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Mortgage Rate Outlook Panel

Our panel of mortgage experts share their views on Canadian mortgage rate trends each month by answering this question: What is your outlook for Canadian mortgage rates over the next 30-45 days?

June 2018 Overall Summary

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There seems to be contrasting opinions among the panel this month as some believe fixed rates will trend upward soon due to rising inflation, which is an indicator of our strengthening economy, in addition to the strengthening economies of other countries around the world, including the U.S.

However, bond yields have fallen slightly since last month when they were reaching record highs, and the demand for mortgages across the country is evidently slowing. In addition, there is still uncertainty in the ongoing NAFTA negotiations and trade wars have recently progressed between the U.S. and other countries, leading others to believe there will be a downward variance in fixed rates within the next month or so, if there is any variance at all.

The panel seems to believe there will be no change to variable rates in the near future. At its last meeting, the Bank of Canada decided to maintain its key interest rate it 1.25 per cent. However, some predict at least one more increase this year due to the Bank's statement following its last meeting, which made mention that higher rates may be necessary to keep inflation on target. The timing of this supposed increase is uncertain.

This Month's Panelists

Will Dunning - Chief Economist, Mortgage Professionals Canada

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To some degree, the interest rates for fixed-rate mortgages are following trends in the bond market. Over the past year, five-year Government of Canada bond yields have increased by about one per cent. Rates for five-year fixed rate mortgages have also increased, but not by much – by about three-quarters of a point. Bond yields and mortgage rates have likely increased because the Canadian economy and economies of other countries around the world are currently strengthening. The economic damage that resulted from the recession of 2008/2009 has now been reversed, and there is no longer a need for interest rates to be as low as they were.

Looking forward, the pressures leading to higher rates include the economic momentum and added stimulus from huge tax cuts within the U.S. On the other hand, the developing trade war between the Trump administration and many other countries, if not soon resolved, will do substantial economic damage.

All things considered, I expect interest rates to rise a bit more within the next six months. U.S. bond yields may rise by one-half point and Canadian yields by one-quarter point. Mortgage interest rates have not kept pace with rising bond yields, in part because housing activity has slowed. This means that demand for mortgages is also slowing rapidly, and this is forcing lenders to become more competitive. All of this said, I expect rates for fixed-rate mortgages to rise by one-quarter to one-half of a point by the end of the year.

The Bank of Canada raised its overnight rate three times over the past year by a quarter point each time, but no change was made at the three most recent meeting dates (March 7, April 18, and May 30). The most recent statement from the BoC says "higher interest rates will be warranted to keep inflation near target." But the timing of any future increase is uncertain. Recent events make it unlikely that there will be any further increases for the BoC rate during the next few months. These events include the developing trade wars, tepid data on employment in Canada (there has been almost no job creation in the past six months), and the sharp slowdown of housing activity caused by the new mortgage stress tests rules.
With a flat "base rate" from the BoC, the banks are unlikely to change their prime rates. Therefore, any changes to variable rate mortgages will depend on how much those rates are discounted by lenders. As intense competition grows between lenders, we should see minor variations in variable rates.

Dr. Ian Lee - Program Director, Carleton University

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Bond yields have fallen back slightly since peaking in late May. Moreover, the latest forecast from CREA found that "the national sales forecast has been revised downward and is now projected to decline by 11% to 459,900 units this year. The decrease almost entirely reflects weaker sales in B.C. and Ontario amid heightened housing market uncertainty, provincial policy measures, high home prices, ongoing supply shortages and this year's new mortgage stress test."

The reduced demand for mortgage funding should provide downward pressure on bond yields which suggests rates will remain unchanged or possibly experience a slight decline going forward.

Despite uncertainty over the NAFTA negotiations and the general unsettled state of trade due to the ongoing disputes between China and the U.S., the Canadian economy is still doing well. Moreover, inflation is trending upwards and could exceed the target set by the Bank of Canada.

The Federal Reserve also recently increased its rate for the second time this year while hinting at two further rate increases this year. In the words of the Bank of Canada in its most recent Financial System Review, "the Canadian economy is operating close to its potential. Labour income growth is solid, supporting households' ability to service their outstanding debt, albeit in an environment of rising global interest rates."

Finally, there is an increasing consensus among central bank observers that the Bank of Canada will raise its key benchmark rate at its next meeting on July 11.

Dan Eisner - President, True North Mortgage

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Inflation is on the rise in Canada, giving the central Bank good cause to raise prime. The recent increase of minimum wage across Canada has subsequently increased the incomes of working Canadians, while at the same time causing a jump in unemployment. But increased family incomes are pushing inflation higher. Hopefully, NAFTA negotiations don't rock the boat too much.

Canadian banks are happy with variable rate spreads at this time.

Shawn Stillman - Mortgage Broker, Mortgage Outlet Inc.

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Based on a flat May job report, a potential NAFTA implosion, and pipeline wars between Alberta and British Columbia, there is a lot of uncertainty in the market. And as such, bond yields are exactly the same as they were 90 days ago. As bond yields are down from their mid-May highs, I predict lenders will decrease their fixed rates slightly in June by 5pb or 10bp to increase deal flow.

As expected, the Bank of Canada did not change rates in May, but the statement following the decision leads many to expect an increase at the meeting in July.

Still, the U.S. decided to impose tariffs on Canadian steel and aluminum the next day and it's clear that NAFTA is on life support. So it's really anyone's guess what will happen over the next two months. Given the slowing pace of rate increases, it looks like there may only be one more this year.

Also, the big surprise in the mortgage market is that all major banks are offering prime – one per cent or better – and monolines are still offering rates as low as low at 2.16 per cent (with prime being 1.29 per cent) on insured and insurable mortgages. Thus, many consumers are taking the variable option with such deep discounts.

I still think variable rates will remain flat over the next few months until the next BoC increase – whenever that might happen.