Spring Market Forecast and the latest rate decision from the Bank of Canada

Darcy DoyleBlog, Interest Rates, Market UpdateLeave a Comment

spring market forecast

After the Bank of Canada’s second rate announcement of 2023, the prime lending rate will remain unchanged at 6.70%.

Topics covered in Today’s Blog:

  • Summarizing Q1 of 2023
  • Historical mortgage trends to reflect on
  • Today’s rate announcement details
  • Our expectations for 2023-2024
  • Protecting yourself against interest rate risks
    • Fixed-rate Mortgage holders
    • Variable rate mortgage holders
  • Market insights from Economist Sherry Cooper
  • Spring housing market expectations
  • Happy Saint Patrick’s Day!

Our job is to help you simplify the mortgage process

As your Mortgage Professional, I understand that this past year has been particularly trying for many of you, as the economic fallout from the pandemic has impacted the housing market and mortgage industry in significant ways. However, I encourage you that there are still many opportunities and reasons to remain optimistic. In fact, as we look ahead to the coming months, there are several positive trends emerging that suggest a brighter future for the mortgage industry. From a decrease in rate hikes to new government policies aimed at supporting homeownership, there are many reasons to believe that the housing market will rebound and even thrive in the months and years ahead. 

As always, our goal is to provide you with the most up-to-date, accurate, and helpful information and advice to guide you through the complex world of mortgages. Whether you’re a first-time homebuyer, a current homeowner looking to refinance, or simply curious about the state of the housing market, we are here to help. 

So let’s try to stay positive, stay informed, and stay focused on building a brighter future together. Thanks for being here, and I look forward to continuing to serve you in all your important mortgage needs.

Helping to make informed mortgage decisions in 2023

As Canadians, we know that the decisions we make regarding our mortgages can have a significant impact on our financial future. With so much at stake, it’s important to stay informed about the latest mortgage rate forecasts and trends, so that we can make the best possible decisions for our financial well-being. 

As we move into 2023, the mortgage rate forecast is a crucial factor to consider. The choices we make about our mortgages this year could have a long-lasting impact on our finances, potentially resulting in significant savings on mortgage interest payments. 

So if you’re a homeowner or prospective homebuyer looking to make informed decisions about your mortgage, stay tuned for more insights and advice from me, your trusted mortgage professional. Together, we can navigate the complex world of mortgage financing and build a strong financial future for you and your family.

Today’s rate announcement details

Today, the Bank of Canada held the overnight rate at 4.50%, with the Bank Rate at 4.75% and the deposit rate at 4.50%. Additionally, the Bank is continuing its policy of quantitative tightening.

In January’s Monetary Policy Report (MPR), global economic developments have broadly evolved in line with expectations. Global growth is slowing, and while inflation is still high, lower energy prices have caused it to come down. The near-term outlooks for growth and inflation in the United States and Europe are both higher than expected in January, with tight labour markets and elevated core inflation persisting. China’s growth is rebounding in the first quarter, and commodity prices have evolved as expected. However, the strength of China’s recovery and Russia’s war in Ukraine remain sources of upside risk. Since January, financial conditions have tightened, and the US dollar has strengthened.

In Canada, the economic growth in the fourth quarter of 2022 was flat, which was lower than the Bank’s projection. While consumption, government spending, and net exports increased, a significant slowdown in inventory investment led to weaker-than-expected GDP. Restrictive monetary policy continues to affect household spending, and business investment has weakened due to slowing domestic and foreign demand.

The labour market in Canada remains tight, with surprisingly strong employment growth and job vacancies at elevated levels. Wages continue to grow, while productivity has declined in recent quarters. Inflation eased to 5.9% in January, primarily due to lower energy prices, durable goods, and some services. However, food and shelter prices remain high, causing continued hardship for Canadians. With weak economic growth expected for the next couple of quarters, pressures in product and labour markets are expected to ease, which should moderate wage growth and increase competitive pressures.

Overall, the latest data is in line with the Bank’s expectation that CPI inflation will come down to around 3% in the middle of this year. Measures of core inflation have ticked down but will need to come down further, as will short-term inflation expectations, to return inflation to the 2% target.

Based on recent data, the Governing Council decided to maintain the policy rate at 4½%, and quantitative tightening is complementing this restrictive stance. The Governing Council will continue to assess economic developments and the impact of past interest rate increases prepared to increase the policy rate further if needed to return inflation to the 2% target. The Bank remains committed to restoring price stability for Canadians.

Historical Trends

To forecast mortgage rates, we can look at history, specifically the financial crisis of 2008, where low-interest rates persisted for over 10 years due to low and consistent inflation. The COVID-19 pandemic led to a larger economic bailout, which caused inflation as supply chains struggled to recover, leading to long-term dependence on cheap debt. With 5 times more debt in the economy now than in the 1980s, even a small rate increase will have a larger impact. A rate increase from 0.25% to 4.50% represents a 16x increase, leading to a greater shock to the economy than in the 1980s.

On January 25, 2023, the Central Bank of Canada announced a conditional pause on increasing the prime interest rate, depending on economic activity and inflation. However, the financial markets have already factored in an additional 0.25% rate hike due to employment strength and expectations for the US to raise their rate. To gauge the current mortgage rate market, we use the Government of Canada Bond Yield, which trades in anticipation of Central Bank rate movements based on economic data. As of the end of February 2023, the Canadian Bonds market data is estimating an additional 0.25% increase in the first half of 2023 and the first Bank of Canada rate drop in early 2024, with further rate drops throughout the next year.

Let’s summarize our expectations moving forward

In summary, the slowing economy and lower inflation have led to expectations of lower mortgage interest rates in Canada. The big banks are predicting a recession in late 2023 due to decreasing consumer spending and higher costs throughout the economy. As a result, prices of many commodities have fallen, which is anti-inflationary. However, housing costs, food costs, and travel/leisure activities continue to be inflationary. The Central Bank of Canada is determined to fight inflation, which is why they have been raising interest rates to slow down the economy. This will likely be painful for many in variable rate mortgages, but low inflation is necessary for long-term low-interest rates. 

Eventually, the Central Bank will begin to lower rates again to stimulate the economy and lower mortgage interest rates. The first-rate drop is projected to occur in early 2024, but it could be sooner if the economy slows down faster than expected. Fixed mortgage rates are expected to trend lower in the later half of  2023 but will not normalize at the lowest levels seen during the COVID-19 pandemic. The expectation is that rate normalization may occur in the low to mid ‘neutral rate’ range, or in the mid 3% range for mortgage rates.

Protecting yourself against interest risks

As mortgage interest rates are on the rise, homeowners need to protect themselves from paying too much on their mortgages. While compared to last year’s rate environment, there is no good low rate to lock into currently, homeowners can take a calculated approach to position themselves to benefit from lower rates once they begin to fall. 

For those with a fixed-rate mortgage

The Central Bank says prime rates may drop by 2024. To reduce interest rate risk, consider a short 2-3 year fixed mortgage rate. Although a 5-year rate is traditionally safer, a shorter term could be better for rate drops. Homeowners with a 5.4% locked rate won’t see upside potential for 3 years. A homeowner who opts for a 3-year fixed term can renew at a lower rate if rates drop by 1% or more. This is better compared to remaining locked into a higher 5-year fixed term for another 2 years.

For those with a variable rate mortgage

Consider a variable rate strategy only if you intend to sell the property or can pay large sums soon and have a higher risk tolerance. As we approach the end of one of the most significant rate increase cycles in history, the variable rate should stabilize by the end of 2024, but there is still some risk that inflation will continue to be persistent and could increase. Once the decreasing rate begins to fall, perhaps in late 2023 or early 2024, variable rate holders will benefit immediately. This “lower rate sooner” potential could lead to more savings than locking in even a shorter-term fixed rate. 

Historical data from a York University study on Canadian interest rates indicates that variable rates are likely to lead to more significant savings over the medium to long term. However, as variable rates are currently higher, it may take a thicker skin to realize these savings over the next 1-3 years. 

As always, it all depends…

In conclusion, while there is no perfect strategy for reducing interest rate risk, homeowners can choose between a fixed or variable rate mortgage. Those who prefer security and predictability in their payments may opt for a shorter-term fixed rate, while those willing to take on more risk and potentially see higher savings, in the long run, may choose a variable rate. It is essential to assess individual financial situations and goals before making a decision.

Economic Insights from Dr. Sherry Cooper

The Bank of Canada was the first major central bank to hit the pause button on rate hikes in late January. Given the slowdown in inflation in the recently released January CPI, The Bank of Canada will refrain from hiking interest rates this month. 

Homeowners with adjustable-rate mortgages can breathe a sigh of relief as the Bank of Canada has signalled a pause in its interest rate hikes. This is particularly good news for those whose rates have increased by 425 basis points in less than a year. However, variable-rate mortgage holders with a fixed payment who bought in the past couple of years have largely hit their trigger points. Although their monthly payments have not increased, they may not be covering the higher interest costs, which is causing their principal outstanding to rise. It is unclear how lenders will handle this when it comes time to renew. Meanwhile, the housing market has seen a significant decline in housing starts, and bank earnings are under pressure due to higher taxes and capital requirements. 

Despite these challenges, the labour market remains robust, with record-low unemployment rates and high job vacancies, which has helped boost consumer spending. The central bank will probably not cut rates this year as inflation falls. Rates are expected to drop only in 2024. A mild contraction is projected for the Canadian economy in Q2-Q3 2023, one quarter later than what the Bank of Canada projected. Inflation is likely to be higher in the next decade, particularly with the reduction in globalization and on-shoring.

Spring Market Forecast

According to the Canadian Real Estate Association, the Spring market is anticipating a drop in home prices edging down approximately 6% from 2022, putting the average home price at $662,103 in 2023. The downward trend stems from rising interest rates and continued uncertainty in the marketplace.

In some cases, sellers have taken their homes off the market in the hopes that prices will rise again; meanwhile, potential buyers are biding their time for interest rates to drop. Due to this, home prices may continue to see reductions throughout 2023, while interest rates are not expected to drop until 2024. While not a particularly buyer-heavy market, there are still individuals who will be looking to make a move, upgrade/downgrade or simply relocate. For those households who think they are on the purchasing end of the Spring market this season, here are five signs from Home Trust to know if you’re ready: 

  1. Your income is stable: 

For most first-time home buyers, purchasing a house indicates that you can make regular payments to service a mortgage. Accordingly, you should make sure you have a secure and steady flow of income to make these payments over the length of your home loan period. Alternative lenders like Home Trust are willing to listen to the unique financial situations of many self-employed Canadians who may also have stable incomes, rather than only requiring a full-time job as a measure of stability.

  1. You are ready with your down payment: 

Having enough money on hand for a down payment is important because the amount will impact the type of house you can buy, the amount you need to borrow and the range of financing options you qualify for.

  1. You found an area you can grow in: 

Buying a house means putting down roots, so you need to make sure that you can buy a house in an area that suits your needs and lifestyle. You should also be able to envision yourself living in that area over the next five to 10 years.

  1. You feel comfortable managing your debt: 

Paying for a house involves having the discipline and commitment to stick to a budget. Take some time to track your spending habits over a couple of months to find out if you are comfortable setting aside roughly 30% of your income to pay for your mortgage debt.

  1. You have an emergency fund on hand: 

Owning a home means that unexpected home maintenance expenses, such as plumbing and electrical repairs, could eat into your budget. So having an emergency fund on hand to cover six months’ worth of expenses will allow you to cover these unforeseen costs. 

If you feel that these signs point to ‘yes’ or you have more questions about purchasing (or selling) a home this Spring, don’t hesitate to reach out to me directly for expert mortgage advice!

Give your Mortgage Professional a Call Today

Understanding all the recent rate increases can be challenging. It may feel as if finding a solution to your current situation can be difficult. There are many individual factors that will affect your mortgage. If you would like to schedule a consultation, or simply want to give us a call, we are happy to help in any way we can. Even if it’s to provide a little peace of mind during these complicated times. 

Contact Darcy Doyle at the Mortgage Professionals today by calling 604-889-7343 or send us an email at darcy@themortgageprofessionals.ca

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Read some of our other blogs:

canadian spring market forecast and bank of canadas rate announcement

Happy Saint Patrick’s Day

Saint Patrick’s Day is celebrated on March 17th, but many people in North America may not know why. The holiday originated as a Christian feast day honouring Saint Patrick, the patron saint of Ireland. Legend has it that Saint Patrick drove all the snakes out of Ireland and used the shamrock to explain the Holy Trinity to the Irish people. Today, Saint Patrick’s Day is celebrated around the world, but the largest celebrations take place in North America. In fact, the first Saint Patrick’s Day parade was held in Boston in 1737, and New York City now hosts the largest Saint Patrick’s Day parade in the world, with over 2 million spectators. 

Fun facts: 

  • Saint Patrick was actually born in Britain, not Ireland, and was kidnapped by pirates at the age of 16 and taken to Ireland as a slave.
  • The colour originally associated with Saint Patrick was blue, not green. The switch to green happened in the 19th century when green became a symbol of Ireland and Irish nationalism.

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