Canadian mortgage rates have, more or less, held steady
in the second quarter after trending surprisingly downward to start the year.
The 5-year fixed rate, the qualifying rate for all insured mortgages, remains
at 4.64 per cent, the lowest level on record. Key bond yields, from which
mortgage rates are priced, have risen from their own record-low levels;
however, those increases have yet to nudge mortgage rates higher and are
unlikely to do so during the important spring/summer home-buying season.
With the Canadian economy unexpectedly contracting in the
first quarter, due to last year’s dramatic decline in oil prices and the
associated downtrend in CPI inflation, there is very little upward pressure on
borrowing rates.
Given the current state of the Canadian economy, perhaps the
most immediate threat to the current low-rate environment is the prospect of
tighter monetary policy from the US Federal Reserve (Fed). After being
effectively cut to zero during the financial crisis of 2008, the Fed’s
overnight target rate has been kept at that level for the past seven years. Fed
Governor Janet Yellen and other key members of the Federal Open Market
Committee have indicated an intention to begin increasing rates this year.
However, there are many reasons to believe that the Fed will not, or at least,
should not, raise rates this year. The US economy contracted in the first
quarter, although there is argument over the cause. Some analysts attribute the
decline to more severe than expected weather and labour disruptions, while
others see a technical problem with how statistical agencies in the US are
seasonally adjusting the data.
Whatever the cause, it is clear that the US
economy is not currently performing at the level many expected it would in
2015. While the job market continues to post solid employment gains and the US
unemployment rate is sharply lower, neither wage nor inflation have responded
as expected to tighter labour markets. Add in a dose of uncertainty from
seemingly endless debt negotiations in Europe, and there is a strong case for
the Fed to hold off on raising rates this year.
Even so, we have built into our
forecast some modest uplift in long-term bond yields this year which could
translate to a moderate rise in mortgage rates. We forecast that the five-year
fixed rate will end the year at 4.79 per cent while the 1-year rate will remain
at 2.85 per cent.
Economic Outlook
The Canadian economy contracted 0.6 per cent
in the first quarter, a much worse outcome than the Bank of Canada’s
pessimistic prediction of zero growth. Naturally, a negative quarter begs the
question of whether or not Canada is in a recession, the standard definition
being two consecutive quarters of negative growth. With one down quarter
already on the books and parts of the economy still reeling from low oil
prices, it is possible that the Canadian economy could experience a brief and
shallow recession this year.
More importantly, Canada is a diverse economy and the
negative oil shock has not had symmetric impacts across the country. Consumer
spending in non-oil producing regions remains very strong and housing markets
in Ontario and BC are on pace to post multi-year highs in sales. In contrast,
oil-producing regions of the country have been facing the brunt of the oil
shock via lower exports, business investment and wages. We forecast that the
Canadian economy will ultimately avoid a technical recession in 2015; with
growth of close to 1 per cent in the second quarter before accelerating to 2.5
per cent in the second half of the year. For 2015 as a whole, growth is likely
to register about 1.5 per cent. Interest Rate Outlook The Bank of Canada has
kept its target for the overnight rate unchanged at its past three interest
rate decision since surprising markets with a rate cut in January.
With oil prices stabilizing and core inflation firming
around its 2 per cent target, a further loosening of monetary policy is
becoming more unlikely, although a worse than expected first quarter has
prompted renewed speculation of further interest rate cuts. However, if
economic growth recovers over the next couple of quarters in-line with the
Bank’s forecasts, attention will shift once again to the timing of future rate
increases. While the door is certainly open for a further reduction in the
Bank’s overnight rate, ultimately, we predict that the Bank will opt to remain
on hold for the rest of the year. While the first quarter was significantly
worse than expected, there is little that the central bank can do to combat the
primary factors dragging the economy down at the start of the year: low oil
prices and unanticipated sputtering of the US economy. Rather, we believe that
the Bank will continue to pin its hopes on continuing stability in global oil
prices and a second half US economic recovery spurring Canadian exports.
Copyright BCREA – Reprinted with Permission
