Could lower interest rates lead to even higher Metro Vancouver house prices?

It’s no secret that Vancouver is one of the world’s hottest real estate markets, and lower mortgage rates could heat things up further.

On Tuesday, Canada’s big banks lowered the interest charged to borrowers with loans and mortgages tied to the prime rate. Royal Bank was the first to cut its prime rate by 15 basis points to 2.85 per cent effective Wednesday, and other banks followed suit.

The cut falls short of the 25 basis points the Bank of Canada passed on to them when they slashed its overnight lending rate to 0.75 per cent from one per cent in a move to soften the blow of falling oil prices on the economy.

Helmut Pastrick, chief economist with Central 1 Credit Union, says the gap between Bank of Canada rate and bank lending rates is a cause for concern.

“For the Bank of Canada to cut its rate and for that not to be passed on to consumers, essentially means there is not much stimulus to the economy so it kind of defeats the purpose of the bank rate cut,” he says.

Today rates on five-year fixed mortgages can be lower than 2.99 per cent, a far cry from the early 80s when rates were as high as 22 per cent.

Ottawa is stuck between trying to stimulate the economy while not driving housing prices much higher, especially in Vancouver, which was recently ranked among the world’s most unaffordable real estate markets in a recent international report.

Whether a mortgage war breaks out is debatable, but if it does, it could be tempered by tougher rules to qualify for a mortgage, according to Jason Suttie of the BC Mortgage Brokers Association.

“All sorts of things are affected by that interest rate,” says Suttie of the Bank of Canada rate, “whether it’s lines of credit and those sorts of things. However, with the mortgage lending rules, that targets housing only…If they want to keep the economy speeding up with interest rates, what they’ll do is they’ll contract some of the mortgage lending rules and just slow down housing notes only.”

-with files from Ted Chernecki and Canadian Press