Canadian mortgage rates
have held steady since the end of the second quarter, and we anticipate they
will continue to do so over the next year. The yield on 5-year Government of
Canada bonds, a common benchmark for 5-year fixed rate mortgages, remains very
low and is forecast to rise gradually over the next year.
The last increase in the 5-year fixed-rate
came when the 5-year bond yield was roughly 30 basis points higher than it is
today. Given our forecast for bond-yields over the next year, the 5-year
mortgage rate is unlikely to rise from its current level of 5.24 per cent until
early-to-mid 2013. Moreover, Banks and other lenders will likely be in no hurry
to raise rates as moderation in the national housing market further intensifies
competitive pressures.
The 1-year and variable
mortgage rates are also likely to stay flat over the next six months while the
Bank of Canada remains on the sidelines. We are forecasting that the current
1-year rate of 3.1 per cent will prevail until mid-2013 while the variable rate
will hold steady at the current Prime lending rate of 3 per cent.
Economic
Outlook
The
Canadian economy stumbled in the third quarter of 2012, growing just 0.6 per
cent at an annualized rate. The economy is clearly feeling the effects of still
sluggish US economic growth as well as a wider slowdown in the global economy.
Canadian exports fell by 2 per cent last quarter, the largest decline since the
2009 recession.
Exports
may not fare much better next year as the global economy faces ongoing
uncertainty. The US economy is at a fiscal crossroads and will likely see
sluggish growth for another year. Much of Europe is mired in either recession
or near zero growth and even the Chinese economy appears to be slowing down.
Against this backdrop, the
Canadian economy should continue to produce consistent, if underwhelming,
growth near 2 per cent in 2013, before accelerating in 2014. The most
significant risk to that forecast is surely the looming ‘fiscal cliff’ in the
United States – a $700 billion austerity bomb set to go off in January 2013
unless the US congress can reach a compromise. If not, expiring tax cuts and
reductions in government spending amounting to over 4 per cent of US GDP will
start impacting growth in the US economy. Every 1 per cent change in US real
GDP translates to about a 0.3 to 0.6 per cent impact on Canada.
Therefore, failure to
avoid the full impact of the fiscal cliff could subtract as much as 1 to 2 per
cent off of Canadian GDP in 2013, enough to potentially push Canada into a
shallow recession. Of course, as Winston Churchill famously said, “Americans
can be counted on to do the right thing, after they have exhausted all other
possibilities,” so it is likely that a deal will be reached that avoids a worst
case scenario, but not without a lot of political posturing first.
Interest
Rate Outlook
The
biggest news out of the Bank of Canada this year had nothing to do with changes
in monetary policy, but rather changes in personnel as it was announced that
Bank of Canada Governor Mark Carney would be departing to helm the Bank of
England. Some have compared the loss of Carney to the tragic memory of Canada
losing Wayne Gretzky to the Los Angeles Kings in the 1980s. However, like the
powerful Edmonton Oiler teams of that decade, the Bank of Canada and the wider
population of Canadian economists is rich in talent and replacing Carney with
someone equally qualified should not be a problem.
Moreover,
monetary policy in Canada is rules based, guided by a legislated inflation
control mandate. Therefore, even the loss of a talented policy maker like
Carney will likely have little impact on the path of Canadian interest rates.
The outlook for growth and
inflation over the next eight quarters suggests that interest rates should
start to tick higher around the middle of 2013. However, the Bank has been
careful to note that a withdrawal of monetary stimulus will be contingent on a
stable global economy as well as the state of household debt burdens. The Bank
will likely be cautious in unwinding monetary stimulus if Canadian household
debt, which has been growing at a more sustainable rate in the past few
quarters, changes direction. We are forecasting that the Bank will leave its
overnight rate unchanged through most of 2013 before raising rates by 25 basis
points late next year.
Copyright BCREA -
Reprinted with permission
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