Fixed Versus Variable Mortgage Rates: Finding the Break-Even Point
May 5, 2014Happy Victoria Day Weekend
May 20, 2014
The Canadian economy shed 29,000 jobs last month, confounding the consensus forecast, which had called for a gain in the 13,500 range.
This continues a trend where a surge in job creation one month is followed by a plunge immediately afterwards. In the latest example, the 43,000 new Canadian jobs that were created in March were almost completely cancelled out by the 29,000 jobs we lost in April.
If you’re keeping track of where mortgage rates may be headed, the employment data are worth following because the cost of labour is one of the most important drivers of overall inflation. And of course inflation and interest rates are closely linked.
When job creation is robust, the demand for labour begins to outstrip its supply and employers raise wages and salaries in order to compete for limited resources. Rising labour costs fuel general price inflation, which pushes up our interest rates over time. Conversely, when job creation is weak, a surplus of available labour ensures that its cost remains relatively consistent and helps keep inflation, and interest rates, stable. (That said, it’s not as though we should be rooting for a weak labour market, which corresponds with lower rates of economic growth.)
Here are the highlights from our April employment data:
- The Canadian economy has added an average of 12,000 new jobs/month over the most recent twelve months, and 3,000 new jobs/month over the most recent six months. Both trends are well below the average of 20,000 or so new jobs that we need to create each month just to keep pace with the average monthly growth of our labour force.
- We lost 31,000 full-time jobs in April. Both the private (-29,000) and public (-17,000) sectors shed jobs, with the ranks of the self-employed growing by 17,000 jobs as a partial offset. This is, however, cold comfort. When self-employment rises in a weak labour market, experts argue that many of the newly self-employed are really just displaced workers who are trying to transition back to full-time employment.
- The manufacturing sector lost another 1,000 jobs, adding to the 9,000 it shed in March. Thus far, the competitive advantage of the cheaper Loonie has not provided the boost to our export manufacturers that was anticipated, although this was predicted by Bank of Canada Governor Poloz. He has cautioned that the cheaper Loonie might actually hurt our economy over the near term because our export manufacturers buy about 40 percent of their inputs from abroad, which squeezes their profit margins, whereas the benefits of the cheaper Loonie will take longer to materialize in the form of increased sales.
- Average wages inched up 0.2% in April, although here again we see the continuation of a decelerating trend in year-over-year wage growth: January (2.6%), February (2.5%), March (2.2%), April (1.8%).
- Our unemployment rate held steady at 6.9%, but only because the size of our labour force shrunk by 26,000 people last month.
We have seen unusually large swings in the employment data of late, so it’s important not to make too much of one month’s data. Nonetheless, the longer term employment trends are disconcerting and should continue to give pause to any of our policy makers who would otherwise advocate for tighter monetary policies.
Five-year Government of Canada bond yields were flat for the week, holding steady at 1.63% when the markets closed on Friday. Five-year fixed-rate mortgages are still offered in the 2.84% to 2.99% range, and five-year fixed-rate pre-approvals are available at rates as low as 3.09%.
Five-year variable-rate mortgages are offered at rates in the prime minus 0.65% range, which works out to 2.35% using today’s prime rate of 3.00%. The Mortgage Qualifying Rate (MQR) will drop to 4.79% this week, making it a little easier for borrowers to qualify for variable-rate mortgages and for fixed-rate terms of less than five years. (If you want to learn more about how the MQR works, here is a post I wrote that explains it in detail).
The Bottom Line: Canadian employment growth remains stuck in the mud. While this is not an encouraging trend for our economy as a whole, stable employment costs will help keep inflation subdued, and should help ensure that both our fixed and variable mortgage rates stay at or near today’s ultra-low levels for the foreseeable future.