07/15/2015 03:46 EDT | Updated 07/15/2015 06:59 EDT

Insanity? Cheaper Loans On Offer 12 Minutes After BoC Rate Cut

Get ready for Canada’s borrowing frenzy to get even more frenzied, thanks to the Bank of Canada’s interest rate cut — a move even some realtors say could “overstimulate” the already hot housing markets in some Canadian cities.

It took only 12 minutes for TD Bank to be out of the gates Wednesday morning with a cut to its prime lending rate, following the Bank of Canada’s decision to lower its key lending rate to 0.5 per cent, from 0.75 per cent.

TD Bank’s prime rate — on which it bases the mortgage rates it offers — fell to 2.75 per cent from 2.85 per cent. As of Wednesday afternoon, it remained to be seen whether the other major banks would follow suit.

But some market observers say this has all gone far enough. Realtor Royal LePage, in a report earlier this week, said the market doesn’t need lower borrowing rates.

"With most Canadian real estate markets across the country advancing modestly, and some rapidly, Royal LePage advises that a further interest rate cut by the Bank of Canada could over-stimulate markets such as greater Toronto and Vancouver."

The impact of January’s rate cut was evident in the latest housing market numbers, released by the Canadian Real Estate Association Wednesday, which showed the average price of a house in Canada jumped 9.6 per cent year on year. Home sales volumes have been at all-time highs in recent months.

But not in the most recent month, June, when sales fell 0.8 per cent. Despite that, prices kept climbing, up by some $3,000 on average in the same period, to a record high of $543,560.

But the Bank of Canada “cast aside concerns about a fire-breathing housing market,” BMO chief economist Doug Porter wrote, because it’s “more focused on the hit to growth from the oil shock and the ‘puzzling’ weakness in the non-energy side of the economy.”

BoC Governor Stephen Poloz made that clear a few weeks ago, when he described soaring debt levels and house prices as a “side effect” of stimulative monetary policy.

“If the doctor says you need surgery to avoid death, the side effects usually don’t deter you, you just go ahead and manage them somehow,” Poloz said told a New York audience last month. “Other issues must be subordinate and I think of them as side effects.”

But even if Poloz doesn’t see rising debt loads as a top policy priority, many Canadians do. A CIBC poll released this week found only 7 per cent of respondents say they will borrow more if rates go down, versus 33 per cent who said they’d use lower interest rates to pay down their existing debt instead.

"With interest rates historically low, and many Canadians already focused on debt repayment, it's not surprising that a further rate cut won't cause many Canadians to borrow more," CIBC VP for retail and busines banking Christina Kramer said in a statement.

"For many Canadians, lower interest rates mean they can accelerate debt repayment by increasing monthly payments or making lump sum payments."

Still, 7 per cent of Canadians borrowing more could certainly drive household debt levels to new highs.

So why is the Bank of Canada lowering rates? Many say it’s simply to drive the loonie down, in order to make Canadian exports cheaper and more competitive on global markets — hopefully kick-starting that export boom economists have been waiting for since the loonie started falling, but which hasn’t materialized.

The idea is to drive interest rates in Canada below U.S. interest rates when rates down south start rising, probably this fall. This will make the Canadian dollar less attractive to foreign investors, and will push the loonie down.

The loonie fell to a six-year low of around 77 cents U.S. after the Bank of Canada’s announcement Wednesday.

“Pushing Canadian short rates below where the Fed is likely to be at year-end is having the desired effect on the Canadian dollar,” CIBC economist Nick Exarhos wrote.

But “there’s a long lag in getting the full benefit of the currency move” because it takes years for companies to decide to shift production to a new location, Exarhos said.

So if the Bank of Canada plans to revive Canada’s economy by driving exports through low interest rates, it will have to keep those rates low for a long time.

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