Mortgage Rate Forecast – British Columbia Real Estate Association

To view the Mortgage Rate Forecast PDF, click here.

Mortgage Rate Outlook

The big news in the Canadian mortgage market is the
return of sub 3 per cent five-year mortgage rates. The
last year of mortgage rate increases has essentially
been erased by an acute repricing of bond market
expectations. A slowing Canadian economy and rising
global trade tensions triggered a sudden change in bond
market sentiment late last year, pushing further Bank of
Canada rate increases off the table.

Even though five-year bond yields and five-year contract
rates have fallen substantially, the structure of the mortgage
stress test allows for limited pass-through to qualifying rates.
As currently constituted, the mortgage stress test is the
higher of the contract rate plus 2 per cent or the posted fiveyear mortgage rate. The latter has not changed in close to
a year despite the drop in five-year bond yields. In fact, the
posted rate appears to be divorced from its prior statistical
relationship with the five-year bond yield. Our models imply
that the five-year posted rate should be 4.84 per cent, rather
than the current 5.34 per cent.

Not only would a lower posted rate help insured buyers
to qualify, but it would provide a significant boost to the
uninsured market through a lower stress test rate.
We anticipate that current low mortgage rates will be
around for most of the summer before rising modestly
into next year. As for the posted rate for insured
borrowers, it would be surprising at this point if the
posted rate moved at all.

Economic Outlook
Canadian economic growth stagnated through the end of
2018 and the first quarter of 2019, averaging just 0.4 per cent
growth in real GDP. There were, however, some bright spots
in an otherwise feeble first quarter. Canadian consumer
spending bounced back, posting the strongest growth in close
to two years. Moreover, GDP growth in March came in at a
very strong 6 per cent annual rate, momentum that should
carry over into the second quarter. We are forecasting that the
Canadian economy will expand between 1 and 1.5 per cent
this year, a deceleration from 1.8 per cent growth in 2018. That
slowdown, along with an uptick in inflation, will likely keep
the Bank of Canada sidelined, particularly given the uncertain
state of the global economy and the ongoing impact of the
B20 stress test on the housing sector.

That said, risks to the economy are very clearly tilted to the
downside. The US continues to flirt with disaster by engaging
in trade wars with China and Mexico. Those actions have the
potential to seriously disrupt the global economy and at worst,
tip the US into recession. Clearly financial markets are very
concerned about that scenario with both the US and Canadian
yield curves inverting. Markets are now expecting both the
US and Canadian central banks will begin reversing course on
monetary policy and lower rates within a year.

Interest Rate Outlook
With market expectations at odds with communication from
the Bank of Canada, its worth asking, “Is it time for the Bank of
Canada to cut interest rates?”

The argument in favour of lower rates is a growing risk of recession,
caused by an exogenous shock like the escalation of global trade
disputes, when the Bank has limited ammunition to boost the
economy. During the last Canadian recession, sparked by the 2008
global financial crisis, the Bank of Canada responded by lowering
its overnight rate 425 basis. The Bank responded to the 2001 tech
bubble and 9/11 attacks by lowering rates by 375 basis points. At an
overnight rate of just 1.75 per cent, the Bank has a fraction of the
usual response at its disposal without venturing into the untested
(Canadian) waters of unconventional policy like negative interest
rates or quantitative easing. Given that monetary policy acts with
long lags, cutting rates today would act as an insurance policy
against rising risk of recession in the next year, similar to how the
Bank responded to the oil price shock of 2015.

Conversely, the Bank and the Federal government are both set
on finally bending the household debt-to-income curve and are
hesitant to ignite a borrowing binge by Canadian households.
Moreover, inflation is slightly above its 2 per cent target and the
Canadian unemployment rate is sitting at a record low. Hardly
the usual conditions for a looser monetary policy.

For more information, please contact:
Brendon Ogmundson
Deputy Chief Economist
Direct: 604.742.2796
Mobile: 604.505.6793
[email protected]

Kellie Fong
Direct: 778.357.0831
Mobile: 604-366-6511
[email protected]

To subscribe to receive BCREA publications such as this one, or to update your email address or current subscriptions, click here.

Source link