Quick Chicken Little, the sky is falling!
That’s my synopsis of the latest Organization for Economic Co-Operation and Development forecast regarding when mortgage rates will begin to climb in Canada.
Much like the fable, the OECD keeps pointing to signs of how Canada’s housing market is in for steep correction, or even a collapse. Much like the fable, the OECD is beginning to sound like an anxious chicken whipping up fears to cause mass hysteria.
I don’t think there’s an economist out there that wouldn’t agree with the assertion that mortgage rates are going to rise next year in Canada. Economists I’ve spoken to (including David Madani at Capital Economics and Robert Hogue of RBC Bank) predict a small increase by mid-year with an overall increase of just over 1% by year-end (2015).
Now, I may be naïve, but I don’t really think there will be much difference in the market if residential mortgage rates rise in May versus June. It’s certainly not a “sky is falling!” situation.
What I do know—and learned people have confirmed this—is that residential mortgage rates will rise before the Bank of Canada (BoC) will raise it’s rates. This is because the banks borrow money from the BoC in order to lend you the money for your mortgage—and banks are pretty concerned about borrowing at higher rates then they are lending at. Since the BoC is predicted to raise rates towards the Fall of 2015, it makes sense that buyers will see an increase in the posted and discounted residential mortgage rates in late spring or mid-summer.
Of course, the OECD predictions are predicated on the idea that the BoC will have to increase it’s overnight and fixed income rates sooner because there’s already inflationary pressure in the economy. But as Mr. Hogue pointed out during our interview, “the Bank of Canada will not push the panic button easily.” Just a few months ago, the BoC had to contend with higher than expected core inflation. Rather then react and adjust monetary policy, the BoC examined the causes. Dropping oil rates and a strengthening U.S. economy were the primary reasons and, despite inflation of 2.4% (the target is 2%), they opted to monitor the situation.
“The Bank proceeds cautiously,” explains Hogue, “and they are mindful of U.S. monetary policy.”
And this is important, says Madani. At some point, the Bank’s long-term rates will go up and this has more to do with an improving U.S. economy and the U.S. Federal Reserves move to increase U.S. Treasure note rates, explains Madani, then with the Bank’s desire to curb inflation. Even the OECD nods to this important correlation between Bank of Canada yield rates and U.S. Treasury rates. Their report predicts Canada’s economy will grow by 2.6% in 2015 and 2.4% in 2016, “largely driven by export demand from the U.S. economy.”
But just ask a U.S. policymaker and they’ll tell you that one quartile’s uptick in the economy doesn’t make a strong economy, or prompt persistent inflation. We have to string a couple of strong economic quartiles before we know that their is sustained growth. That’s what the BoC is doing. Rather than react to fluctuating inflationary pressures, they’re looking at the overall domestic and global economy and making common sense decisions.
Now, if that means a yield increase in September—prompting rising mortgage rates in May—I don’t think this will cause the sky to fall on our nation’s housing market.