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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?

May 2018 Overall Summary

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This month, the panel is in agreeance that there will soon be an increase in fixed rates for numerous reasons. Five-year government bond yields are now trading at their highest since 2011 (around 2.17 per cent at the time of posting). The April job report also came back positive as employment rates stay steady, and a potential NAFTA settlement may be on the horizon.

But more importantly, as of May 1, three of Canada's five largest banks have increased their benchmark rates again. The Canadian Imperial Bank of Commerce (CIBC), the Royal Bank of Canada (RBC) and Toronto Dominion Bank (TD) now have their five-year fixed-rate mortgages posted at over five per cent. While CIBC's rate now sits at 5.14 per cent, RBC's rate is posted at 5.34 per cent and TD's rate is now 5.59 per cent – its biggest hike in years.

At its April announcement, the Bank of Canada once again announced that it will maintain its key interest rate at 1.25 per cent. The Bank says it will continue to monitor the effects of the past three rate hikes on the economy, and cites weaker mortgage demand and weakening exports as reasons for the stay. Although the economy seems to be performing close to capacity, growth was slower than expected over the past few weeks, according to the BoC.

As such, it seems like variable rates will remain flat over the next few months. While many forecasters expected a rate hike at the next announcement (May 30), this is seeming less likely.

This Month's Panelists

Will Dunning - Chief Economist, Mortgage Professionals Canada

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In looking at the economy, my go-to statistic is the "employment-to-population ratio" – the percentage of adults who have jobs in the country. And, for an even deeper dive, I look at the data for the so-called "prime working age group", which is 25 to 54 years. Prior to the great recession of 2008/2009, the ratio for the prime age group peaked at 82.5 per cent. During the recession, the rate fell to 80 per cent. Since then, it gradually recovered. By the end of last year, it had returned to the peak level. This tells me that the Canadian economy is essentially at "full-employment."

The stronger, tighter economy has caused interest rates to rise in Canada (and even more so in the U.S.). In Canada, the yield for five-year government bonds has recently been in the range of 2.1 to 2.2 per cent, which is a substantial rise from the average of 0.79 per cent seen during 2015 and 2016. In theory, the higher interest rates should be reducing economic pressures, but reckless economic policies in the U.S. (tax cuts and spending increases) are providing further stimulus. This will create more pressure for interest rates to rise. I expect that during the next six months, U.S. bond yields will 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, and this is forcing lenders to become more competitive. All of this said, I expect that during the remainder of this year, rates for fixed rate mortgages may rise by one-quarter to one-half of a point.

Over the past year, the Bank of Canada raised its overnight rate three times, by a quarter point each time. But no change was made at the most recent meeting. The BoC is in a wait-and-see stance. The caution is related to uncertainty about the housing market, the impact of the past income rate hikes on the economy, and trade policy developments – meaning fears that the Trump government may terminate the North American Free Trade Agreement (NAFTA).

Most economists continue to expect there will be one or two more increases to the policy rate this year. Under current conditions, I expect that job creation in Canada will be in-line (or slightly below) population growth. That being said, I also expect the employment-to-population ratio to stay at the "speed limit." Therefore, I don't expect inflation pressures to increase in Canada, and the BoC will probably hold the overnight rate at its current level for some time.

Dan Eisner - President, True North Mortgage

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Bond yields have been trading at their highest point since mid 2011. Although we have seen five-year fixed rates move up lately, we may see more rate increases coming (unless U.S. President Trump tweets something negative about trade, NAFTA, Canada, etc.).

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

Shawn Stillman - Mortgage Broker, Mortgage Outlet Inc.

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There are currently a lot of uncertainties in the market due to a multitude of things such as the April job report, a potential NAFTA settlement, and pipeline wars between Alberta and British Columbia. As such, bond yields have remained flat (though at high levels) over the past 30 days. However, most monoline lenders also increased their mortgage rates by 10bp recently. Even though TD, CIBC and RBC raised posted rates this week, I don't see the discounted fixed rates changing much over the next few weeks.

It should be noted, though, that this increase in posted rates will cause the qualifying Bank of Canada rate to increase from 5.14 per cent to 5.59 per cent, which will reduce the amount people can borrow going forward.

The Bank of Canada announced on April 18 that the overnight rate would remain at 1.25 per cent. With inflation at two per cent and the economy picking up, the chance of a rate increase over the next two months is a coin flip. Given the slowing pace of rate increases it looks like the chances of us seeing prime over four per cent in 2018 are less likely. The big surprise in the mortgage market is that there are many monoline lenders offering prime – one per cent or better on insured and insurable mortgages, with rates as low at 2.16 per cent (with prime at 1.29 per cent), many consumers are taking the variable option with such deep discounts. I still see variable rates flat over the next few months until the next BoC increase... whenever that may happen. With an increase in inflation and flat job numbers there, is only a 50 per cent chance the BoC will increase rates over the next few months. Given these factors, I don't see any major changes over the next few weeks.

Dr. Ian Lee - Program Director, Carleton University

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As of May 1, three of Canada's five largest banks have increased their five-year fixed mortgage rates to just above five per cent. These increases mirror the steady increase in the yield on five-year Canada bonds which increased from around 1.5 per cent back in November to over two per cent today. The last time we expected these levels in bond yields in Canada was in 2011, reflecting an economy operating close to capacity per Bank of Canada Governor Poloz's recent comments.

On April 18, the Bank of Canada announced it was holding rates steady. The proximate cause was weaker mortgage demand and weakening exports. Nonetheless, the key sentence in the Bank's announcement was, "...both exports and investment are being held back by ongoing competitiveness challenges and uncertainty about trade policies." Although the economy is performing at close to capacity, this resulted in "slower than expected growth" as Poloz explained to the House of Commons Finance Committee. For these reasons, it appears less likely the BoC will raise rates on the next scheduled announcement (May 30).