Surging prices continue to dominate the headlines, but last week’s US inflation data offered the first glimmer of hope that inflation may finally have peaked.
The annual headline US Consumer Price Index (CPI) fell from 8.5% in April to 8.3% in March, and annual core US CPI, which strips out more volatile CPI inputs such as food and energy prices, dropped from 6.5% in March to 6.2% in April.
US inflation trends should provide some hint of what to expect when our own inflation data are released this Wednesday, but more importantly for readers of this blog, the US data will impact our bond yields and interest rates, which closely track their US equivalents.
Last week we received the April employment data on both sides of the 49th parallel, and the US Federal Reserve made its much-anticipated policy-rate announcement.
Let’s dive right into the details that will be noteworthy for anyone keeping an eye on Canadian mortgage rates.
Canadian mortgage rates have been on a tear lately.
The five-year Government of Canada (GoC) bond yield has more than doubled, from 1.25% in early January to 2.78% at last Friday’s close, and that has driven our five-year fixed mortgage rates up into the 4% range, marking their highest level in more than a decade.
Meanwhile, the Bank of Canada (BoC) has hiked its policy rate by a total of 0.75% over its last two meetings, and lender prime rates, and the variable mortgage rates that are priced on them, have increased by the same amount.
Those developments may have been big news on the home front, but they are mere sidenotes on the global stage. The biggest punch bowl at the global cheap-money party belongs to the US Federal Reserve, and the Fed is expected to start taking that punch bowl away when it meets this week.
Mortgage rates have surged higher of late.
Five-year fixed rates are now offered in the 4% range, and while five-year variable rates are still offered at discounts of about 1.50% below that, the Bank of Canada (BoC) recently hiked its policy rate by 0.75% and is warning Canadians to “expect further increases”.
Against that backdrop, it’s time for a fresh take on which option is more likely to produce a lower borrowing cost over the next five years.
Last Wednesday the Bank of Canada (BoC) raised its policy rate by 0.50%, marking its first half-point hike since May 2000. The Bank also stated that inflation is going to be “elevated for longer than we previously thought” and advised Canadians to “expect further increases”.
After reviewing all the Bank’s latest communications, here are the five key points that I think are most important for Canadian mortgage borrowers and for anyone concerned about where our fixed and variable rates may be headed.
Our federal government released its 2022 budget last week, and it included a wide range of initiatives designed to address housing affordability. In today’s post I’ll outline the new measures and offer my take on their likely impact.
Let’s start with the three most prominent housing-related items:
Surging Government of Canada (GoC) bond yields have recently pushed our fixed mortgage rates significantly higher. They have risen by an average of about 1% across different loan-to-values and product types, marking the fastest run-up that I can remember in my two decades in the mortgage industry.
The Bank of Canada (BoC) has hiked its policy rate by only 0.25% thus far over that same period, and right now five-year variable rates are available at discounts of 1.50%, or more, over their fixed-rate equivalents. But that is about to change.
Five-year fixed-mortgage rates continued their rise last week, driven higher by the spiking five-year Government of Canada (GoC) bond yield (which closed at 2.51% on Friday, marking its highest level in more than ten years) and by new market-risk premiums that materialized in response to Russia’s invasion of Ukraine.
To put that statement in context, five-year fixed-rate mortgages with 30-year amortizations were available at about 2.50% in January and are now offered at rates about 1% higher. If they continue to rise at their current pace, five-year fixed rates could easily exceed 4% by Easter.
Five-year fixed mortgage rates continued their dramatic march higher last week with several prominent lenders now raising them up into the 3.5% range.
This latest round of hikes will impact the market in new and significant ways.
Borrowers who are applying at federally regulated lenders (which is most of them) must qualify at the greater of either the current stress-test rate of 5.25% or the contract rate + 2%.
For the past several years, the stress-test rate has been the higher of the two, but when five-year fixed rates rise above 3.25%, the contract rate + 2% becomes the rate used for qualification. (For example, a fixed rate of 3.5% would be qualified using 5.5%.) Going forward, in addition to being more expensive, for the first time in a long while, five-year fixed-rate rises will also reduce maximum loan amounts.
Russia’s invasion of Ukraine is first and foremost a tragic tale of human suffering, but it has also sent shockwaves through the global economy.
Oil, gas, and wheat prices have spiked by more than 30%, and many other commodity prices have surged higher. The price of nickel rose so fast that the London Metal Exchange had to temporarily suspend trading last week.
The Bank of Canada (BoC) raised its policy rate from 0.25% to 0.50% last Wednesday, as expected, and lenders increased their prime rates by the same amount shortly thereafter.
The hike was almost universally expected, but the Bank’s hawkish statements about our current conditions was not (at least by this blogger).
In his speech last Thursday supporting the policy shift, BoC Governor Macklem acknowledged the economic uncertainties surrounding Russia’s attack on Ukraine, the continued evolution of COVID-19, and the ongoing supply chain disruptions. But he said that, on balance, the BoC’s decision to start removing monetary-policy stimulus was based on the assessment that “slack in the economy is absorbed, there is solid momentum, and inflation is too high”.
The Bank of Canada (BoC) is expected to hike its policy rate by 0.25% when it meets this Wednesday, and if that happens, Canadian variable mortgage rates and lines of credit will rise by the same amount.
The Bank has thus far navigated through our pandemic-induced inflation run up with a strategy best described as “talk tough and drag your feet”.
That approach helped to keep longer-term inflation expectations anchored and bought time for fiscal and monetary-policy stimuli to boost our recovery. But at some point, words must be backed by actions if they are to remain credible, and that time has now come.
I hope that you enjoyed the Family Day long weekend.
I used the holiday yesterday for its stated purpose, so there won’t be a new post this week. I’ll be back next Monday as usual.
In the meantime, here are links to five key recent posts about Canadian mortgage rates and inflation:
Last week we learned that US inflation hit 7.5% in January, exceeding the consensus forecast of 7.3% and marking a 40-year high.
The market’s reaction was as expected. US bond yields surged higher and investors raised their bets on Fed rate hikes to come.
The consensus now believes that the Fed will raise its policy rate by a total of 1.75% in 2022, and the bond futures market is pricing in a 63.7% chance of a 50-basis-point Fed rate hike at its next meeting on March 16.
Job losses were expected after our latest round of lockdowns, so the pullback didn’t come as a surprise. But the headline result was almost double the consensus forecast of 110,000, and that magnitude of loss was unexpected. The same was true of the big drop in average hours worked (-2.2%), the spike in the number of Canadians working less than half of their normal hours (620,000), and the record number of Canadians who missed work due to illness (10%).
All of that aside, the part I found most noteworthy, and instructive, was the reaction of our Government of Canada (GoC) bond yields.