Mortgage Rate Update – Down For The Count?
June 7, 2023
Mortgage Rate Update – What Goes Up, Surely Must Come Down?
September 6, 2023
The Bank of Canada ( BOC ) Governor Tiff Mackelm ( Tiff ) raised the lending rate by 25bps today, making prime 7.20% at most of the major lenders, a level not seen since 2001.
We are now on the 10th rate increase since March 2022, and Canadians are beginning to feel that maybe the light at the end of the tunnel is actually a freight train hurtling toward them.
When will inflation die off, and Tiff get to stand one foot on his slayed opponent, chest out, head high and proud? According to our esteemed Governor, the dawn of an inflation free day is near. Hopefully, today’s rate increase will ensure its arrival – sooner rather than later.
Here are some key (optimistic) points from today’s meeting:
- China’s economy is slowing – namely, its exports.
- Translation – Businesses are slowing inventories because they see the signs of demand slowing
- Oil prices are down
- this points to a slowing economy, especially given the ongoing Ukraine situation and OPEC tightening the tap
- Euro area growth has stalled
- We’ll likely see the numbers drop further once all of us “Yanks” have finished our European vacations.
- Canadian inflation eased in May
- US inflation numbers came in lower this morning ( not a part of today’s BOC meeting, but important because concern on US inflation was mentioned in the 2nd paragraph of today’s release
So with all this optimistic economic data referenced by Tiff, why did he raise rates? These are the key points:
- Immigration:
- New Canadians are helping to solve our labour shortage problems but, they are buying all the things they left behind in their other country because it’s too expensive to move it here.
- Service Sector:
- This is the fire that Tiff can’t seem to put out. However, my feeling is this last increase will do the trick. When budgets get tight, we tend to go for simpler pleasures and put a pin in the big ticket items. However when things get really tight, people will turn off the “experience” tap and hunker down. My feeling is that come September, the belt is going to get tightened on the family budget – BIG TIME
And that’s all Tiff had…which suggests he is trying to douse the final embers of inflation vs dealing with a re-ignition of a previous fire.
So where does that leave real estate and mortgage rates?
Let’s talk about real estate first because I think there is a window of opportunity.
Right now, there is an all time low inventory of homes for sale. Couple that with most builders putting projects on hold, and we have the makings of a strong base under current home prices. In fact, we are seeing multiple offers for quality homes.
What about the buyers?
They are piling up and waiting for rates to come down. Our team is now at a higher than average level of pre-approvals for this time of year. Given where rates are, that is extraordinary. Once there is a clear downward trend in rates, buyers will likely be coming off the sidelines and into the market.
So where is the opportunity if there is limited inventory?
In the North Shore, fixer-upper. Homes requiring work are languishing on the market due to higher renovation costs. However, if you can find the right home and get it at the right price, you’ll more than offset the higher reno costs AND you’ll have a home that is truly your own. How do you come up with the down payment AND do a renovation? We have access to a product that can help you tie the renovation cost into your mortgage at the time of purchase. This means you only need to come up with 20% of the money to put your personal touch on that diamond in the rough.
What about mortgage rates? Will they go higher?
If you’ve followed my updates, you’ll probably feel my April update was overly optimistic. I’ll give you that. I got caught by what technical analysts call a “false bottom,” meaning we saw the first signs of improvement, but all the economic forces hadn’t yet come into alignment. But my view is more out on the horizon than off the ship’s bow, and we see more positive economic signs each day. Here are just a few:
- The Nasdaq 100 is up 3,000 points since March – this is a classic leading indicator of a lower interest rate environment is on the way.
- Cost of funds is down 0.14% on the positive US inflation data.
- Supply chain issues are back to normal. Waiting 6 months for an item seems like a distant memory.
- Inflation is steady. Not an ideal scenario at mid 3%, but as I mentioned above, once the “Summer of Fun” is over, I expect we’ll see this number drop sooner.
- Banks are lightening fast to price in any increase out of fear of making the same mistakes as last year. From April to now rates have moved up by 70bps on average for a 5 year term and 90bps for the 3 year term. The banks now have a massive inflation buffer built into their pricing to protect themselves. Once we see some consistency in the downward direction in the inflation figures, they will shed this excess pricing fairly quickly, just like we saw in March of this year.
When will things start moving in the right direction?
The next six months will set the stage for what the next 12 months look like. Consumer spending is the “one domino” that needs to fall. If that comes in lower, that will give Tiff the comfort he’s been seeking to confirm his efforts over the past year are taking hold. The inflation report that comes out on August 15th will be the one that decides if we are going to start seeing rates make their descent from their current lofty highs down to more reasonable levels.
Hopefully, by the September 6th BOC meeting, that freight train barreling at us will be stopped, and we’ll be able to see the light at the end of the tunnel behind it.
Stay tuned for a series of posts over the coming weeks on how to strategize your mortgage in this high-rate environment.
The next Bank of Canada meeting is September 6th, 2023
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