What to expect from banks when rates rise

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Brokers should expect the banks to match an eventual rate hike – something they have failed to do when rates have gone in the opposite direction.

“They will go up the full amount; their margins are really squeezed right now so when rates go in the opposite direction they will take advantage of it,” Dr. Sherry Cooper, chief economist with Dominion Lending Centres told MortgageBrokerNews.ca. “It obviously will depend on everything else that’s going on at the time but I think they all will collude to make sure they can increase their margins.”

The Bank of Canada has lowered its rates twice this year now, with the first 0.25 per cent cut made in January. Lenders followed with a 0.15 per cut of their own.

And Cooper doesn’t believe the same logic will apply when rates tick up, as tight margins will force the big banks to try to squeeze as much profit as possible.

On Wednesday, the central bank made a further 0.25 per cent cut that was quickly followed by TD Bank, which cut its prime rate by 10 basis points.

The move has some questioning the efficacy of the decision.

“The question in my mind is the effectiveness of a rate cut at this time. The follow-through at the financial institutions will likely be partial, as it was with the last rate cut in January,” Cooper wrote in an economic statement. “The prime rate and mortgage rates are likely to fall by no more than 10 to 15 basis points from already very low levels. At the margin, this might boost housing and consumer credit a bit, but these are not the sectors most in need of stimulus.”
  • Ernie MacDonald on 2015-07-16 10:40:31 AM

    Why is no one talking about the fact that the Bank of Canada has cut it overnight rate by 50 bps in 2015, and the banks and mortgage lenders have only passed on 30 bps to the clients. Am I the only one that is mad about this!!! The BOC dropped the over night rate to help boost the economy, and the banking industry as a whole has kept 40% of it for them selves. Last time I looked the banks weren't hurting, but the economy is. A little backlash and bad press may get the banks to pass on the entire 25 bp drop the their clients. Lets get talking about this!!!!

  • CJ on 2015-07-16 11:17:00 AM

    Ernie, have you considered that somebody perhaps grew a spine . . . finally.

  • CJ on 2015-07-16 11:37:39 AM

    If you are desperate thou and your mortgage is variable, perhaps you should consider selling before this ship of fools sinks. Here are some clues, if you will. US/CDN bond market is 97% interlaced. This will only work for you if you put patriotism on a side for awhile thou.

    BoC - July 15, 2015
    The lower outlook for Canadian growth has increased the downside risks to inflation. While vulnerabilities associated with household imbalances remain elevated and could edge higher, Canada’s economy is undergoing a significant and complex adjustment. Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target.

    Bloomberg - July 15, 2015
    Federal Reserve chair Janet Yellen said prospects are good for further improvements in the labour market and the economy, keeping the central bank on track for an interest rate increase in 2015. “If the economy evolves as we expect, economic conditions would likely make it appropriate at some point this year to raise to raise the federal funds rate target,” Yellen said in testimony prepared for delivery before the House Financial Services Committee in Washington.

  • Lies! our government don't want us to know on 2015-07-16 8:09:00 PM

    Canada’s housing boom has no demographic legs to stand on.


    Ben Rabidoux is president of North Cove Advisors, a market research firm. His Canadian Housing, Macro, and Credit Newsletter is read by institutional investors around the world.

    If you read the headlines, you’d be inclined to believe that Canada’s population is booming. And, as the story goes, it’s this strong population growth that is providing much of the fuel propelling Canadian house prices to new all-time highs virtually every month. “Supply and demand”, as they say.

    The pace of home sales in Vancouver hits the second-highest level on record in June, but affordability continues to track the historical pace. For more on why the market isn't too hot to handle and what risks could present themselves, BNN is joined by Diana Petramala, Real Estate Economist, TD Economics.

    Vancouver housing heats up, but it's not too hot to handle
    It’s a great story, but it’s mostly wrong.

    In reality, Canada’s working-age population (15-64 year-olds) is growing at the slowest pace on record, a paltry 0.4 per cent or just one third of the long-term average. In 2010, Canada added 240,000 people to the working-age population. Today that number has dwindled to just 90,000. In provinces like Quebec, that number is actually declining.

    An outside observer might note that against a backdrop of an unprecedented decline in population growth, the level of residential construction activity should slow sharply. Curiously, that hasn’t happened.

    In fact, in the first quarter of this year, residential investment in Canada hit 7.1 per cent of GDP, the highest level since 1989 (which, coincidentally, was the peak of the last housing cycle). Of course back then, population growth was triple what it is currently, so at that time there was at least some demographic justification for a high level of investment in housing.

    Fast forward to today. Housing starts in June hit their highest level in 10 months at just under 203,000 on a seasonally adjusted basis. That level of construction means we’re currently building over two new houses for every person we’re adding to the working-age population.

    To frame why that’s potentially problematic, consider the chart below, which shows housing starts as a multiple of the number of people added to the working-age population. You’ll note that in the late 1980s, we were building 1.5 new homes for every person added to this group. It’s clear in hindsight that there was significant overbuilding during that time period, particularly in Ontario where house prices subsequently fell 25 per cent between 1989 and 1993 as supply overwhelmed demand. And that drop occurred in spite of the Bank of Canada cutting the overnight rate by 1,000 basis points (10 per cent) over that time frame, which helped put a floor under prices.

    The current level of housing construction in Canada is absolutely unprecedented relative to underlying demographic trends. Some of this phenomenon could be due to demand for new houses from foreign investors. Unfortunately regulators and policy makers can’t seem to figure out how to accurately measure this potential source of demand.

    This is problematic since, as you might expect, a near record 7.6 per cent of all jobs in Canada are in the construction industry, so there’s a lot riding on understanding the dynamics behind the current boom. It takes on additional importance as housing has been a source of economic growth at a time when other parts of the economy have slowed. That makes the prospects of a reversal in housing activity back to long-term norms all the more worrisome.

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