Will Low Interest Rates Cause A Housing Crisis? Unlikely......

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Now for the big news, mortgage rate drops! After the release of the new rates talks always spark about the outcomes of such a change. After searching for a good article this is as far as I am concerned the best insight on what is happening in the market.

“Politicians of every stripe are putting up a rare united front in criticizing the bank for cutting its five-year, fixed-rate mortgage by 10 basis points. That’s 10 one-hundredths of a percentage point.

The suggestion is that BMO is somehow putting Canada’s housing market at risk of U.S.-style ruin, and enticing borrowers to build up debt at a time when policy makers are urging them to do just the opposite.

As The Globe and Mail’s Tara Perkins reports, BMO on the weekend cut the key rate to 2.99 per cent, from 3.09 per cent, sparking fears of a mortgage rate war and prompting warnings from Finance Minister Jim Flaherty and members of the other political parties.

What BMO is doing is offering homebuyers significant longer-term savings of almost $2,400 in interest over the five years, but on a daily basis savings that are well below the price of a cup of coffee.

Hardly an inducement.

It’s true that Canadians are juggling a record household debt burden, but, since Mr. Flaherty’s mortgage restrictions of last summer, the housing market has cooled rapidly. And credit growth has slowed markedly.

The residential real estate market is expected to continue cooling regardless of 10 basis points.

What BMO may do is attract a small number of borrowers – to BMO – who were looking to buy anyway. What it’s not going to do is cause a bubble that wouldn’t otherwise have been there.

Consider the last time BMO did this, a year ago, with the same cut-rate offer. As The Globe and Mail’s Grant Robertson writes, that price war won BMO a gain in market share of just 0.31 per cent, and overall mortgage volumes didn’t change all that much.

True, you can look at this with the suggestion that BMO is going against the spirit of what Mr. Flaherty is trying to do, which is engineer a soft-landing in the real estate market.

Or you can look at it as a break for people who were probably going to buy regardless.

Homebuyers will look at what they can handle on a monthly basis. On that front, the difference on a $500,000, five-year, fixed-rate mortgage with 25-year amortization is $25.72 .

Or 86 cents a day.

Despite how odd it may sound, put it in its simplest terms. That’s far less than the $2.15 you’d pay at my neighbourhood Starbucks for a grande blonde, medium or dark roast cup of coffee. Or the $1.71 at Tim Hortons for a similar-size coffee without a fancy name.

We attack our banks when we believe their rates are usurious. Then we attack them when we think they’re too low.

So let’s put this in perspective: If you drink two coffees a day, you’d save the same amount (2 cents more, actually) by simply switching from Starbucks to Tim Hortons.”

*Article compliments of The Globe and Mail*

TIP OF THE WEEK
When you are ready to buy a home don't be fooled by rate specials! Ask questions, sometimes great rates are too good to be true. That great rate that is plastered everywhere sometimes come with a even higher price than expected. This may not always be the case but you owe it to yourself to ask questions. Find out about the mortgage product your are signing up for. How much is the penalty to break the mortgage early? How much additional money can you put on the principle mortgage amount without a penalty? Is this mortgage portable? Make your decision to sign after you research the product that impacts the biggest purchase most make in their lifetime, I promise you won't be sorry!


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