Flaherty pulling wrong lever, says former TD economist

Flaherty pulling wrong lever, says former TD economist

Flaherty pulling wrong lever, says former TD economist

 

A former TD Chief Economist and Department of Finance analyst is perplexed by Jim Flaherty’s obsession over mortgage rates, and sees a rate of 2.95 as being in step with bond yields.
 
“It actually perplexes me, the actions by the finance minister,” Don Drummond said in an interview with CTV News, just ahead of Thursday’s budget announcement. “If the finance minister is worried, there are all kinds of direct levers he has, that he has exploited recently.”
 
The levers Drummond speaks of includes tightening of the mortgage rules that were put in place last year by Jim Flaherty, requiring a larger down payment and reducing the maximum amortization for insured mortgages. 
 
Not on that list, suggests Drummond, is the kind of direct intervention Flaherty’s engaged in this week, asking Manulife to reverse its decision to lower rates from 3.09 per cent to 2.89.
 
“I get the concern of the housing bubble; I get the concern of the debt,” Drummond said. “But 2.95 per cent doesn’t seem particularly low, especially when you consider that the banks back up their mortgages with bonds,” he said. “You take a five-year mortgage that is backed up by a five-year bond that pays 1.7 per cent. A typical mortgage is 2.99 – that is a nifty mark up.”
 
Flaherty had spoken out in early March when BMO posted a 2.99 per cent rate on a 5-year fixed mortgage, expressing fears that a rate war would be ignited for the spring season. At the time, he personally contacted BMO to express his displeasure with the rate. The institution nonetheless kept that offer in place.
 
Drummond’s interview comes on the cusp of the federal budget to be presented today, a budget that Flaherty has hinted will aim to balance the budget by 2015, eliminating the $26 billion deficit in three years. So far Flaherty has stated that he is pleased with how the housing market has cooled off and how personal debt has been reduced.
 
In the intervening months, organizations such as CAAMP have campaigned vigorously to have restrictions on first-time buyers lifted, with CAAMP CEO Jim Murphy meeting personally with the finance minister just recently to ask for a return of 30-year amortizations and increases to the first-time homebuyer’s tax credit.
 
8 Comments
  • Paolo Di Petta | dipettamortgage.com 2013-03-21 10:08:09 AM
    While I agree, that there's not that much of a difference between 2.89 and 3.09, and that I'm generally, I'm against government intervention, I don't think it was the wrong move, even if it were only symbolic and to drum up some awareness.

    The fact is, the banks have one duty: to provide the maximum return to their investors. They have no concern for the long term health of the economy, they're just worried about their quarter-to-quarter numbers, keeping their jobs, and earning their bonuses. There is no concern for how these low rates have artificially inflated home prices, and how they've pushed us to a record high 165% debt to income ratio.

    It's no surprise bank reports are calling for a "correction" or a "flat market" - their books are heavily weighted in mortgages. They couldn't afford a "crash" or a "downturn".

    Obviously, it varies across the country, but there's going to be a lot of difficulty in some parts of the country. All Flaherty is trying to do is tell people to not get too comfortable racking up cheap debt.
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  • jvice/ Milestonesfinanical.ca 2013-03-21 11:30:06 AM
    Maybe Jim Flaherty needs to address the real problem, have the banks offering lines of credits to cusotmers who shouldn't if customsers have over exteneded and have no option to refi maybe the extending line of credit before that should have been better qualfing clients needs for the credit.
    When banks offer 5K even maybe 10K to customers at 19.9%. Maybe Flaherty should have a second look at tighting those lines up.
    Dont get me wrong we need to keep money moving however there should be better measures on the high interest lines.
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  • JSydneyH 2013-03-22 6:04:28 AM
    I'm still at a loss on this entire situation. For years we've been advised that rates will return to historical norms. Yet no one has been able to offer even one reason as to why this is necessary. What if this is the new norm? What if low interest rates due to global pressures and integration is the new norm? The world today is very different - financially - then the world of even five years ago, so there is no 'historical norm' that relate to today's rates.

    I'm not a pollyanna wearing rose colored glasses. I just see a different outcome. Low interest rates and extended amortizations achieved the goal of stimulating the economy without government intervention; low interest rates will continue to encourage borrowing but (and this is a big but) businesses are not taking advantage of them.

    Until they do - we are stuck in this limbo.
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