Canadian Mortgage Rates Explained: Why a Smaller Down Payment Comes with a Lower Mortgage RateMay 23, 2017
Why the Latest U.S. Employment Report Disappointed and Why the Fed Is About To Raise Rates AnywayJune 5, 2017
The Bank of Canada (BoC) held its policy rate steady last week, as was universally expected, and it also issued a statement that outlined its current view of how both domestic and foreign forces are impacting our economic momentum.
The Bank knows that its words are carefully parsed, and in today’s post I’ll highlight the key phrases that it used in its latest statement and offer my take on the implications for our mortgage rates:
- The BoC sees inflation as being “broadly in line” with the projection it made in its April Monetary Policy Report (MPR), which I reviewed in detail here, and it observed that our current low levels of inflation and subdued wage growth are still “consistent with ongoing excess capacity in the economy”. In its April MPR, the BoC projected that this excess capacity would be absorbed by mid-2018, and the Bank would typically begin raising its policy rate at around the same time that this happens. That said, the BoC has been predicting that this excess capacity would be absorbed about a year into the future since the start of the Great Recession in 2008, so its estimate of timing should be taken with a healthy dose of salt.
- “The global economy continues to gain traction” and the BoC believes that economic growth will “gradually strengthen and broaden” over the next three years. It attributed weak U.S. economic growth in the first quarter of this year to “mostly temporary factors” and observed that more recent data pointed to “a rebound in the second quarter”. That said, the Bank noted that “uncertainties outlined in the April MPR continue to cloud the global and Canadian outlooks” and central banks don’t begin to tighten monetary policy when uncertainty is highlighted as a key ongoing theme.
- The BoC observed that our economy’s “adjustment to lower oil prices is largely complete”. Given that the Bank cut its policy rate by 0.50% in direct response to the collapse in oil prices, if the adjustments relating to that economic event are now complete, some observers now question why those emergency rate cuts remain in place.
- The BoC called the recent economic data “encouraging” and most notably, observed that business investment is now improving. Increased business investment has been one of the key missing ingredients thus far in our slow, grinding economic recovery since the start of the Great Recession (and that’s been true in most of the world’s other developed economies as well). The BoC has long believed that any sustainable Canadian recovery would need to be led by export growth that would fuel business investment in productivity enhancements and capacity expansion. Interestingly, while business investment is now improving, the Bank noted that “export growth remains subdued” due to “competitiveness challenges”, and that calls into question the sustainability of this encouraging but still nascent trend.
- The Bank observed that “consumer spending and the housing market continue to be robust” and noted that the most recent round of mortgage-rule changes “have yet to have a substantial cooling effect on housing markets”. I would dispute that observation and encourage the Bank to speak to anyone who works in real estate in Vancouver and/or Toronto for more up-to-date analysis.
- The BoC acknowledged our “very strong growth in the first quarter” but predicted that it will be followed by “some moderation in the second quarter”. This puts to rest any speculation that the Bank might have to start raising its policy rate more quickly than expected in response to a sustainable surge in our economic momentum.
In summary, the Bank doesn’t sound at though it is planning to raise its policy rate any time soon. It sees benign inflation, subdued wage and export growth, and heightened levels of uncertainty beyond our borders and it believes that the current circumstances still warrant accommodative monetary policy.
Furthermore, the Bank doesn’t want to tighten monetary policy because it believes that export growth is the key ingredient to any sustainable recovery and rate rises would cause the Loonie to appreciate further against a basket of other currencies. (The Loonie’s strength relative to other currencies is what the Bank referred to as “competitiveness challenges”.)
That said, the BoC continues to predict that the excess capacity in our economy will be absorbed in the near future, but this is really a warning and a reminder to would-be speculators who might otherwise increase their lower-rates-for-longer bets. Unfortunately, there is rising risk that the Bank’s actions speak so loudly that those speculators may no longer be hearing what it has to say on that point.
Time will tell.
Five-year Government of Canada bond yields fell five basis points this week, closing at 0.95% on Friday. Five-year fixed-rate mortgages are available at rates as low as 2.24% for high-ratio buyers, and at rates as low as 2.29% for low-ratio buyers, depending on the size of their down payment and the purchase price of the property. Meanwhile, borrowers who are looking to refinance should be able to find five-year fixed rates in the 2.59% to 2.69% range.
Five-year variable-rate mortgages are available at rates as low as prime minus 0.80% (1.90% today) for high-ratio buyers, and at rates as low as prime minus 0.70% (2.00% today) for low-ratio buyers, again depending on the size of their down payment and the purchase price of the property. Borrowers who are looking to refinance should be able to find five-year variable rates around the prime minus 0.40% to 0.45% range, which works out to 2.20% to 2.25% using today’s prime rate of 2.70%.
The Bottom Line: Observers who parsed the BoC’s latest statement had differing views about when the Bank might begin to raise its policy rate. But their disagreement was only really about how far off in the future this monetary-policy tightening might occur, and not about whether it will be any time soon.