Fears over the coronavirus has pushed investors to the safety of government bonds, sending yields lower.
The 5-year government bond yield, “a harbinger of conventional mortgage rates” now stands at 1.34%, down from the 1.60% plus range it was trading at before the virus hit, said Dr. Sherry Cooper, chief economist, Dominion Lending Centres.
Yesterday the first of Canada’s big banks reacted when Toronto Dominion Bank cut its posted 5-year fixed rate from 5.34% to 4.99%.
Dr. Cooper says if other big banks follow TD’s lead the Bank of Canada benchmark rate (the stress test rate) would fall below 5% for the first time since January 2018.
A stress test rate of 4.99% would mean Canadians would need about 1.8% less income to qualify for a mortgage (assuming a 20% down payment on the average home price), giving them 2% more buying power, said Dr. Cooper.
“This doesn’t sound like much, but it can have a meaningful psychological impact on already improving housing markets,” said Dr. Cooper. “The latest CREA data shows that the national average home price surged 9.6% year-over-year in December. A lower stress test rate would make a busy spring housing market even more active.”
Dr. Cooper said even regulators have been questioning the fairness of using big bank posted rates as a qualifying rate for mortgage stress testing.
Just two weeks ago Ben Gully, assistant superintendent at the Office of the Superintendent of Financial Institutions (OSFI), said in a speech at the C.D. Howe Institute that “the posted rate is not playing the role that we intended.”
“For many years, our data showed the difference between the benchmark rate and the average contract rate was about 2%,” Gully said. “However, the difference between the average contract rate and the benchmark has been widening more recently, suggesting that the benchmark is less responsive to market changes than when it was first proposed.”
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Tourism spending in Canada declined 0.2 per cent in the third quarter — its first contraction since at least 20 quarters, according to Statistics Canada data.
The decline was led by lower transportation spending by domestic tourists, while spending by international visitors was flat. As a result, tourism gross domestic product (GDP) edged down 0.1 per cent in the third quarter.
“Higher spending on accommodation (+1.1 per cent) was offset by lower spending on passenger air transport (-1.3 per cent). “Both air travel from abroad and same-day car travel from the United States decreased in the third quarter,” StatsCan said.
With files from The Canadian Press, Thomson Reuters and Bloomberg