RBC may be priming the pump for an interest rate hike at the Central Bank, its economists arguing prime should soon be pushed up in order to block vulnerable buyers from entering the housing market – that warning coming as banks continue to cut rates in order to win greater mortgage volumes.
“There is a popular misconception that the Bank of Canada cannot afford to raise interest rates because this would prove too damaging for mortgage holders,” Eric Lascelles, chief economist for RBC Global Asset Management, says in a report released this week. “The opposite is, in fact, true. The reality is that the Bank of Canada cannot afford to delay raising interest rates, for precisely the same reason. The longer the bank delays, the more marginal borrowers will enter the market and be walloped when rates rise, and the further home prices will go above their equilibrium levels, only to tumble later.”
The report was released on the heels of the Bank of Canada’s decision last week to maintain its overnight rate at 1 per cent. It cited global volatility in the U.S. and Europe as reasons for keeping the economic stimulus in place. In so doing, it has prolonged the current lending climate, one marked by tight margins and decreased profitability. Despite that, the banks have moved to undercut already rock-bottom pricing available through the broker channel in order to better compete for a dwindling number of originations.
That climate has posed a risk to some of the channel’s smaller lenders, said one national network head.
“The rate (hold), no question, is good news in terms of generating business and sustained the broker channel, as it has over the last couple years,” John Bargis of Mortgage Edge told MortgageBrokerNews.ca. “But the longer the rates remain at these levels, which is basically an anomaly, the longer the difficult period for our smaller lenders, now struggling with spreads. Holding the rate puts the squeeze on our mono-lines because they don’t ancillary products and services to sell to the client.”
Lascelles is arguing that any further extension of those rates could compromise the country’s economic stability if it encourages unprepared borrowers to enter the housing market just before the inevitable rate increase.
Still, the economist concedes that a relatively small portion of Canadians are most vulnerable to the shock of rising rates. That’s despite the high levels of household debt-to-income ratios, currently sitting at147 per cent.