• Rising rates and tighter mortgage regulations in 2018
• Canadian economy slowing
• Bank of Canada waiting on higher inflation
Mortgage Rate Outlook
Canadian mortgage rates rose substantially in 2017 and are forecast to rise further in 2018. After beginning the year at or near historical lows for both the qualifying rate as well as 5-year contract rates, an acceleration of economic growth prompted a shift at the Bank of Canada and a withdrawal of stimulus implemented to help the economy absorb the oil-shock of 2015.
After the hawkish turn by the Bank of Canada, the Canadian 5-year bond yield, the key benchmark for the mortgage qualifying rate, seemed set on a higher trajectory before a slowing economy and the tepid inflation resulted in markets reassessing the likelihood of further rate hikes. The 5-year mortgage qualifying rate now sits at a three-year high of 4.99 per cent, while most lenders offer a discounted rate of 3.24 per cent. Our baseline forecast for
2018 is for those rates to increase to 5.15 per cent and 3.44 per cent, respectively.
One complicating factor will be the impact of new mortgage regulations, which require borrowers with more than 20 per cent equity to qualify at a rate at least as high as the 5-year posted mortgage rate. This will erode purchasing power by as much as 20 per cent, and will likely cause some prospective buyers to delay home purchases. Since non-federally regulated lenders such as credit unions do not need to comply with those regulations, large bank lenders could hold off on raising mortgage qualifying rates to remain competitive.
In the four quarters from the second half of 2016 to the first half of 2017, the Canadian economy grew at an average quarterly rate of 3.6 per cent, posting more than 4 per cent
growth in the second quarter of 2017. However, in the third quarter, growth slowed to just 1.7 per cent.
Despite a second-half slowdown, the Canadian economy still saw a surge in employment in October and November and will post annual real GDP growth of over 3 per cent in 2017, making it the envy of most advanced economies around the world.
We do not expect that performance to be repeated in 2018, as the effect of higher interest rates and trade disputes present a drag on growth. Those factors are forecast to slow the overall Canadian economy to a still above-trend 2.2 per cent growth next year. As relatively strong growth continues to erode slack in the economy, inflation should return to its 2 per cent target by the end of next year.
Interest Rate Outlook
Despite strong economic growth, Canadian inflation remains subdued. The argument for a more hawkish approach from the Bank of Canada relies on two factors.
Firstly, that the elimination of unused capacity in the economy, generally referred to as the output gap, is inflationary. Therefore, an economy operating at or above capacity, as the Canadian economy is projected to do, should see rising price pressure. That view is supported by statistical evidence, though inflation has been well anchored due to the success of inflation targeting.
Secondly, the Bank’s framework for monetary policy is built upon setting interest rates at a “neutral” level to stabilize consumer price inflation around the Bank’s 2 per cent target. Since the Bank’s policy rate is currently 200 basis points below its estimate of “neutral,” there is an upward tilt to the Bank’s bias. That is, all else equal, the Bank would prefer to see interest rates “normalize” to a higher level over the medium term.
Still, there are significant risks to the downside for the Canadian economy over the next year. Elevated household debt presents a challenging tight-rope for monetary policy, as rates rising too quickly could have substantial and widespread consequences. Moreover, forthcoming restrictions on mortgage qualifying will already have a dampening impact on housing demand, which should also factor into the Bank’s thinking on monetary policy.
Weighing those risks against expectations of a closing output gap and inflation slowly moving toward 2 per cent over the next year, the Bank may still find just enough
reason to raise the its target rate once or twice in 2018.
This article appeared on the CBC News website on January 20th, 2016 and was written by Sheena Goodyear.
Despite a topsy-turvy mortgage landscape that has seen rates go up unexpectedly, don’t expect your monthly payments to skyrocket any time soon, economists say.
“I think that mortgage rates will remain relatively stable,” CIBC deputy chief economist Benamin Tal told CBC News. “I just don’t see anything that will send them up.”
Mortgage rates have been creeping up over the last few months— a fact that may have many homeowners scratching their heads.
Usually a turbulent economy, like the one Canada is currently facing, with oil below $30 US a barrel and the loonie lower than 70 cents US, would be accompanied by a drop in mortgage costs, especially fixed rates.
That’s because fixed mortgages are tied directly to government bond yields, which are at an all-time low as risk-wary investors steer clear of the stock market.
Still, all the major banks have announced mortgage-rate increases since December.
CIBC increased its three-year fixed rate by 10 basis points to 2.59 per cent. RBC upped its special offer on a five-year fixed mortgage by one-tenth of a point to 3.04 per cent. TD Bank increased its one-year and four-year closed special rates by one-tenth of a point each. Scotiabank increased its variable rate by 10 basis points.
Government regulations and global forces
Robert McLister, a mortgage planner at intelliMortgage and the founder of RateSpy.com, told Canadian Press the hikes stem partly from new government regulations designed to reduce risk in the country’s housing industry, including plans to force the banks to have more money set aside in case the mortgage loans on their books go bad.
“It’s going to be more expensive for banks to hold mortgages,” McLister said. “They have to put aside more capital and when you put aside more capital, then you can’t do other things with it. And that costs you money, so that gets baked into pricing.”
But it’s more complicated than that, said Tal. In order to understand Canadian mortgage rates, you have to look at the global picture.
“Given the uncertainty and given the fact that risk profiles are rising globally, I think that the Canadian banks have to pay more to fund themselves,” he said.
Still, there’s no reason for homeowners and would-be homeowners to fret over modest hikes to already low rates, John Andrew, a real-estate professor from Queen’s University in Kingston, Ont., told CBC News.
“I think the rise we’ve seen in mortgage rates isn’t really very significant,” he said.
Bank of Canada holds key rate steady
Meanwhile, the prime rate — the interest rate commercial banks charge their most credit-worthy customers — is unlikely to change substantially any time soon after the Bank of Canada announced Wednesday it would leave its benchmark overnight rate unchanged at 0.5 per cent.
Changes to the overnight rate — the interest rate at which big banks borrow and lend — have traditionally had major implications for Canadian mortgages, as the big commercial banks would follow in lockstep with changes to their prime rate.
But even if the Bank of Canada had announced a rate change on Wednesday, the impact on mortgages likely would have been minimal. The central bank’s power to influence the housing market has dwindled in recent years, economists say.
When the Bank of Canada slashed the overnight rate by 0.25 per cent a year ago, commercial banks only cut their prime rate by 0.15 per cent.
“That’s maybe something the [Bank of Canada] should look at, because the ability of the bank to really impact market rates and activity is very limited,” Tal said.
Rates will go up eventually
Despite the steady forecast for the next year or two, Andrew advises new homeowners or those looking to renew their mortgages to choose a fixed, or locked in, rate with regular monthly payments that aren’t tied to the prime.
“I’m a little gun-shy about variable-rate mortgages, just because you’re in a period where mortgage rates are so low and there isn’t a widespread expectation in the market that they’re going to rise dramatically,” he said.
“I’m a big one for certainty, and I think the big uncertainty is rising rates. We know they’re going to rise — we just don’t know when and we don’t know by how much. So do you want to get into a variable situation where you’ve got no control over that?”
Marcus Tzaferis, a mortgage broker with MorCan Direct, disagrees. There are good deals on variable-rate mortgages right now, he said, especially from non-bank lenders that won’t penalize you if decide to lock in.
“I’ve been doing this now for about 15 years — nothing happens all that quickly. This tool of inciting some fear that rates are going to go up — it almost works in the banks’ favour. The banks make more money on the fixed rate,” he said. “I don’t think we’re going to see rates increase any time soon.”
Tal said when it comes to fixed versus variable, it all comes down to the individual. There’s no one-size-fits-all for mortgages. But, he warned, the pendulum will eventually swing back, so it’s best to plan ahead.
“If you’re buying right now, it’s very, very likely that five years from now, when you renew, rates will be notably higher,” he said. “If you cannot finance your mortgage at rates that are one to two per cent higher, then you have to think twice about the type of house that you want to buy.”
This article appeared on the Business News Network on January 14th, 2016 and was written by Fergal Smith of Reuters.
Bank of Canada interest rate cut speculation intensified on Tuesday as crude oil prices and the Canadian dollar both weakened to 12-year lows, with traders pricing in a full 25-basis-point easing by mid year.
The Canadian central bank cut rates twice in 2015 as an oil price shock drove the economy into recession in the first half of the year, but has been sidelined since July.
“People are calling for the Bank of Canada to cut rates at the next meeting,” said David Bradley, director of foreign exchange trading at Scotiabank.
The implied probability of a Bank of Canada rate cut at next week’s interest rate announcement has climbed from 22 percent after a speech by Governor Stephen Poloz last week to more than 30 percent, while the market has nearly fully discounted a rate cut in May.
The prospect of easing helped drive the yield on the Canadian government’s two-year bond to a four-month low.
Even so, “the market is underpricing the probability of a rate cut next week,” said Andrew Kelvin, senior rates strategist at TD Securities.
A Jan. 7 speech by Poloz had left investors doubtful he would cut Canada’s benchmark rate this month.
However, the central bank’s quarterly Business Outlook Survey has since found that business sentiment has deteriorated, while investment and hiring intentions have fallen to their lowest levels since 2009.
“It’s clearly going to be a very close call for the Bank of Canada given the financial turmoil we have seen,” said Kelvin.
U.S. crude oil prices have fallen an additional 8 percent this week, dipping below US$30 a barrel. Moreover, Western Canada Select, a blend produced by Canadian oil companies, trades at a greater than $14 discount to U.S. crude oil prices.
“We know falling oil prices have preceded both the last two cuts from the Bank (of Canada),” said Kelvin.
The central bank assumed a $45 price for U.S. crude oil prices when making its latest forecasts for the economy in October.
Speaking on Tuesday, Canadian Finance Minister Bill Morneau acknowledged that the public is concerned about the economy, but declined to indicate whether the government will stick to its budget deficit pledge or boost spending.
“We will be working in our budget to make sure that our initiatives help to grow the economy. We think the initiatives we already outlined are the appropriate initiatives to make a difference,” he said.
This article appeared on CBC.ca on the 29th of May 2015.
Canadians are showing a strong ability to manage their debts even as housing prices rise, with arrears on CMHC mortgages at a low 0.34 per cent for the first quarter of this year, according to new figures from the federal housing agency.
That means there were 9,572 Canada Mortgage and Housing Corp.-insured mortgages in arrears in the quarter, while it insures a total of 2.8 million mortgages. It had to pay just 588 claims.
The gross debt service ratio for Canadian homeowners – the percentage of housing costs to gross monthly income – sits at 26 per cent for the three months ended March 31.
That’s almost the same as in the first quarter of 2014, but up slightly from 25 per cent in 2013.
The ratios are highest in Alberta, British Columbia and Ontario, where housing prices have been rising rapidly. New homeowners in those provinces are also more likely to need a CMHC mortgage, which is necessary when buyers do not have a 20 per cent down payment.
However, a small proportion of CMHC-insured homeowners – 12.1 per cent – have a gross debt service ratio of more than 35 per cent, meaning more than a third of their monthly income goes to housing costs.
Another 21 per cent of CHMC-insured mortgage holders are juggling housing costs of 30 to 35 per cent of their gross income.
As housing costs rise, more than a quarter of the mortgages insured by CMHC are for over $400,000.
However, the average insured loan amount was $238,630.
In its annual report the federal agency predicts today’s low interest rates will continue to stimulate demand for housing.
It expects mortgage rates will not rise in Canada before the end of 2015.
The report comes after CEO Evan Siddall said CMHC’s share of the mortgage market had dropped from about 90 per cent of new mortgages to about half of new mortgages.
Ottawa had encouraged the agency to reduce exposure to mortgage defaults for the Canadian taxpayer, saying it wanted private insurers to take over the risk.
In its annual report, CMHC said it insured mortgages worth $543 billion in 2014, down 4.1 per cent from 2012, and below the legal limit of $600 billion.