It seems like a lot of people got really excited when the Royal (now matched by a number of others) dropped their mortgage rate by 0.15% last Thursday.

Any time rates or prices drop, it’s great for buyers, but this one isn’t anything to get excited about. It’s a rate drop for new mortgages and not a drop in the prime rate. So if you’re on a variable rate mortgage, it’s not likely your bank will drop your payment starting next month. Even if they did, it’d amount to $5.60 on a $250,000 mortgage. If they choose to drop your line of credit rate, you’d save $1.20 a month on an average $36,000 credit line.

Any tiny drop in rates isn’t going to rescue the housing market in 80% of the country. What needs to change is the mortgage stress rules that force borrowers to qualify for sticker rates when their actual rate will be about two percent lower. That rule certainly makes sense in overpriced housing markets.

It was designed to slow down the market. But what it’s done is not only slow it down, but stop it, and then shrink it in a big way. Toronto sales down 16% last year, as well as prices – Vancouver sales down 32%. Overall, sales are down 47% and mortgage applications are now at a 22-year low. One of the big banks’ mortgage applications are down by half over a year ago.

Is THAT what the goal was? The desire to own a home hasn’t changed, but the ability has. Now there are many signs that the federal government is running scared – and should be.

The stress test might still have a purpose but should be set by postal codes so the slow housing markets don’t keep getting killed. Plus, we’re pretty much done with rate increases. Sure, there might be one or two more, but we’re much more likely to have a recession in the next year than to have another huge wave of inflation with the corresponding rising rates.

It’s an old stat, but someone buying a home spends an additional $10,000 in everything from furniture to painting, renovators to appliances. None of that happens if the housing market has grinded to a halt. And I still maintain that there are tons of younger people who would love to get into the housing market but can’t. And if they don’t buy an entry level home, the people selling those can’t move up when they can’t sell…and none of the dominos to a healthy housing markets move!

George Boelcke – Money Tools & Rules book – yourmoneybook.com