Price Expectations vs. Reality: “…Consumer expectations for house price growth in Canada dropped to zero,” according to a BoC survey released yesterday. But the data is about a month and a half old. Since then, home prices in the Greater Toronto Area have broken their 2017 record high. Imagine where prices would be if employment and immigration were running full tilt. Montreal was strong too, while Vancouver prices were mostly flat versus May. Unfortunately, not all markets are doing as well (e.g., Calgary and Saskatoon). As for listings, they’re still well below year-ago levels. Only when supply builds and is back above normal (later this year or next) will we know if demand is strong enough to: (a) continue depleting limited inventories, (b) counter high unemployment and (c) offset potential fall selling—triggered by the end of mortgage deferrals.
Deferrals Do End: Here’s another reminder that six-month mortgage payment deferrals are not guaranteed. This man needed a deferral extension but was declined. The story…
Perceived Rate Risk: Five years from now, most Canadians think mortgage and other interest rates will be far higher (250+ bps higher) than they are today. There’s little basis for that thinking given the weak inflation and employment outlook, but regardless, it helps explain why people are overwhelmingly choosing fixed rates. Rate expectations are falling, however, as this chart shows.
NBC Cuts: National Bank of Canada became just the latest major lender to trim its “special” fixed rates. These are the rates it cut.
4yr: 2.84% to 2.54%
5yr: 2.89% to 2.59% The big banks are advertising similar rates for uninsured 5-year mortgages nowadays (2.57% to 2.59%), albeit their hidden discretionary rates are much better, as usual. The typical Big 6 bank discretionary 5-year fixed rate is now 20+ basis points less at 2.39% or lower.
The Floor Could Give:Bond yields influence fixed mortgage rates, which is why this chart below matters. Yields have had major trouble getting lift and are now just 7 bps from a record low. The path of least resistance may be down for the time being. We’re not far from zero, and when you have a target that big, the market often hits it. If Canada did sink to 0% on its 5-year yield, 5-year fixed rates would likely drop to 1.99% or less across most of the industry. And the lowest 5-year fixed rates—particularly for default-insured mortgages—would ultimately slip into the 1.60% to 1.75% zone, maybe lower.
Wait for It: Things could get dicey for the economy in August, says the world’s “most accurate” economist. That story…
Stat Check: COVID testing has surged in North America, which is part of the reason more new cases are being reported. But death rates have fallen meaningfully. That’s prompted many to think we won’t get another major economic shutdown, something that would be supportive for interest rates.
BoC on Deck: Next Wednesday, Bank of Canada Governor Tiff Macklem will officially preside over his first Bank of Canada rate decision. Markets are pricing in virtually no chance of a rate change at that meeting.