Mortgage rates lowest in history
Canadian mortgages rates are at a record low, but should potential home buyers lock in rates now or will rates go any lower?
Rates will go lower — but not by much, is the answer from several analysts who cite Bank of Canada’s policy, competition among lenders, seasonal factors and the pandemic’s economic impact.
Canada’s central bank slashed the benchmark interest rate by 0.5 per cent on three separate occasions in March to bring them down to 0.25 per cent. Government of Canada five-year bond yields fell to 0.41 per cent in Aug. from 1.64 per cent last Dec.
Both measures affect how mortgage rates are set. By June most major banks and mortgage brokers were offering five-year fixed-rate loans at less than two per cent. A rate of 1.64 per cent a year can be found on Ratehub, a Toronto-based personal finance website co-founded by James Laird.
“It seems absurd because we are way lower than the previous record which was 2.09 per cent during the oil crisis in 2017,” Laird said by phone. “Lenders compete with each other and sometimes that causes the margin in lending to shrink, which causes lower mortgage rates.”
That competition to snag buyers rushing to take advantage of the cheapest loans ever combined with pent-up demand after the pandemic limited new sales listings in the spring has led to a competitive mortgage market. The lack of supply also accelerated house prices in most markets across Canada, except the Prairies, where oil industry woes and oversupply contributed to price declines.
The Canada Mortgage and Housing Corp., the country’s largest public mortgage provider, forecasts that house prices could fall by doubledigits early next year as the pandemic continues to weigh.
Other analysts predict price deceleration — though not as steep as predicted by some — and more likely in condos than houses. But they says borrowing costs won’t increase appreciably until after a solid economic recovery is well under way. When that happens depends on the strength of the expected second pandemic wave due this winter and when a vaccine becomes widely available.
The fall in the annual inflation rate to 0.1 per cent in August from 2.4 per cent in January has also helped keep interest rates positive in real terms and the central bank is unlikely to let them go negative, according to Benjamin Tal, deputy chief economist at The Canadian Imperial Bank of Commerce.
“As we enter the winter days, I think the economic activity will slow down and that usually leads to lower interest rates,” Tal said by phone. “If you look at the Bank of Canada buying in the bond market, they are starting to focus more and more on the two- to five-year rate and they are actually selling 10- and 30-years (bonds). They are reducing their involvement in the long end of the curve and keeping their involvement in the two- to five- years which means they are putting some downward pressure on this segment of the curve.” “These two reasons suggest that we might see some moderate pressure to lower interest rates.”
Other analysts say it’s unlikely the Bank of Canada will further cut interest rates — unless something even more calamitous happens to the economy — as it’s already said a few times that 0.25 per cent is as low as it wants to go. Still, the pandemic’s cull of part- time and wage earning jobs is depressing rents and condo prices in urban cores. At the same time, work-from-home arrangements are boosting cottage- area prices and prompting an exodus from high-density urban centres.
“What COVID has done to housing demand is shift it a lot to low- rise and single-detached homes,” Robert Hogue, senior economist at RBC Royal Bank focusing on the housing market, said by phone. “Single- detached homes will be more resilient that what CMHC has been talking about.”
Demand is also affected by the lack of immigration this year, which usually stands about 300,000 annually. And tourism’s decline is putting more Airbnb units back on the market as longterm rentals. Still, Hogue says the housing market has been much more vibrant than what the bank expected.
“When you look at how tight markets are across Canada — there are exceptions out there, especially in Alberta, for example, — it’s hard to imagine that prices will start declining in very short order,” Hogue said. “There is probably momentum that will carry for a number of months.”
As for the potential of borrowing rates to sink further: “They’re incredibly low. I never thought I’d see this in my lifetime, but here we are,” the economist said.
“We’re getting pretty close to zero, but what I’ve learned over the last decade is ‘ never say never.’”