Mortgage update

Yesterday the Bank of Canada decided NOT to increase rates. Why am I not surprised? And how surprised will I be if they choose to continue down the path of increasing them in 2019 as everyone widely predicted only a short time ago?

First let’s talk about why I’m not surprised.

We have seen a 1.25% increase in Prime rate, or, 5 times at .25 (the typical rule of thumb is Bank of Canada increases rates at .25 clips each time, only once in my career has it happened at a .50% clip). 1.25% increase in the past 15 months after not seeing any increases over the past 7 years is an accelerated move. Why did it happen? The Bank of Canada says/said “Our economy is on fire, we need to keep inflation in check, and get back to a neutral rate”. Part of the rationale surely has to do with the housing market. I always said that the best way to control housing is via rising rates. The harder and more expensive it is for borrowers, the more difficult time they will have borrowing therefore housing will slow down.

And, it worked. It, along with the B20/21 stress tests definitely put a damper on our sales numbers and prices, coupled with a maniacal Spring of 2017 and foreign buying policy changes, and voila. Things are “treading water” and “back to normal”.

Now that you know what happened, let’s talk about what is happening.

1. Oil. Oil is contracting and it’s going to cause a contracting in our already-weakening economy.

2. Wage growth is slowing. This is a very important metric the BoC uses to determine the movement of rates. Sure, we might see a very low unemployment rate but digging deeper into the numbers we’ll see some of those jobs are seasonal, contract, and part-time. Wage growth has to keep up in order for average Canadians to afford higher rates.

3. The overall economy is showing signs of weakness.

These three factors above are the reasons why the Bank of Canada did a 180-degree turn this morning in the language they used when dictating the present, and, future movement of rates.

Well, we all know that people should not decide if to buy a house ONLY based on interest rates, but, unfortunately, this is one reason people use to justify their actions. This does not mean the BoC will suddenly stop increasing rates but it has given them very good reason for pause. I STILL think we’ll see at least 2 more increases by the end of 2019 but even that now is possibly going to change. However for now we will have a pause in rate chatter and hopefully a more positive consumer outlook to end the year.

FIXED RATES are also expected to (OMG!) DROP. Why? Simple. The #1 way to predict movement of fixed rates is to see what’s happening in the bond market: