The Bank of Canada (BoC) is facing increased pressure to accelerate its rate-hike timetable to slow house-price appreciation and stave off housing bubble risks.
Its promise to keep rates at ultra-low levels for years to come has combined with the growing belief that house prices will rise forever to form a potent, intoxicating mix.
Buyers are also haunted by the warning that they must buy now or be priced out forever, and would-be sellers who hold on to their properties are quickly rewarded with more gains.
There are other COVID-related factors that are helping to push prices higher.
Last week was a slow one for mortgage-rate news, so today I offer a recap of three recent posts.
In them, I explain why fixed rates have been rising while variable rates have been falling, and I also provide background on the current battle between bond-market investors and central banks.
In last week’s post I explained that the bond market and the Bank of Canada (BoC) are currently in a fight about future inflation.
In one corner we have bond-market investors driving up Government of Canada (GoC) bond yields (and the fixed-mortgage rates that are priced on them) over fears of rising inflation. To wit, both the five-year GoC bond yield and average five-year fixed mortgage rates have surged about 0.50% higher over the past few weeks.
In the other corner, the BoC is predicting that the current inflation run-up will prove transitory, and it just doubled down on keeping its policy rate (which our inflation variable mortgage rates are priced on) at 0.25% until sometime in 2023.
Last Wednesday, the US Federal Reserve took its turn pushing back against the mainstream narrative.
The five-year Government of Canada (GoC) bond yield that our five-year fixed mortgage rates are priced on has moved steadily higher of late in response to the consensus belief that inflation has turned the corner and will now rise sustainably.
It increased from 0.40% to 1.04% over the past month, and, not surprisingly, five-year fixed mortgage rates have risen by almost the same amount.
Today’s consensus inflation narrative is underpinned by improving US vaccination rates, the approval of new massive US stimulus programs, and better-than-expected economic data on both sides of the border. These factors are fueling the belief that growth is about to take off, and that, by association, inflation, and rates, have bottomed.
In the lead-up to the latest Bank of Canada (BoC) meeting, which took place last Wednesday, mainstream economists predicted that the improving backdrop would force it to adopt more hawkish language. Specifically, they expected the Bank to hint that it would soon begin to taper its quantitative easing (QE) programs, and to move up the expected timing of its next policy-rate increase.
The BoC had other plans.
Five-year fixed mortgage rates have reversed course and risen by about 0.25% recently, while five-year variable mortgage rates have continued to inch lower.
The rather sudden widening of the gap between these two options makes now a good time to revisit the age-old fixed vs. variable question.
Let’s start with a quick look back at how we reached this point.
The inflation trade pretty much exploded last week.
Investors bet that we’re going to get more inflation than our policy makers expect, and they drove up bond yields in response.
The Government of Canada (GoC) five-year bond yield that our five-year fixed mortgage rates are priced on surged from 0.67% at the start of the week to 0.88% at Friday’s close (and it was at only 0.43% when February began). Lenders responded by raising their five-year fixed rates anywhere from 0.15% to 0.25% (so far).
This bond yield surge is a global phenomenon that is primarily underpinned by the belief that US inflation is about to sustainably rise (which I also wrote about in last week’s post). If that happens, the US will export its rising inflation through trade, and it will permeate the globe.
The five-year Government of Canada (GoC) bond yield surged higher last week, and that means that our five-year fixed mortgage rates are on the way up.
In fact, I’m surprised they haven’t risen already.
In today’s post I’ll explain what is pushing rates higher and offer advice on how borrowers who are currently in the market for a mortgage can navigate the current environment.
I hope that everyone 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 of my recent posts covering key mortgage-related topics:
- What’s in store for fixed and variable mortgage rates in 2021?
- Why is the Bank of Canada hinting that it may cut its policy rate again?
- What would happen to mortgage rates in a worst-case pandemic scenario?
- The obvious flaw in the Bank of Canada’s newfound optimism.
- How mortgage rates will be impacted by the race between the virus and the vaccines.
The Bottom Line: The Government of Canada bond yields that our fixed mortgage rates are priced on held steady last week. As such, our fixed mortgage rates were mostly unchanged, with one lender announcing a small cut.
Variable mortgage rates were unchanged last week.
The consensus predicted that our economy would shed 40,000 jobs last month, largely as a result of lockdown measures reintroduced in Ontario and Quebec. Instead, we lost 213,000.
That’s on top of the 53,000 job drop in December, when infection rates put an end to the impressive employment recovery that had run through the summer and fall.
Overall employment has now dropped by 858,000 over the past twelve months, and Statistics Canada estimates that 529,000 of those losses were COVID-related.
Canadian mortgage rates are at rock-bottom levels, and the only debate today is over how long they will remain there.
The Bank of Canada (BoC) recently offered a more optimistic economic forecast that was tied to the earlier than expected arrival of vaccines. It cautioned that our recovery will still be drawn out and uneven, but less so if we are able to meet the vaccination timetable that our federal government is committing to.
Vaccination rates are critical now because our economy will continue to be hampered by varying stages of lockdown until we achieve herd immunity, which will occur when 20 million (or so) of us have had our shots. Our federal government is promising that every Canadian who wants a vaccine will have access to one by September, and that is also when it expects us to reach that goal.
If vaccination rates hold the key to our recovery, and if the BoC’s forecast is underpinned by our federal government’s planned vaccination timeline, then tracking actual vaccination rates relative to that timeline will provide us with a useful gauge of how our economic momentum is lining up with the Bank’s projections.
Last week the Bank of Canada (BoC) provided its latest assessment of the economic landscape both at home and abroad via its policy statement, Governor Macklem’s accompanying press conference, and the issuance of its latest Monetary Policy Report (MPR).
There had been speculation that the BoC might cut its policy rate, which our variable mortgage rates are priced on, but that didn’t happen. Nonetheless, the Bank did offer several valuable insights that are noteworthy for anyone keeping an eye on Canadian mortgage rates.
Here are my thoughts on five of the Bank’s key messages:
Today, mainstream economic forecasts fall within a fairly narrow band.
The narrative, in simple form, acknowledges that we’re in for a tough winter but predicts that we’ll be on our way back to normal not long after the snow melts, thanks to widespread vaccinations. After that, most forecasters expect our economy to rebound robustly and inflation to surge, as consumers unleash the cash they saved up during the lockdown.
In recent posts I have challenged several of the assumptions on which this view is built. Here is a summary of my key counter-arguments:
In last week’s post I offered my interest-rate forecast for the year ahead.
I contrasted our hope that vaccines will bring an end to the pandemic and breathe life into our economy with our fear that record-high infection rates and the reintroduction of lockdowns will inflict further economic damage in the interim.
Our latest jobs data, released last Friday, provided a snapshot of how COVID-19’s second wave has impacted employment. The picture wasn’t pretty.
We begin 2021 with our glasses half full – and that’s not just because our New Year’s celebrations were cancelled.
On the one hand, recently approved vaccines give us hope that we will beat the pandemic back and return to normal activities sometime this year. But on the other hand, spiking infection rates have necessitated the reintroduction of lockdown restrictions that will severely test our resolve over the near term.
Against that backdrop, and in keeping with my annual tradition, here is my interest-rate forecast for the year ahead.
I would like to wish my readers a healthy and happy holiday season.
I’ll be off until the new year. In the meantime, here are links to my recent blog posts that address five key mortgage questions:
- Is Another Bank of Canada Rate Cut on the Way?
- Have Canadian Mortgage Rates Bottomed?
- What Will Happen to Mortgage Rates When the Pandemic Ends?
- Should You Choose a Fixed- or Variable-Rate Mortgage? (Right Now It’s No Contest)
- When Will Canadian Mortgage Rates Rise?