Canada’s big banks dominate the mortgage market and aren’t helping homebuyers and housing affordability with lower mortgage rates for the time being. Analysts point to the banking oligopoly in Canada as a major factor in the lack of competitive options for consumers as compared with the United States.
Like other industries, the big banks are facing their share of challenges as recession fears grow, but the current high rates in the Canadian mortgage market are unwarranted, says Rob McLister, mortgage expert and editor of MortgageLogic.news.
“In Canada, we’ve seen over a 100-basis-point [1 percentage point] drop from the peak in June, and not one big-six bank has budged on 5-year fixed [mortgage] rates. It’s just shocking,” he told The Epoch Times, referring to the 5-year government bond yield that has plunged from about 3.6 percent in mid-June to just over 2.6 percent at the end of July.
The decline resulted from the financial markets adjusting for a potential recession and expecting central banks to cut interest rates eventually.
The 5-year bond yield is a key determinant for the mortgage market in Canada, as the 5-year term is the most popular with fixed-rate mortgages, which are far more common than variable-rate mortgages.
However, despite the fall in bond yield, the best 5-year mortgage rate has continued its steady climb since early June—from 3.6 percent to 4.35 percent in late July—according to data from mortgage site RateHub.ca.
The disparity is even more egregious with the big banks in Canada, as McLister points out that the spread between their typical discretionary 5-year fixed mortgage rate and the 5-year bond yield has ballooned to about 250 basis points, or 2.5 percentage points.
“That is an absolutely massive, massive gap. And there’s really nothing in the market that would warrant such a wide gap even knowing that we’re going to have a potential recession,” said McLister.
In contrast, the United States has seen similar yield declines in its bond markets but mortgage rates there are coming down instead of continuing to climb.
“And you’re telling me that the risk profile in Canada is so dramatically different than that in the U.S.? I don’t think so,” McLister said.
Oligopoly
Canada’s mortgage market operates at the mercy of the big banks. Smaller lenders typically depend on the big banks for financing in order to lend.
“The banks are big players in Canada. They’re oligopolies. … They have the most money. … But that doesn’t mean you can’t find deals at other lenders,” McLister said, adding that “once one of the majors cuts fixed rates, most of the rest should fall in line.”
In the United States, mortgage rates have dropped significantly since hitting a high in mid-June. The popular 30-year fixed mortgage rate hit a high of 5.81 percent in mid-June but has since fallen to 5.30 percent at the end of July, based on data from Freddie Mac.
“It is just shocking how fast the market adjusts to lower yields,” McLister says, referring to the U.S. mortgage market.
If the 10-year bond yield drops by say 10 basis points, McLister says he’d see a bunch of rate updates from a whole slew of lenders on their 30-year fixed-rate mortgages.
