The State of the Residential Mortgage Market: 2021

Despite the headwinds of a global pandemic, Canadians’ interest in real estate and the resulting rise in prices took even the most seasoned experts by surprise.

This, of course, had major implications for the mortgage market.

Mortgage Professionals Canada’s Annual State of the Residential Mortgage Market in Canada report provided a detailed look at borrower behaviour and mortgage market trends in 2020. The comprehensive report, compiled by MPC’s chief economist Will Dunning, looked at everything from average mortgage rates and sources of down payments to equity takeout and mortgage preferences.

“In a normal year, about 4.5% to 5% of Canadians buy a new or existing home,” Dunning said in a release, adding that percentage could rise to 5.5% to 6% this year.

“…in proportional terms, this is a very large increase, and it is overwhelming the available supply,” he continued. “It is possible, but far from certain, that this could continue for some time – that a small rise in the percentage of Canadians who buy homes could result in sustained, very strong demand.”

We took a deep dive into the report and have extracted some of the most relevant findings by category below…

The Mortgage Market:

• 6.08 million: The number of homeowners with mortgages (out of a total of 10.01 million owner-occupied dwellings in Canada)
• 1.72 million: The number of Home Equity Line of Credit (HELOC) holders
  • This is up from 1.45 million last year
• 4.92 million: The number of tenants in Canada

Mortgage Types

• 73%: Percentage of mortgage holders with fixed-rate mortgages in 2020
  • Down from 74% in 2019
  • For mortgages on homes purchased specifically in 2020, fixed-rate mortgages were chosen 77% of the time (down from 85% of 2019 purchases)
• 22%: Percentage of mortgages that have variable or adjustable rates
  • Down from 21% in 2019
  • For mortgages taken out in 2020, 18% had variable rates (up from 12% of 2019 purchases)
• 5%: Percentage of mortgages that are combination of fixed and variable, known as “hybrid” mortgages (unchanged from 2019)
• “Early in the pandemic period, the Bank of Canada established an expectation that short–term interest rates will remain extremely low for some time. This made variable rates seem less risky. Still, a large majority of active borrowers chose the security of a fixed rate at the extremely low interest rates that were available during the year,” Dunning wrote.

Amortization Periods

• 9%: Percentage with extended amortizations of more than 25 years (unchanged from 2019)
  • However, looking specifically at mortgages taken out in 2018 or later (after the stress test on uninsured mortgages came into effect), 13% have amortizations exceeding 25 years
• 20.6 years: The average amortization period (for all mortgage holders)
  • Down from 21.2 years in 2019

Actions that Accelerate Repayment

• ~33%: Percentage of mortgage holders who voluntarily take action to shorten their amortization periods (up marginally from 32% in 2019)
• Among all mortgage holders:
  • 17% made a lump-sum payment (the average payment was $26,700—up from $19,100 a year earlier)
  • 15% increased the amount of their payment (the average amount was $470 more a month, compared to $370 in 2019)
  • 6% increased payment frequency

Mortgage Arrears

• 0.22%: The current mortgage arrears rate in Canada (as of November 2020), down slightly from 0.23% in the previous report
  • This equates to roughly 1-in-427 borrowers
• “…with exceptionally low interest rates and very strong housing markets across Canada, mortgage holders who have trouble with their payments will often be able to solve their problems by selling (a solution that is far from ideal, but is certainly preferable to losing a home due to a mortgage default),” Dunning noted.
  

Mortgage Sources

• 55%: Percentage of borrowers who took out a new mortgage in 2020 who obtained the mortgage from a Canadian bank
  • Up slightly from 54% in 2019
• 31%: Percentage of overall outstanding mortgages that were arranged by a mortgage broker
  • This rises to 40% for mortgages obtained in 2020
• 9%: Percentage of borrowers who obtained their mortgage through a credit union (vs. 3% for purchases in 2020)

Interest Rates

• 2.60%: The average mortgage interest rate in Canada in 2020
  • Down from the 3.14% average reported in 2019
• 2.32%: The average mortgage rate on homes purchased in 2020
  • Fixed rates averaged 2.37% and variables averaged 1.93%
• 2.29%: The average rate for mortgages renewed in 2020
  • 2.36% for fixed mortgages and 1.92% for variables
• 84%: The percentage of those who renewed a mortgage in 2020 who saw their mortgage rate decrease (9% saw their rate increase)
• $245,000: The average remaining principal for renewals in 2020
• 2.25%: The average actual (discounted) rate for a 5-year fixed mortgage in 2020, more than two percentage points lower than the posted rate, which averaged 4.95%

Equity

• 72.7%: The average home equity of Canadian homeowners, as a percentage of home value (nearly unchanged from 73% a year earlier)
• 1%: The percentage of mortgage-holders with less than 10% home equity (down from 2% in 2019)
• 91%: Percentage of homeowners who have 25% or more equity in their homes (up from 88%)
• 78%: Among recent buyers who bought their home from 2018 to 2021, the percentage with 25% or more equity in their homes

Equity Takeout

• 7.7%: Percentage of homeowners who took equity out of their home in the past year (down from 8.6% in 2019)
• $96,800: The average amount of equity taken out (up from $72,000 in 2019)
• $74.5 billion: The total equity takeout over the past year (up from $62 billion in 2019)
• $46.4 billion was via mortgages and $28.1 billion was via HELOCs
• The most common uses for the funds include:
  • 25%: For debt consolidation and repayment
  • 24%: For investments
  • 23%: For home renovation and repair
  • 19%: For purchases
  • 6%: For “other” purposes
• Equity takeout was most common among homeowners who purchased their home from 2010 to 2013

Sources of Down Payments

• 21%: The average down payment made by first-time buyers in recent years, as a percentage of home price
• The top sources of these down payment funds for all first-time buyers:
  • 84%: Personal savings
  • 25%: Gifts from parents or other family members (vs. 28% for purchases made over the last three years)
  • 30%: Loan from a financial institution
  • 26%: Withdrawal from RRSP
  • 14%: Loan from parents or other family members

Homeownership as “Forced Saving”

• ~57%: Approximate percentage of the first mortgage payment that goes towards principal repayment (based on current rates)
  • Up from ~47% in 2019, but down from 50% in 2017
  • In the 1980s and early 90s, less than 10% of payments were going towards principal repayment
  • “Homeownership represents a very aggressive forced saving program. As a result (and even before we consider the impact of price growth) housing equity is built very rapidly,” Dunning wrote. “But, the large amounts of forced saving that occur through homeownership are indeed a burden in terms of consumers’ cash flows, and this has impaired buying activity.”

Consumer Sentiment

• 90%: The percentage of homeowners who are happy with their decision to buy a home
• 4%: Percentage of those who regret their decision to buy a home
  • Of those who regret their decision to buy, 7% say their regret pertains to the particular property purchased

–Steve Huebl

Latest in Mortgage News: Rising Prices Spur Talk of Capital Gains Tax on Home Sales

The Globe and Mail‘s Editorial Board tread into controversial territory recently by saying Canada’s “bonkers” housing market is making the case for taxing capital gains on the sale of principal residences.

The editorial readily admits it would be the country’s “most unpopular tax,” but suggests it’s a discussion worth having due to the enormous tax-free gains being made by today’s sellers.

“No one likes taxes. But this unique hole in the tax code is big, and it encourages Canadians to sink ever more money into real estate,” the editorial reads. “Since 2000, home prices in Canada’s big cities are up 270%.”

The Department of Finance actually tracks the revenue the government is missing out on by not taxing home equity on principal residences: $7.1 billion this year alone.

“Today, the housing tax break is one whose biggest benefits flow to those with the deepest pockets,” the piece continues. “A $200,000 gain on the sale of a $300,000 home is tax free, but so is a $10-million windfall on the sale of a $15-million home.”

But the Globe readily admits the likelihood of this tax seeing the light of day is “low.”

Columnist Andrew Coyne penned a piece on the subject last July, writing: “If homeownership were not so (artificially) financially attractive, more people might choose to rent, rather than buy. The supply of rental properties would likely increase, in line with the demand…With less distinction between what you can buy and what you can rent, fewer Canadians would be induced to take on more house than they can afford for lifestyle reasons.”

That piece elicited this reaction on Twitter from former CMHC CEO Evan Siddall: “…interesting observations re: tax-free gains on housing — *NOT* under consideration, however, and [the Government of Canada] has denied any interest.”

And by the 900+ comments on the Globe‘s latest editorial—the large majority with negative reactions—it’s clear any government that would attempt to enact such taxation would face a firestorm of criticism from angry homeowners, of which two thirds of Canadians now call themselves.

But those in favour of taxing capital gains on home sales say the opposition is no reason to back down. “That doesn’t mean it’s not worth pursuing,” Coyne wrote. “As with most such proposals to take away someone’s tax break, the bigger the blowback, the better the idea.”

Canada’s Top Livable Cities Unveiled

For city dwellers looking to make their big move to a smaller and (slightly) more affordable housing market, there’s now a list of more than 150 of Canada’s most livable communities.

RATESDOTCA recently unveiled its list of the 10 Most Livable Places in 2021, based on a number of desirability factors, including positive population growth, home price growth, low mortgage costs, along with other criteria like nightlife, climate and scenic beauty.

Langford, BC, topped the list for 2021, described as “small but fast-growing,” followed by the lakefront mountain town of Kelowna, BC, and Trois-Rivières, QC. Ontario’s sole Top-10 placing was Niagara-on-the-Lake at number 6.

At number 4, Bathhurst, NB, was the top-ranked city with the lowest mortgage carrying cost, with a monthly payment of under $500.

The list was released in conjunction with a Leger survey, which found more than half (51%) of those who moved due to COVID-19 in 2020 did so to “live in an area with more nature.” Affordability was the bigger factor for 36% of respondents who said they moved to find a cheaper home.

Fixed Rates Keep on Rising

Mortgage rates have continued on their upward trajectory since we first reported on rising fixed mortgage rates a month ago.

While there are still some nationally available 5-year fixed rates (both insured and uninsured) available for under 2.00%, they’re not likely to stay there for long.

Many of the Big 6 banks have raised their rates in recent weeks, bringing their 5-year fixed conventional rates above 2.00%. Meanwhile, as lenders have been raising fixed mortgage rates, they’ve also been lowering their variable rates by small increments.

This begs the question: given the divergence in rates, would a new borrower be better to go fixed or variable? Well, it depends who you ask.

“The modest difference between fixed and variable rates doesn’t provide much incentive to float your mortgage,” notes RateSpy’s Rob McLister.

However, Dave Larock of Integrated Mortgage Planners outlined a number of reasons why he thinks longer-term deflationary pressures will persist, and why variable rates may be the better option.

“I continue to believe that, for most borrowers, variable rates are a better option than today’s fixed-rate alternatives,” he wrote.

–Steve Huebl

FOMO & Tight Housing Supply Drive Home Prices to a New Record

For the eighth straight month, Canadian home prices set a new record high in February, the Canadian Real Estate Association reported on Monday.

The average house price surged 25% from last year to a new high of $678,091, CREA’s figures show. At the same time, housing inventories continue to tighten, with just 1.8 months of inventory available—the lowest reading on record. This is the amount of time it would take to liquidate current inventories at today’s rate of sales. In Ontario, there are now 40 regional markets with less than one month of housing supply available, up from 35 markets last month.

“We are right at the start of the first undisturbed (by policy or lockdown) spring housing market in years and we also have the most extreme demand-supply imbalance ever by a large margin. So, the question is, what is going on?” CREA’s senior economist, Shaun Cathcart, said in a statement.

“I think part of it is demand that built up as a result of regulatory changes in the years leading up to COVID that is playing out now,” he added. “(And) part of it is demand that is being pulled forward from the future either in search of a home base to ride out the pandemic, or to lock down a purchase amid rapidly rising prices while securing a record low mortgage rate.”

In other words, one of the key factors helping to propel this market is FOMO, or the “fear of missing out” on getting into the housing market before prices continue to rise out of reach.

Cross-Country Round-up of Home Prices

Several communities—all within a couple hours’ drive from the Greater Toronto Area—saw prices skyrocket by more than 35%. They included Tillsonburg District (+39.7%), Woodstock-Ingersoll (+36.6%) and the Lakelands cottage country region, comprising Parry Sound, Muskoka, Haliburton and Orillia (+37.4%).

Here’s a look at some more regional and local housing market results for February:

• Ontario: $864,159 (+24.5%)
• Quebec: $418,230 (+22.5%)
• B.C.: $887,695 (+17.1%)
• Alberta: $418,403 (+8.5%)
• Halifax-Dartmouth: $450,562 (+36.9%)
• Barrie & District: $685,800 (+33.8%)
• Ottawa: $578,800 (+24.9%)
• Greater Montreal Area: $451,900 (+18.8%)
• Greater Toronto Area: $969,600 (+14.8%)
• Winnipeg: $304,400 (+12.4)
• Greater Vancouver Area: $1,084,000 (+6.8%)
• Victoria: $752,300 (+6.4%)
• Calgary: $426,600 (+3.7%)
• Edmonton: $324,300 (+3.6%)
• St. John’s: 262,200 (+2.5%)

Housing Market Predictions for 2021

In an updated forecast released on Monday, CREA says it expects about 700,000 properties to trade hands in 2021, which would be a 27% increase from the 551,262 sales in 2020. Prices are also expected to continue rising by 16.5% on an annual basis to $665,000 for the whole of 2021, and a more moderate increase of just 2% to $679,341 in 2022.

“This reflects the current unprecedented imbalance of supply and demand,” CREA said in its forecast.

RBC’s Robert Hogue agrees with CREA that prices will continue to rise over the next year or so, but suggests price growth could turn negative by the end of 2022.

“Signs of overheated market conditions of course raise the risk of a price correction down the road,” he wrote in a research note. “Our base case scenario, though, remains that prices will continue to appreciate in the year ahead, albeit at a slower and slower pace as we get closer to 2022.

Factors that will eventually cool homebuyer demand include a “creeping-up” of longer-term interest rates, deteriorating affordability, a return to working from the office and possible policy intervention, Hogue added, suggesting the stage is set for a “soft landing.”

“We think modest outright price declines could be in the cards over the medium term, perhaps by the latter stages of 2022 when interest rates rise more broadly.”

–Steve Huebl

-Dr. Sherry Cooper

-Dr.Sherry Cooper

Bank of Canada Still Sees Low Rates Until 2023; Financial Markets Disagree

The Bank of Canada delivered welcome news for variable-rate mortgage holders today when it stood by its expectation of no rate hikes until early 2023.

“We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved,” reads the BoC statement released following its rate decision. “In the Bank’s January projection, this does not happen until into 2023.”

In its decision, the Bank left its key overnight rate unchanged at 0.25%, where it’s been for the past year.

Despite the economy proving “more resilient than anticipated” during the second wave of the pandemic, resulting in a stronger near-term outlook, the Bank noted there remains “considerable economic slack and a great deal of uncertainty about the evolution of the virus and the path of economic growth.”

As a result, in addition to keeping interest rates low, the Bank said it will maintain its current bond-buying pace of at least $4 billion each week, which it says will continue until the recovery is “well underway.”

Also known as Quantitative Easing, this program has helped keep fixed mortgage rates lower than they otherwise would be. The Bank’s large-scale asset purchases keep upward pressure on bond prices, resulting in lower yields, which lead fixed mortgage rates.

The program has largely achieved its objective of keeping borrowing costs lower for households and businesses for much of the past year, but a recent surge in yields in late February has led to a sustained increase in fixed mortgage rates. Five-year fixed rates are now about 20 to 30 basis points higher than they were just weeks ago.

The Bank indicated in January that it would begin to reduce the pace of bond purchases if growth was in line with its expectations. A number of analysts have suggested that tapering could begin as early as April.

Financial Markets at Odds with BoC’s 2023 Rate-Hike Call

Despite the BoC sticking to its script that it foresees the overnight rate remaining unchanged for the next two years, financial markets see rate hikes closer on the horizon.

As of today, OIS prices tracked by Bloomberg imply about a 40% chance of a 25-bps rate hike by year-end. That could result in today’s prime rate of 2.45% rising to 2.70% and immediately boosting borrowing costs for variable-rate mortgage holders. However, markets are still largely expecting the first rate hikes to begin by mid-to-late 2022.

Bond traders see two to three BoC rate hikes by 2024, resulting in prime rate rising by 50 to 75 bps.

“That kind of monetary tightening is nothing to panic over,” writes RateSpy’s Robert McLister, noting it would be “historically modest” for a rate-hike cycle following a recession. Historically, rates have risen about 200 basis points from their lows in previous policy-tightening cycles.

He adds that those who already have a variable rate could still enjoy another full year of a near-record low prime rate, or “maybe 2+ years if you’re lucky.”

Should the BoC be Worried About Runaway Inflation?

The Bank also touched on the strong 9.6% growth in GDP recorded in the fourth quarter, adding that it now expects Q1 GDP growth to be positive rather than the contraction originally forecast.

Indeed, strong economic growth prospects have been largely responsible for the recent run-up in bond yields, which are driving fixed rates higher. The BoC warned that CPI inflation is likely to move to the top of its 1-3% target band over the next few months, but added that the expected rise “reflects base-year effects from deep price declines in some goods and services at the outset of the crisis a year ago.”

“We expect the BoC will look through a largely energy-driven increase in headline inflation in Q2, but note that risks are tilted to the upside as the economy re-opens with the potential for demand to outpace supply in some sectors,” writes Josh Nye of RBC Economics. “Our base case, though, assumes headline inflation will slip back below 2% by the end of this year and that underlying inflation won’t be sustained at the BoC’s 2% target until 2022.”

TD senior economist Sri Thanabalasingam said there are two reasons why inflationary pressures haven’t yet forced the Bank to revisit its level of monetary support through QE.

“One, a more resilient Canadian economy implies less scarring from the pandemic, which suggests growth can be stronger without becoming inflationary. This offers room for the Bank to maintain monetary stimulus at its current level,” Thanabalasingam wrote.

“Two, even while some areas of the economy are outperforming, others are struggling. Over 500,000 workers have been unemployed for 27 weeks or more, and until these Canadians find new opportunities, inflationary pressures are likely to be modest.”

–Steve Huebl

Bank of Canada Holds Policy Rate at 0.25% and Maintains QE Program At Current Pace.

Bank of Canada Holds Rates and Bond-Buying Steady

Much has changed since the Bank of Canada’s last decision on January 20. While the second pandemic wave was raging, new lockdowns were implemented in late 2020, and there were fears that the economy, in consequence, was likely to grow at a 4.8% annual rate in Q4 and contract in Q1. Instead, the lockdowns were less disruptive than feared, as Q4 growth came in at a surprisingly strong 9.6% annual rate–double the pace expected by the Bank.

Rather than a contraction in  Q1 this year, Statistics Canada’s flash estimate for January growth was 0.5% (not annualized). Strength in January came from housing, resources and government spending, and the mild weather likely helped. In today’s decision statement, the central bank acknowledged that “the economy is proving to be more resilient than anticipated to the second wave of the virus and the associated containment measures.”  The BoC now expects the economy to grow in the first quarter. “Consumers and businesses are adapting to containment measures, and housing market activity has been much stronger than expected. Improving foreign demand and higher commodity prices have also brightened the prospects for exports and business investment.”

A massive $1.9 trillion stimulus plan in the US is also about to turbocharge Canada’s largest trading partner’s economy, which will be a huge boon to the global economy and explains why commodity prices and bond yields have risen substantially in recent months. The Canadian dollar has been relatively stable against the US dollar but has appreciated against most other currencies.

Economists now expect Canada to expand at a 5.5% pace this year versus a 4% projection by the Bank of Canada in January. Going into today’s meeting, no one expected the Bank to raise the overnight policy rate, but markets were pricing in more than a 50% chance of an increase by this time next year, up from about 25% odds in January.

On the other hand, the BoC continued to emphasize the risks to the outlook and the huge degree of slack in the economy. “The labour market is a long way from recovery, with employment still well below pre-COVID levels. Low-wage workers, young people and women have borne the brunt of the job losses. The spread of more transmissible variants of the virus poses the largest downside risk to activity, as localized outbreaks and restrictions could restrain growth and add choppiness to the recovery.”

The Bank also attributed the recent rise in inflation was due to temporary factors. One year ago, many prices fell with the onslaught of the pandemic, so that year-over-year comparisons will rise for a while because of these base-year effects combined with higher gasoline prices pushed up by the recent run-up in oil prices. The Governing Council expects CPI inflation to moderate as these effects dissipate and excess capacity continues to exert downward pressure.

According to the policy statement, “While economic prospects have improved, the Governing Council judges that the recovery continues to require extraordinary monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In the Bank’s January projection, this does not happen until 2023.” The Bank will continue its QE program to reinforce this commitment and keep interest rates low across the yield curve until the recovery is well underway. As the Governing Council continues to gain confidence in the recovery’s strength, the pace of net purchases of Government of Canada bonds will be adjusted as required. The central bank will “continue to provide the appropriate monetary policy stimulus to support the recovery and achieve the inflation objective.”

Bottom Line

The Bank gave no indication when it might start to taper its bond-buying. The next decision date is on April 21, when a full economic forecast will be released in the April Monetary Policy Report. Governor Macklem is more dovish than many had expected and will err on the side of caution. When the central bank starts tapering its asset purchases, it will be the equivalent of easing off the accelerator rather than applying the brakes. The Bank of Canada has been buying a minimum of $4 billion in federal government bonds each week to help keep borrowing costs low. That pace may no longer be warranted with an outlook that appears to show the economy absorbing all excess slack by next year, ahead of the Bank of Canada’s 2023 timeline for closing the so-called output gap.

-Dr. Sherry Cooper

Mortgages Lead Credit Growth as Delinquency Rates Decline

Mortgage credit grew in the fourth quarter of 2020 as Canadian consumers took steps to reduce all other forms of debt, according to new data from TransUnion.

The credit agency’s Q4 Industry Insights Report showed mortgage credit grew 5.6% year-over-year, while the average balance of mortgage loans outstanding rose 5.7% to $292,863.

Meanwhile, new originations of unsecured credit were mostly down sharply, led by personal lines of credit (-36.9%), followed by credit cards (-35.4%), personal loans (-18%) and auto loans (-2.9%).

“The Canadian credit market remained stable as consumers have been deleveraging and many have improved their risk scores,” the report noted. “However, new lockdown restrictions to prevent future waves of COVID-19 and the winding down of deferral programs are expected to create additional stress in managing debt obligations.”

Overall, total credit growth in the quarter rose 3.7% to $68.9 billion, driven “overwhelmingly” by mortgage growth, TransUnion reported.

Credit Quality Improving as Delinquencies Remain at Historic Lows

Many have been watching delinquency rates for signs of potential stress from consumers as government relief and mortgage deferral programs mostly wound down by the end of 2020. But TransUnion’s latest data shows delinquency rates remain at record lows.

“Despite deferrals ending for a majority of consumers, delinquency rates remained lower compared to the prior year across all products,” the report reads.

Credit cards were the only form of credit to see a small rise in delinquencies, which were up 5 bps from Q3. Overall, non-mortgage delinquencies in Canada were down more than 28% year-over-year.

“We expect to see some increase in delinquency rates through 2021, especially among the most economically vulnerable consumers, but the current signs suggest that Canadians generally will be able to absorb the impact and that deferral and government support programs have been relatively effective at supporting consumers through the pandemic,” said Matthew Fabian, Director, Research and Industry Insights, in a statement. “Delinquency rates, however, are sensitive to economic events like interest rates, unemployment and income, so the long-term impact will depend significantly on how these progress through 2021.”

Mortgage Delinquencies Fall in 26 Cities

Fresh data from the Canada Mortgage and Housing Corporation and Equifax, as reported by Better Dwelling, also showed a decline in delinquency rates across a majority of major real estate markets.

Southern Ontario is currently home to the lowest delinquency rates, with Guelph reporting the lowest rate in the country at just 0.05%, down 28.6% year-over-year. Delinquency rates in the major metro areas were also down substantially in Q4:

• Toronto: 0.10% (down 9.1% year-over-year)
• Montreal: 0.20% (down 26%)
• Vancouver: 0.13% (unchanged)

–Steve Huebl

Canadian Economy Ended 2020 On An Extremely Upbeat Note.

Strong Canadian Economic Growth in Q4 and January

This morning’s Stats Canada release showed that economic growth in the final quarter of last year was a surprisingly strong 9.6% (annualized). The surge in growth in January was even more interesting, estimated at a 0.5% (not annualized) pace. If these numbers pan out, it means that Canada did not suffer a contraction during the second wave and ensuing lockdown.

The January figure is noteworthy in that retail sales plunged as nonessential stores were closed in key parts of the country as we faced surging numbers of COVID cases. The strength came from resources, housing and government spending and the mild weather likely helped.

At its last meeting in January, the Bank of Canada (BoC) estimated that Q4 growth would come in at 4.8% (half the actual 9.6% pace) and that there would be a net contraction in Q1 of this year. The strength in Q4 emanated from very hot housing, some business investment in machinery, government outlays and a resurgence in inventory accumulation. Inventory build-up is often seen as a negative sign reflecting weak consumer spending. But maybe firms were preparing for a considerable rebound in demand.

Economists on Bay Street are upwardly revising their growth forecasts for this year, and no doubt the BoC will do so again when it meets next Wednesday. Clearly, the economy has been more resilient than expected. Will that change the Bank’s assessment of the continued need for monetary stimulus? Probably not. But it will likely temper their view that the next rate hike will not be until 2023, a sentiment the BoC has asserted regularly in the past.

Market Interest Rates are Rising Almost Everywhere.

Longer-Term Yields are Rising Despite Central Bank Inaction

While central banks hold overnight rates at record lows, anchoring short-term interest rates and the prime rate, mid-to-long-term government yields have been rising since early this month. As the chart below shows, the 5-year Government of Canada bond, upon which mortgage rates are generally tethered, are currently at 0.69%, up 27 basis points since January 29th. This is the highest 5-year yield since late-March 2020.  Canadian bond yields have increased more than in the US, perhaps due to the surge in commodity prices, most notably oil, which has climbed 16.9% in just the past month, taking the year-to-date gain to 27%.

Growing government debt arising from fiscal measures to cushion the blow of the pandemic and stimulate the economy has set the stage for higher government bond yields in much of the developed world.

Inflation concerns are mounting. In a rare move, yesterday Statistics Canada revised up its estimate of core inflation–unveiled only five days ago–from 1.5% to 1.77%. The result is an inflation picture that is more elevated than reported last week, at a time when investors are becoming more worried about global price pressures. The core CPI is the Bank of Canada’s preferred measure of underlying inflation, and it has rattled markets that it now appears to be running at nearly a 1.8% year-over-year pace.

While inflation is expected to accelerate in the coming months on higher energy costs, policymakers led by Governor Tiff Macklem see little immediate threat from rising prices, even with extraordinary levels of stimulus coursing through the economy. Despite a temporary pickup early this year, the Bank of Canada doesn’t anticipate inflation will sustainably return to its 2% target until 2023. Macklem speaks in Calgary later today, and he is likely to suggest that the Canadian economy is still far from an inflationary threshold.

Keep in mind that Canada’s economy has considerable slack with unemployment rising in recent months and the lockdown continuing for at least a couple more weeks in the GTA. Moreover, Canada has fallen far beyond other countries in the vaccine rollout.

The biggest vaccination campaign in history is currently underway. More than 209 million doses have been administered across 92 countries, according to data collected by Bloomberg News. The latest pace was roughly 6.24 million doses a day. Israel has administered more than 82 doses of vaccine per 100 people, the UK is at 27.5, and the US is at 19.3. Canada, on the other hand, has administered only 4.1 doses per 100 people, now ranking 43rd in the world (see chart below).

This slow start to the rollout likely portends a longer period of economic underperformance.

Bottom Line

Some upward pressure on fixed mortgage rates might be in store, although the Big Five Banks have yet to respond, and the qualifying rate remains at 4.79%, well above contract rates. Without any prospect of near-term tightening by the Bank of Canada, variable rate mortgage rates–typically tied to the prime rate–will remain stable. But mortgage rates have moved up at some of the non-bank lenders. No question, the economy’s trajectory and interest rates will be linked to the return to the ‘new normal’ following the pandemic. Good news on the pandemic front inevitably means higher mortgage rates in 2022-23–if not sooner.

-Dr. Sherry Cooper