Wednesday, July 03, 2013

Macroprudential Mortgage Rates

A comment in this Financial Post article "Rising rates creating increasing dilemma for homeowners" piqued my interest:
Jim Murphy, chief executive of CAAMP, wonders about what the impact of higher rates will be for new buyers when stacked on top of tougher rules.
His groups pointed out this month that sales for homes under $400,000 in the greater Toronto area were down 18% in May from a year ago. For homes priced above that level, sales were down just 5%.
“All of these changes have impacted the first-time buyer,” said Mr. Murphy. “Now we are seeing rising rates and that will have an impact too.”
Vince Gaetano, a principal at, said the gap has become wide enough to convince him to go variable now.
Strangely enough, banks have not moved quickly to change their 5.14% posted rate — the percentage nobody actually accepts but which everybody qualifies based on.
“What has gone on is the discounting has shrunk. It’s absolutely sneaky and it’s done on purpose because they don’t want to move people away from not qualifying at all,” said Mr. Gaetano.
Another reason the banks don’t want to change the posted rate is it’s used to calculate any penalty on your mortgage. A higher posted rate would shrink your penalty, said Mr. Gaetano.
“It’s a very cleaver way for the banks to keep the handcuffs on people,” he says. “I still see people just break their mortgages outright. Variable is attractive too because of all the games banks play with breaking mortgages and penalties. With a variable mortgage, it’s three-months straight and simple.”
"Strangely enough" banks have kept their posted rate locked at 5.14%. Conspiracy! Or... let's check the data. Below a graph of posted and discounted rates with their spread:

From 2011 or so, save the last two months, there has been a consistent widening of posted-discount spread. The posted rate has been kept artificially elevated. Public shots have been fired by Flaherty towards banks stepping out of holding the posted line. This is almost certainly due to government policy of macroprudential credit controls targeted directly at housing market credit excesses.

Calls for a bank conspiracy seem a bit premature to me; more likely recent closing of posted-discount spreads are tickling memories of the way we were, when economies ran near full capacity.

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