Making Sense of the Mortgage Market
As you can see from the chart below, Canadian residential real estate has grown steadily for many years. There was that frustrating plateau from 2016 to mid-2020, but it was followed by a pandemic boom and mini-bust that puts it right back on trend!
Another thing we can see, especially in more recent years, is how responsive home prices are to interest rates. Historically unprecedented stimulus in response to the pandemic forced mortgage rates down in mid-2020, creating a corresponding boom in prices. The Bank of Canada's more recent attempts to reduce inflation by raising interest rates have reduced prices a bit.
We can observe two things from all this.
First, home prices are highly sensitive to mortgage rates. When rates have gone down, home prices have gone up. When rates have gone up a lot, home prices have gone down a little!
Second, even though the Bank of Canada has not begun to reduce interest rates, investors have determined the slowing economy will demand lower rates.
Historically, five-year fixed mortgage rates tend to be around 1.5% higher than the five-year Canada bond yield, give or take .5%. As you can see from the chart below, courtesy of Canadian Mortgage Trends, the Bond is yielding around 3% now. Current five-year fixed mortgage rates are around 4.54% today.
What does it all mean?
Fixed Mortgage rates are likely headed down. Lower rates are already making mortgage payments more affordable and putting a floor under home prices for the moment. Current 5-year fixed CMHC-insured mortgage rates are around 4.5%.
Variable rate mortgages, which are highly sensitive to the Bank of Canada rate (4.5% at the moment), are around Prime -.9%. The prime rate is currently 6.7% -.9%= 5.8%. The bank rate and prime rate will likely fall dramatically by this time next year, but variable mortgage rates currently remain brutally high and unattractive.
The consensus outlook is for fixed and variable rates to come down sharply by this time next year. If they do not, we are likely to have a serious recession, which may even be unavoidable at this point. This is something to consider if your job security is at all shaky.
What should mortgage borrowers do?
2022 has reminded us that - it's never truly clear! But three-year fixed rates - just under 5% - are generally the most attractive to me at this point. They are almost as low as the 5-year fixed rates but will allow one to access the mortgage market when I believe rates will be lower.
What should Home Buyers do now?
As you can reconnoitre from the charts above, home prices move with the affordability of mortgage payments. As fixed mortgage rates are already coming down, home prices are no longer falling. Home prices could fall further if there is a deep recession, but that is speculation at this point. So I would simply buy a house you can afford at the current rates. If the rates fall further, your next mortgage renewal will be a pleasant surprise. I would not wait for home prices to fall. That said, you may be able to qualify for a larger mortgage this time next year if you need more house than you can qualify for. It's usually safer to buy a place you are happy to keep for some time.
Let's review your mortgage options!