Mortgage Rate Outlook 

 

Although there have been a number of ups and downs in the Canadian mortgage market over the past 12 months, there was very little movement in posted mortgage rates. In fact, volatility in mortgage rates, as measured by a rolling 52-week standard deviation of posted five-year rates, is at a multi-decade low. With growth and inflation remaining relatively subdued and the Bank of Canada on the sidelines for all of 2013, the unprecedented low volatility in Canadian mortgage rates is likely to continue for much of the year. 　

 

While posted mortgage rates remain relatively constant, some chartered banks have recently re-ignited a small furor by again offering below 3 per cent five-year fixed rates to help spur spring-time demand following a nationwide slowdown in home sales activity. We expect that, disapproval from Ottawa notwithstanding, lenders will continue to offer steeply discounted rates to their most credit worthy borrowers while leaving their official posted rates constant. We are forecasting that the five-year fixed rate will remain at 5.24 per cent, and the one-year rate at 3 per cent for most of 2013 before gradually rising toward the end of the year as the outlook for economic growth improves.

 

The primary risk to our outlook is that growth in the global and Canadian economy will outperform current expectations. Faster growth could cause bond yields to quickly rise off of their current near historic lows, thereby forcing banks to re-price their mortgage offerings.

 

Economic Outlook

 

The second half of 2012 saw the Canadian economy post its weakest rate of growth since the 2009 recession, expanding at an average annual rate of just 0.6 per cent. Moreover, there is reason to believe that growth will continue to underwhelm in 2013. Excluding recessionary periods, consumer credit is currently expanding at its slowest pace in decades as households look to de-leverage following several years of low-interest debt accumulation. Slower credit growth will likely constrain consumer spending and the economy will require a greater contribution from exports and business investment.  

 

However, a pivot to investment driven growth appears unlikely given that anticipated investment for 2013 is set to rise just 1.7 per cent, the smallest increase since 2009. Add-in a still struggling global economy and you have a Canadian economy that will likely struggle through much of 2013, posting growth of just 1.5 per cent.
 
However, there are reasons to be optimistic about the second half of this year and beyond. Following nearly seven long years, the US economy is set to finally post sustained economic growth, led by a resurgent housing market and a reprieve from a seeming endless string of economically injurious congressional battles. A strong US economy will help lift Canadian economic growth in 2014, though headwinds from potentially higher interest rates and slower residential construction may limit growth to around 2.6 per cent.

 
Interest Rate Outlook

 
With an expanding output gap and inflation trending well below its 2 per cent target, it is natural to ask if the next move by the Bank of Canada is a rate cut rather than the rate hike that almost all economists have penciled into their forecasts. Economists tend to evaluate the ‘rightness’ of monetary policy using estimated policy rules. That is, a formula for setting interest rates in a way that is consistent with the goals of the central bank. In the Bank of Canada’s case, that means stabilizing inflation around a target rate of 2 per cent. Using an interest rate rule that closely matches past Bank of Canada rate-setting behaviour, along with the most recent Bank of Canada forecast, we can see that the interest rate path that gets inflation back to 2 per cent is still consistent with the next rate move being up.

 

Besides that, the Bank is also unlikely to lower interest rates since doing so would run counter to a year of loudly exhorting households to cut back on debt. Instead, the Bank will likely continue to use forward guidance about the need, or lack thereof, for future rate hikes in order to influence long-term rates and the Canadian dollar lower. The combined effect of which should provide continued stimulus to the Canadian economy.

 

Copyright BCREA – reprinted with permission