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How a TD (TSX:TD) Mortgage Rate Cut Could Ignite a Housing Boom in 2020

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Canada’s housing bubble has been growing for some time now. If it weren’t for the government’s strenuous efforts to rein-in the housing market, it would have continued uncontrolled. It’s just one of the reasons that many experts marked 2020 as the year for recession.

But the growth slowed down a bit thanks in part to the stricter mortgage qualifying criteria, known as the stress test. But many market experts are skeptical as to whether this slowdown will persist.

They believe that the housing market can see a bounce-back. Many indicators augment this expectation, and one of them is Toronto Dominion’s (TSX:TD)(NYSE:TD) newly posted five-year fixed mortgage rate.

Can TD’s new mortgage rates really cause a buying spree?

The answer depends heavily upon what the other banks will do. Will the Big Six follow TD’s lead and cut down the mortgage rates as well? If they don’t, many potential buyers who would not have qualified for decent mortgages due to the stress test might turn toward TD.

This move is very well timed as well, as springtime has historically seen the highest number of home sales. So if few (not necessarily all) banks follow the same pattern and cut down the fixed mortgage rates as well, enabling an easier stress test, the housing market can indeed experience a new boom.

Another factor to consider is that with more people qualifying for better mortgagees and looking to buy new properties, the prices will go up, balancing the gap.

But the psychological factor of TD’s cut in mortgage rates has the potential to start a momentum that might help the housing market soar through the spring market. That said, other triggers, such as increased fear of coronavirus breakout, might affect the market in unpredictable ways.

The second-largest bank in the country

TD enjoys a strong position among the Big Six, the strongest player team on the TSX. This makes the mortgage cut all the more prominent, because TD has enough presence and sway to push the market forward. It might also help the bank with its growth, which became relatively stagnant in the past couple of years.

Currently, the bank is trading at $75.7 per share, which is barely a 3% increase since Feb 2018. This growth was in stark comparison to the bank’s prior history when it grew over 34% in three years.

Still, TD is one of the most sought after banking stock. As a Dividend Aristocrat, the bank grew its dividend payouts by almost 48% in the past five years. And it’s likely to increase in the future. The current yield is 3.93%.

Foolish takeaway

Whether TD’s mortgage rate cut is enough to trigger a housing boom on its own is yet to be determined. If it is, then the bank can really capitalize on the potential influx of new home buyers.

But if other banks follow its lead, the probability of a buying frenzy initiating will be much higher. In that case, TD may have to share the cake with its brothers, but an active housing market will benefit TD nevertheless.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned.

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