There’s been no shortage of events to fret about over the last few months, but a concern that has been consistently weighing on Canadians’ minds has been around the housing market – especially the rise of mortgage rates, and how their trajectory will impact their finances.
“Rising mortgage rates have been difficult for many Canadian consumers. The weakness in the formerly frothy Canadian housing market has slowed the Canadian economy considerably, and strong population growth has created an oversupply of labour that has weakened employment,” the experts at Canso Investment Counsel Ltd. write in the October 2024 Canso Market Observer.
But while “Canadian housing market hope springs eternal,” they say, “the problem might be that tomorrow’s mortgage rates might not be much different than today’s.”
When you consider that the current 5-year Canada (at 3%) is actually not too far from where it should be given a normal economy with inflation at 2%, “that means that current fixed mortgage rates, which are based on Canada bond yields, don’t have a lot to fall if the (Bank of Canada) brings short-term rates towards 3%, which would only be 1% above the BOC target 2% inflation,” Canso says.
In that scenario, variable rate mortgages would fall considerably, since the BOC rate (as of Oct. 23) is 3.75%, higher than the 5-year Canada at 3%.
But “given the disastrous experience of Canadians with variable rate mortgages that went from 0.8% to 6%, we don’t think variable rate mortgages will be a popular option for many Canadian borrowers.”
The federal government is doing all it can to improve housing market conditions (including loosening of mortgage tests, lengthening of amortization and increasing in the maximum CMHC insurable house price), since the residential housing market forms a large part of the Canadian economy.
“Canadians have the double whammy of a weakening housing-dependent economy and higher rates biting into disposable cash flow for consumers with mortgages,” the Market Observers reads. “That suggests to us that Canada will be much weaker economically than the U.S. (which) puts more pressure on the BOC to lower rates, but with short Canada bonds at under 3%, there isn’t much room for further monetary policy accommodation.”
To learn more about Canso’s views on the bond market and how it’s impacting mortgage rates and monetary policy, check out the October 2024 Canso Market Observer.
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