompetitive choice for consumers compared to the United States.

Like other industries, big banks face challenges amid growing recession fears, but say the current high interest rates in the Canadian mortgage market are unjustified. Rob McListeris a mortgage expert and editor of MortgageLogic.news.

“In Canada, more than 100 basis points [1 percentage point] Down from its peak in June, not even one of the Big 6 banks is baffled by its five-year fixed rate. [mortgage] price. It’s just shocking,” he told the Epoch Times. rammed It rose from about 3.6% in mid-June to just over 2.6% at the end of July.

The decline comes as financial markets respond to a potential recession and hopes the central bank will eventually cut interest rates.

The 5-year bond yield is a key determinant of the Canadian mortgage market as the 5-year term is the most popular for fixed-rate mortgages, which are much more common than variable-rate mortgages.

But despite falling bond yields, mortgage site data shows top five-year mortgage rates have continued to rise steadily since early June, rising from 3.6% to 4.35% in late July. rising. RateHub.jp.

As McLister points out, the spread between a typical arbitrary 5-year fixed mortgage rate and the 5-year bond yield has ballooned to about 250 basis points (2.5 percentage points) at a large Canadian bank, making the gap even wider. is even more serious.

“It’s an absolutely huge, huge gap, and even knowing there’s a possibility of a recession, there really isn’t a market that would justify a gap that big,” McLister said. increase.

In contrast, the US bond market has seen a similar decline in yields, but mortgage rates have fallen instead of continuing to rise.

“And you said Canada’s risk profile is dramatically different than the US? I don’t think so,” said McLister.

oligopoly

The Canadian mortgage market is at the mercy of big banks. Smaller lenders typically rely on large banks for funding to make loans.

“Banks are big players in Canada. They are an oligopoly. …They have the most money.

in the America, mortgage rates have fallen significantly since hitting a high in mid-June. Interest rates on the popular 30-year fixed mortgage hit a high of 5.81% in mid-June, but then fell to 5.30% at the end of July (according to Freddie Mac data).

“It’s just shocking how quickly the market adapts to lower yields,” McLister said, referring to the US mortgage market.

If 10-year bond yields fell, say, 10 basis points, McLister said we would see a series of rate updates from a number of lenders on 30-year fixed-rate mortgages.

hunkering down

Banks have not been forced to cut interest rates so far, but they are trying to maintain mortgage margins and are not keen on growing their mortgage business.

He also added that he expects banks to have to set aside more money to cover losses on mortgages and other loans as the likelihood of a recession increases.

Given fears of a potential recession, McLister said, the extra premium (or credit spread) that banks have to pay investors to compensate them for the higher risk has increased, making long-term funding less attractive. Procurement costs are high.

“So there’s a shift right now in terms of getting higher margins instead of increasing market share.”

this is, major bankwhich was You have grown your mortgage business in the three months ended April 30th.

In theory, a rising interest rate environment should be good for banks. Banks profit from lending for longer periods at higher interest rates and borrowing for shorter periods at lower interest rates. They earn a difference or net profit margin.

However, when long-term interest rates are lower than short-term interest rates, as they are now, bank lending tends to slow down.phenomenon known as inverted yield curve—has an astonishing ability to signal the next economic downturn.

As of the end of July, banking sector The Toronto Stock Exchange stock index is down 10.3% year-to-date. This is worse than the overall index, down 7.2%. The situation is similar in the S&P 500 banking sector, but the decline is even more severe.

Housing affordability has deteriorated as interest rates rise significantly in 2022.

Higher interest rates also make it harder to get a mortgage, because the mortgage stress test requires borrowers to qualify for interest rates that are 2 percentage points higher than the offered mortgage rate.

As Banks Do, So Does the Economy

US banks and Canadian banks face similar obstacles to borrowers’ ability to repay loans amid high inflation.

US banks are expected to tighten lending standards for all types of lending, according to a survey of senior loan officers conducted by the US Federal Reserve in July.

Nancy Vanden Houten, chief U.S. economist at Oxford Economics, said in a report on Aug. It will be suppressed to the limit,” he said.

Bank credit flows are essential for a growing economy, but are expected to slow down as a result.

Banks of Canada are also discouraging people from keeping money in savings accounts because the interest rates offered are still very low despite inflation exceeding 8%. This behavior is inconsistent with history, as when prices were rising rapidly, savings accounts typically paid out more than inflation.

Claire Serrier, professor of finance at the University of Toronto, said: canadian press Part of the problem is the concentration in the banking sector, where less competition means banks may be slower to adjust interest rates.

Banks are overflowing with deposits as Canadian savings ballooned during the pandemic.