It’s been a good week for mortgage shoppers seeking a discount – several of the big banks have chopped 10 basis points or more off their most popular fixed rate offerings. RBC led the pack, covertly discounting their five-year fixed rate to 3.69 over the weekend. Scotiabank and BMO soon followed, with TD being the latest lender to jump into the fray.
The banks are finally reacting to lower government of Canada bond yields, which have been sliding since the beginning of the month. This latest round of discounting has narrowed the gap between the larger lenders and discounted rates. For example, the lowest five-year fixed in Ontario currently sits at 3.19 per cent – just 50 basis points under RBC’s offer.
Is It Time To Lock In To Fixed Rate Mortgages?
So, should you jump into the housing market now, or wait for even better deals? While we can’t predict whether rates will slide slower, consider this: yields, which fixed rates are based on, are directly affected by global investor sentiment.
Right now, investor confidence in bonds, particularly U.S. ones, is high. They’re simultaneously buoyed by the economic improvement the U.S. is forecasted to experience this year, while assured that central rates likely won’t rise for the long term. Both these factors have investors snapping U.S. and Canadian bonds up, keeping yields low in turn. As long as this sentiment sticks around – and given the spring housing market heat up is around the corner – it wouldn’t be entirely surprising to see the banks cut their rates further in the months to come.
Bank of Canada Not Budging On Central Interest Rates
While fixed rates trend lower, the variable cost of borrowing is staying at status quo – for now. The Bank of Canada released the first interest rate announcement and Monetary Policy Report of 2014 Wednesday, keeping their rate at one per cent, where it has been since September 2010.
The Bank’s MPR did have a few bombshells, however, stating that cutting the interest rate in the future is a possibility, and that inflation won’t meet its target of two per cent until 2016.
The report cites the “recent depreciation of the Canadian dollar” as a balancing factor – as long as the Loonie dips, it’s not likely that Governor Stephen Poloz would rush to lower rates. Rather, he’s more likely to keep the measure in his tool belt for future necessities – how soon in the future depends on how quickly inflation and other growth factors get up to snuff.
Inflation Risks Gaining Importance
The failure of inflation to reach its two per cent benchmark has been a long standing theme in the Bank’s updates, but pressure is starting to build. In their report the Bank states:
“Inflation in Canada has moved further below the 2 per cent target, owing largely to significant excess supply in the economy and heightened competition in the retail sector. The path for inflation is now expected to be lower than previously anticipated for most of the projection period. The Bank expects inflation to return to the 2 per cent target in about two years, as the effects of retail competition dissipate and excess capacity is absorbed.”
What this means is inflation is suffering due to imbalances among old fashioned supply and demand. For example, Canada’s export industry, which was supposed to grow into a main economic support last year, has floundered due to weak U.S. and global participation. Now that the U.S. is showing signs of recovery (and bringing the rest of the world up with it), this situation could change – we’ll just have to wait and see.
Forget The White Picket Fence
Excess supply may be to blame for lagging inflation, but the opposite is true for some of Canada’s biggest housing markets, namely Toronto. This week RealNet Canada Inc. announced the price spread between high rise and low rise housing in the city is growing. Turns out, everyone wants a single family home with a white picket fence – but they’re literally running out of room.
Available land for building has become so limited for low rise developers, that they’re forgoing singly detached homes for townhomes or even denser housing – all at higher prices. Such searing demand has pushed RealNet’s Low Rise Price Index to $654,147 – compared to high rises at $436,564.
As a result, sales are actually dropping in the region, as buyers may be waiting out the market .Might be even more incentive to snap up one of these lower rates while they last.