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Rising Tides: The Unpredictable Surge of Fixed Mortgage Rates

In a financial landscape where variable-rate mortgage holders are keenly awaiting the Bank of Canada’s potential rate cut, their fixed-rate counterparts are witnessing a contrasting scenario. Despite a significant decrease in Government of Canada bond yields last autumn, fixed mortgage rates are now on an upward trajectory.

After a sharp 125 basis point fall from their peak in early October to a low in early January, bond yields have rebounded by about 60 basis points, with a notable 25 basis point increase occurring in the past three weeks. This resurgence in yields is compelling fixed mortgage rates to ascend concurrently, much to the dismay of prospective homeowners who now face escalating borrowing costs.

Deciphering the Economic Signals

Ron Butler, a prominent figure at Butler Mortgage, notes that this recent surge in 2- to 5-year fixed mortgage rates—rising between 15 to 30 basis points across various lenders—is largely driven by potent economic data from the U.S., particularly in employment, GDP, and inflation figures. The U.S. CPI inflation saw a 0.4% rise month-over-month and 3.5% on an annualized basis in March, prompting some economists to delay their forecasts for U.S. rate cuts to later this year or even next year. U.S. Federal Reserve Chair Jerome Powell recently reinforced this outlook by stating that interest rates would stay higher “for as long as needed” to combat inflation challenges.

In Canada, despite GDP growth and employment figures performing better than anticipated, fixed mortgage rates have continued their upward climb, detached from the trajectory of the anticipated Bank of Canada rate cuts possibly commencing in June or July.

Forecasting Future Rate Movements

Mortgage broker Ryan Sims, known for his accurate predictions, believes fixed rates have room to increase further, potentially by an additional 20 to 30 basis points. The average deep-discount 5-year fixed rate is currently about 4.79%, but Sims predicts it could rise to around 5.29%. He attributes the gap between fixed and variable rates and the bond market’s overly optimistic pricing in of rate cuts, which he thinks won’t occur as soon as anticipated.

Moreover, Sims highlights a potential wildcard: fixed rates might continue to rise even as the Bank of Canada lowers its benchmark rate. He argues that Canada’s fiscal challenges could push government bond yields—and by extension, mortgage rates—higher regardless of the central bank’s actions. Sims warns that premature rate cuts might be perceived negatively by international markets as a “panic move,” which could exacerbate the risk premium on Canadian bonds.

As we navigate these uncertain waters, it’s evident that both variable and fixed-rate mortgage holders need to stay vigilant and well-informed about the influences shaping the economic environment. The months ahead will be pivotal in determining Canada’s fiscal direction and the strategic financial decisions of many Canadians eyeing the housing market.

In Conclusion: Navigating Uncertain Waters

While variable-rate mortgage holders look towards potential relief from rate cuts, the reality for fixed-rate borrowers appears starkly different with rates poised to climb. As economic resilience tests fiscal policies, borrowers will need to be astutely aware of both domestic and international economic indicators. The dynamic and volatile nature of these rates demands a cautious yet proactive approach to mortgage planning.

Navigating the financial landscape requires a discerning eye and a robust understanding of market forces. Keep a close watch, plan strategically, and you might just weather the shifting tides of mortgage rates. We’d welcome an opportunity to discuss Rising Tides: The Unpredictable Surge of Fixed Mortgage Rates, if you have any questions about our services, please contact our team.

Cooling inflation reinforces a Bank of Canada Rate Pause

Highlights:

  • Inflation slows: October inflation slowed more than expected to 3.1%, contributing to a pause in Bank of Canada rate hikes
  • Mortgage rates remain high: Despite lower bond yields, fixed mortgage rates are high, but expect rates to come down another 10 – 20 basis points (“bps”) over the next couple weeks if bond yields hold
  • Home sales slide across the country: Home sales were down across the country in October, led by Alberta (-8.3%)

Canada’s headline inflation rate slowed more than expected in October, coming in at 3.1% annually compared to expectations of 3.2%. The slowdown was due primarily to a 6% monthly decline in gasoline prices.

Slowing inflation—together with weakening GDP growth (Q3 is shaping up to be flat or slightly down) and a rising unemployment rate (up 0.7% in the past 6 months) —paints a compelling picture of an economy shifting into a lower gear.

It certainly looks at this point like the Bank of Canada is done hiking for the foreseeable future. Markets are now pricing in a Bank of Canada pause until April 2024, followed by 75 bps of rate cuts by the end of next year.

Mortgage Market Update

Government bond yields are a major determinant of fixed mortgage pricing. The bellwether 5-year Government of Canada bond yield is reflecting the likelihood of rate cuts in 2024 and has fallen by roughly 50 bps, or 0.5%, over the past six weeks.

Meanwhile, fixed mortgage rates—which are heavily influenced by bond yields —have remained stubbornly high, with average deep-discounted rates down by just 10 bps from the recent peak.

Lenders have a long history of quickly raising mortgage rates to match bond yields on the way up, but being slow to pass on cost savings when bond yields fall. We should expect rates to come down another 10 – 20 bps over the next couple weeks if bond yields hold here.

Household loan growth falls below 3%

With rates still elevated, household borrowing remains tepid. Loan growth fell to just 2.9% year-over-year in September…the first sub-3% “print” since 1983. Mortgage growth slowed to just 3.2% year-over-year and 0.2% on a monthly basis. It would be even lower were it not for the impact of negatively amortizing static-payment variable rate mortgages at several big banks.

Mortgage originations remain roughly 40% below peak and will likely remain below normal levels for the next year before the wave of mortgages originated in the 2020-to-early 2022 boom era begin to renew in 2025.

New originations continue to be heavily skewed to shorter-term fixed rate loans, but we are seeing some signs that that popularity of variable rate loans is beginning to rise again, having grown from 5% of originations to closer to 10% in the past two months.

Affordability eases slightly

Any improvement in affordability, however modest, is welcome news these days. The monthly mortgage payment required to purchase a typical home in Canada fell by $59 in October as a function of a slight decline in both interest rates and house prices.

With affordability still deeply strained, demand remained under considerable pressure in October. Seasonally adjusted home sales nationally posted the largest monthly decline since June of last year, falling 5.6% month-over-month. All big provinces posted substantial declines led by Alberta (-8.3%) and British Columbia (-6.9%). Ontario saw a 5.5% decline while Quebec saw a sales drop of 5.1%.

The market balance continues to tilt towards buyers with the sales-to-new listings ratio falling below 50% nationally for the first time since 2012.

Consequently, house prices have come under renewed pressure with the MLS House Price Index posting a 0.8% monthly decline in October.

It’s important to remember that there is no single “Canadian” real estate market. Regional dynamics vary widely, and this becomes abundantly clear when we look at the change in house prices over the past three months in major Canadian cities. It’s clear that major metros in southern Ontario are driving the national weakness, while Alberta and eastern Canada continue to perform well for now.

*Any forecasts contained in this report are accurate as of the date indicated

We’d welcome an opportunity to discuss the perspectives presented in this Q3-2023 Housing and Mortgage Market Review. Please contact our team today at (416)925-3140 or (613)366-8525 or by e-mail.

Tiff Macklem, BoC | Fighting to get back to low inflation

HIGH INFLATION MAKES LIFE HARDER FOR EVERYONE

Distinctive Advisors is pleased to provide you with the highlights from the Wednesday, November 22nd speech by Governor Tiff Macklem, Bank of Canada (“BoC“), outlining how high inflation is hurting Canadians and how monetary policy is working to bring it down. He also explains why the Bank of Canada must stay the course in its inflation fight.

The economy and job market have done quite well since the worst of the COVID-19 pandemic.

But Canadians aren’t happy—and high inflation is a major reason why.

Almost 9 out of 10 people responding to BoC‘s Canadian Survey of Consumer Expectations (“CSCE“) said high inflation has made them feel worse off. BoC can see the impacts of high inflation in other ways too:

  • Labour strikes have increased, with employers and workers struggling to agree on fair pay.
  • Businesses have been raising their prices more often than usual, and by larger amounts.
  • The CSCE survey show families are spending less and trying to find cheaper goods and services.

High inflation is particularly hard for lower-income Canadians. They have little savings to buffer higher prices, and necessities—food, rent, gasoline—have had some of the fastest price increases.

LOW UNEMPLOYMENT IS NOT BOOSTING CONSUMER CONFIDENCE

INFLATION WAS ESPECIALLY HIGH AND HARMFUL IN THE 1970s

Back in the ‘70s, just as now, global economic forces caused prices to climb around the world. However, inflation rose higher then, and remained high for longer, peaking at almost 13% and averaging more than 7% for the decade.

With such high inflation throughout the ‘70s, that decade also had a lot of strikes— many of which were long and heated. People felt ripped off because they’d get raises but prices would keep on rising.

Policy-makers tried to get inflation down, but their measures were either ineffective or too timid. Eventually, it took very high interest rates and a deep recession with high unemployment to lower inflation.

IN 1981, THE POLICY RATE AND MORTGAGE RATES CLIMBED ABOVE 20%

ADVANTAGES WE HAVE THIS TIME AROUND — WHAT’S DIFFERENT TODAY?

Tiff Macklem expressed confidence that we will get back to low inflation more quickly and at lower economic cost than we did in the 1970s. In his opinion, we have learned the bitter lessons from that time. And we’ve got some distinct advantages this time around: an inflation target with a strong track record and a forceful and sustained response.

BoC began targeting inflation more than 30 years ago. Since 1995, their inflation target has been 2%, the middle of the band of 1% to 3%. Between then and when the pandemic hit in 2020, inflation averaged 1.9% and was within that band 80% of the time — BoC’s expressed view is a remarkable success compared with the 1970s and 1980s.

Click here for a transcript of the full remarks from November 22nd, 2023 by Tim Macklem, Governor of the Bank of Canada.

 

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  1. Evaluate your current market position and help you assess your future market position based on your plans and goals;
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  3. Help assess your options including holding real estate, disposing of it, acquiring it or leasing it.

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