Mortgage Rate Forecast 2010

BRITISH COLUMBIA REAL ESTATE ASSOCIATION

MORTGAGE RATE FORECAST
ECONOMICS SEPTEMBER 2009

MORTGAGE RATES TO MOVE HIGHER THROUGH 2010

Prospective homebuyers took advantage of historically low mortgage rates through the summer months, fuelling a rebound in housing activity in BC and across Canada. The BC Real Estate Associations (BCREA) expects a low interest rate environment to persist through 2009 and into 2010. Mortgage rates are forecast
to fluctuate within a narrow range near current levels for the remainder of the year, before rising modestly through 2010 as the economy improves.

Declining interest rates since late 2008 have been the product of the worldwide economic downturn which led to a global coordinated effort to mitigate further damage through fiscal and monetary stimulus. The resulting cuts to short-term central bank interest rates, when combined with continued economic
weakness, higher investor risk aversion and lower expectations of inflation lowered bond market yields and contributed to declines in bank administered interest rates for products such as mortgages.

Precluding discounts offered by lenders to clients with preferred credit histories, posted mortgage have settled at decades-low levels during the last few months.The borrowing cost on a fixed-rate one-year term mortgage remained stable at a record low of 3.75 per cent in August, after declining 320 basis points (bps) from August 2008 to June 2009. In contrast, the fixed-rate 5-year term mortgage rate gradually edged up to 5.85 per cent in June after declining to an April low of 5.25 per cent (Fig.1). Despite this increase, the rate remains near record lows and continues to support home-ownership demand.

BCREA’s outlook reflects continued monetary stimulus from the Bank of Canada (BoC). On September 10, the BoC reiterated its conditional commitment to anchor its policy interest rate at 0.25 per cent until the end of the second quarter of 2010. This will keep borrowing costs on variable rate mortgages flat until the second half of 2010. A gradual 1 percentage point increase is forecast for the latter half of next year as prime rates rise to meet BoC’s rate hikes. Fixed-rate term mortgage rates, which move closely with bond yields and deposit rates of similar maturity will likely edge up later this year and next. These increases are expected to be modest as the stronger Canadian dollar and weaker labour market temper inflation expectations despite signs of economic growth. This will moderate upward pressure on borrowing
costs for fixed-rate term mortgages.

The Recovery Stage

Recent data suggests that Canada’s economy is emerging from recession. Despite a 3 per cent annualized contraction in the second quarter, there was a sliver of economic growth recorded in the month of June. This marked the first monthly expansion in real economic activity since July 2008 and suggests a technical end to the Canadian recession.

The massive government response to the financial crisis appears to be working. Public spending initiatives and low interest rates have fast-tracked public infrastructure projects and fuelled an uptick in consumer spending. Retail activity, while down 4 per cent yearover-year, is trending higher after sharp declines in 2008, due in large part to increased vehicle sales. Meanwhile, industries related to the residential real estate market such as insurance and finance have benefitted from rebound in home sales. Other factors such as a rebound in commodity prices and an improvement in global financial conditions are also supporting domestic demand in Canada.

Despite signs of economic growth and recovery, continued excess capacity in the economy will limit upward pressure on interest rates as inflation operates closer to the lower bound of the BoC’s 1-3 per cent target. July headline inflation fell below zero for the second consecutive month, primarily due to year-overyear energy prices declines. Core inflation, which excludes volatile components like energy, remained stable near 1.8 per cent. Headline inflation is expected to revert to 1-1.5 per cent in coming months, but labour market concerns and excess capacity will limit inflation pressure and interest rate hikes.

While the labour market has shown signs of stability, employment continues to edge lower. The national unemployment rate climbed to 8.7 per cent in August, the highest since January 1998. With unemployment not expected to peak until early 2010 and stagnant or declining wages, growth in domestic demand and inflation will be modest.

The BoC will begin to reverse some of its monetary stimulus as the economic recovery progresses. BCREA forecasts a rise in the BoC overnight rate to a still very low 1.25 per cent during the second half of 2010, with further increases in 2011. Nonetheless, interest rate hikes will be gradual as the BoC attempts to normalize rates amidst a fragile economic recovery and a higher Canadian dollar. A prolonged economic recovery, dampened inflationary expectations and relatively low short-term rates will mean a continuation of low mortgage rates for homebuyers over the next year.

Cameron Muir, Chief Economist 
Bryan Yu, Economist

The information contained in this report has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does the British Columbia Real Estate Association assume any responsibility or liability.