Flaherty warns against 'race to the bottom' lending wars
Finance Minister Jim Flaherty is warning Canada's banks to refrain from any mortgage wars following a Bank of Montreal announcement that it was re-introducing a record-low interest rate.
BMO announced Sunday that it was offering a fixed-rate, five-year mortgage of 2.99 per cent-- down from a rate of 3.09 per cent-- amid concerns of a cooling housing market.
In a statement to the Globe and Mail on Sunday, Flaherty said he expects Canadian banks to continue to engage in “prudent” lending, “not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.”
BMO offered the same rate last January, which triggered a round of interest rate cuts among mortgage lenders.
Some analysts say banks are responding to the cooling housing market, a lower demand for mortgages and signs that the Bank of Canada will keep its benchmark interest at one per cent.
On Monday, CIBC World Markets extended its forecast for when the central bank would start hiking rates to the third quarter of 2014 -- six months longer than it had previously anticipated.
While in the past lower mortgage costs have helped revive a slowing housing market, some analysts warn that may not be the case this time around, with Canadians seeing record-high household debt and modest income growth.
Flaherty previously cited high household debt, largely driven by mortgages, as the greatest risk to the Canadian economy.
Last month, Canada Mortgage and Housing Corp. said new housing construction is expected to be lower this year due to moderate economic and employment growth in the second half of 2012.
With files from The Canadian Press