Mortgage Rate Outlook Panel

While there is substantial competition among mortgage lenders, the reality is that the successive Flaherty-era tightening reforms made a substantial number of first-time buyers ineligible for a mortgage due to insufficient income or down payment (for example, shortening the amortization requires more income and equity to qualify for the forced up higher mortgage payment caused by the reduced amortization). Moreover, when we examine the five-year Canada bond rate, it is moving around in very narrow circles with no major change in either direction – up or down. This suggests rates will be unchanged for the next month.

David Rosenberg, chief economist at Gluskin Sheff, authored a fascinating analysis last week: "The Fed is 'playing with fire'", which argues both the U.S. Federal Reserve and the Bank of Canada are underestimating the resurgence of inflation in both countries. He argues markets have already experienced asset inflation, credit inflation, commodity inflation and now, finally, consumer inflation with core CPI at 2.8 per cent in Q1 2013, and core service inflation at 3.5 per cent. Rosenberg argued the Fed – and implicitly the Bank of Canada – will have to increase rates sooner if they want to ensure inflation does not become entrenched, or to use Carney's phrase, "anchored". If core inflation continues above 2 per cent for the rest of 2014, we can reasonably expect a central bank rate sooner than the oft forecast 2015 or even 2016.

Government of Canada bond yields, which correlate directly with the fixed cost of borrowing in Canada, have experienced little movement through May and June. This prolonged stability means rates lack the economic pressure to rise or fall.

Lenders are unlikely to ramp up rates as aggressive offers from credit unions are forcing all in the market to remain competitive.

Despite improving inflation metrics, the Bank of Canada has made no indication it intends to move the Prime lending rate anytime soon, and that no change will occur in the next announcement, to take place July 16

Bond yields remain very low, and interest rates for fixed rate mortgages continue to flirt with record lows. The big question is when will the "inevitable rise" begin?. We have been waiting for that "inevitable rise" since the fall of 2008. The path of interest rates depends a lot on what happens in the U.S. economy. Job creation has gotten stronger – currently at 1.8 per cent, which is healthy but far from being over-heated. The percentage of adults in the U.S. that have jobs (currently 59.0 per cent) is far below the pre-recession peak of 63.4 per cent. This means that it will be quite some time before there is a meaningful and sustained rise in interest rates. But, there will certainly be short-term gyrations.

The inflation rate has increased in Canada, to 2.3 per cent as of May, exceeding the 2 per cent target. But, there are several temporary factors and it is too soon for the Bank of Canada to increase its target interest rate (which means that there should not be any meaningful change in rates for variable rate mortgages). Those temporary factors include the impacts of a weakened Canadian dollar (which makes imported goods more expensive) as well as rising energy costs and food prices. Analysts expect it might be another year before these short term rates increase, and even then the expectations are for moderate rises (one-quarter to one-half percentage points by the end of 2015).

Bond yields have made little movement over the past four weeks, not straying from the 1.50 - 1.65 range for five-year yields. Meanwhile market conditions remain competitive with the best five-year fixed mortgage rates available below the 3 per cent threshold. However, we've yet to see rates cut to the same extent as last year, when offerings dipped as low as 2.62. per cent. Given these factors, it's not anticipated we'll see much fluctuation among fixed rates in July.

While consumer price index inflation hit its 2 per cent benchmark in June - earlier than prescribed in the Bank of Canada's April Monetary Policy Report - the central bank has stated the improvement is likely temporary. And, while economic conditions improve in the U.S. (the Fed decided this week to end their $35-billion-per-month bond buying program in October), it's not yet proven whether Canada's ready to take off the economic training wheels. It's unlikely that the BoC will announce a change to Prime in the July 16th announcement.