Most banks are decreasing its residential mortgage rates by one tenth of a percentage point, effective Tuesday morning, a day after a report from the Canadian Real Estate Association showed that housing sales dropped nationwide considerably last month.

The move brings the five-year closed rate down to 5.49 per cent.

“Pretty much across the board, fixed current rates are coming down by about a tenth of a percentage point,” said BNN’s Michael Kane.

“The Royal Bank of Canada, which is the largest, kicked things off yesterday with the announcement and it was followed by CIBC, Scotia, pretty much everyone except National Bank and TD. But generally speaking they will probably make their announcements today.”

The move doesn’t affect the one-year closed rate for mortgages, which is holding steady at 3.30 per cent at most institutions.

Kane said the reduction of mortgage rates is linked to the shifting bond market.

“The bond market is where banks finance their mortgages and so with bond prices going up and bond yields or the interest rates they pay coming down, that creates easing conditions so the charter banks can give you a bit of a break,” he told CTV’s Canada AM.

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A real estate industry association cited the Harmonized Sales Tax (HST) as a prime suspect behind the chill that affects Canada’s two busiest housing markets, by causing demand for homes in British Columbia and Ontario to dry up in July.

However, most analysts believe that while some homebuyers may have timed their purchases to avoid the HST, it’s not possible to quantify how much of the downturn is a result of the tax.

“There are a number of things going on in the market right now – and the introduction of the HST is just one of them,” said Cameron Muir, chief economist with the British Columbia Real Estate Association.

Homebuyers who fuelled brisk sales earlier this year were bracing for the HST at the same time as rising interest rates and tighter lending conditions were also coming in to play, he added.

“The combination of those three certainly gave us the expectation that sales would wane over the summer months,” Mr. Muir said. “And I think that it’s pretty clear that’s occurred.”

The Canadian Real Estate Association said on Monday that national home sales activity slowed in July, with the decline almost entirely the result of fewer sales in B.C. and Ontario. Month-to-month declines of 14.1 per cent in B.C. and 8 per cent in Ontario accounted for 85 per cent of a seasonally adjusted national decline of 6.8 per cent.

A slowdown in demand in these two provinces had been widely expected in July, as “many purchases were brought forward into the first half of the year in advance of the introduction of the HST,” the Canadian association said.

“The HST is still a concern for us and certainly if the homes are priced above $525,000, it’s a big hit,” said Greater Vancouver Home Builders’ Association president Peter Simpson, whose group successfully lobbied the provincial government to hike the threshold for HST rebates on new home purchases from $400,000 to $525,000.

Prospective home buyers can overestimate the impact of the HST, said Rob Grimm, a principal at Vancouver-based homebuilder Portrait Homes – which, like most builders, does not support the tax.

In response to consumer confusion, Portrait uses a spreadsheet to show prospective buyers a “before and after HST” breakdown of home prices. The difference can amount to thousands of dollars but does not necessarily influence buyers’ decisions, Mr. Grimm said.

“I don’t think a lot of people have figured it out yet,” said Mr. Grimm, whose company sells homes ranging from $300,000 to more than $600,000. “On a $625,000 home, [the HST] only makes a $5,000 difference.”

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The U.S. Treasury Department will be hosting a summit tomorrow on how to repair the mortgage-finance system, an industry that accounts for 15 percent of the country’s economy.

Housing advocates and industry participants have warned that the size and complexity of the U.S. mortgage-finance system means that a move on the wrong direction could be overall more detrimental than beneficial, by further restricting credit, driving down home prices, increasing foreclosures and slowing the economy.

At the same time, some lawmakers say it’s time to close government-controlled loan guarantors and halt limitless bailouts.

“It’s like building an airplane while you’re still flying it,” said David Ledford, from the National Association of Home Builders in Washington. Housing investments and related services account for 15 percent of gross domestic product, according to the group, ranking the industry second to health care.

Central to the effort are Fannie Mae and Freddie Mac, the government-controlled companies that issued and guaranteed more than 71 percent of mortgage-backed bonds last year. Between those companies and Ginnie Mae, that has always enjoyed the explicit backing of the state (unlike Fannie and Freddie) and guarantees loans insured by the Federal Housing Administration, the government has guaranteed 96.5% of all newly originated mortgages.

Since 2005, when the three companies accounted for about 45 percent of a $2.2 trillion market, government involvement has more than doubled. Since Fannie Mae and Freddie Mac were seized by the government in 2008 after losses on mortgage investments pushed them to the brink of collapse, almost $150 billion of taxpayers money have been injected just to keep them solvent.

In the U.S. 60% of mortgages are securitised rather than kept on banks’ balance-sheets. That partly reflects Americans’ preference for 30-year fixed-rate mortgages that can be pre-paid without penalty—a difficult sort of asset for banks to hedge. The securitisation rate is more than twice as much as that in Canada, Spain and Britain, the next-highest countries.

Defenders of a federal backstop say this securitisation rate leaves the American system uniquely vulnerable during a crisis, when investors will refuse to buy any MBS that lacks a government guarantee, as they will assume that the government will always intervene, so it makes sense to charge for that guarantee explicitly.