Dave Larock in Monday Interest Rate Update, Mortgages and Finances, Home Buying
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Last week the Bank of Canada (BoC) left its overnight rate unchanged as expected.
It has now been more than four years since the BoC last moved this rate, and given that this is the rate that our variable-rate mortgages are priced on, that means that anyone who took out a variable rate on or after September 2010 is still waiting for their first rate change.
(This makes me wonder if it is time to revisit Kevin O’Leary’s dire warning two years ago that variable-rate borrowers would “get slaughtered” if they didn’t lock in a fixed rate immediately. Rereading that article reminds me of Andy Capp’s famous quote about how “those who know the least always seem to know it the loudest”.)
Here are the highlights from the accompanying BoC commentary, which reads to me like a textbook example of a neutral interest-rate policy statement:
The most noteworthy change in the BoC’s carefully worded statement was its reference to our household debt levels. In its previous statement the Bank viewed the risks associated with what it calls “household imbalances” as “edging higher”, but last week the BoC was much more pointed when it said that these household imbalances “present a significant risk to financial stability”.
This reads to me like the latest salvo in a long running tug-of-war between the BoC Governor on the one hand, who laments that household debt levels are dangerously high but that raising rates is too blunt a policy tool for addressing this problem, and our Federal Finance Minister on the other hand, who is reluctant to tighten regulations for a fifth time in order to reign in market forces - especially with a federal election on the horizon.
The BoC’s warning follows a familiar pattern of late, where stronger than expected low-season (winter) demand in our major real-estate markets alarms our regulators, who then respond by announcing policy changes, which have now become a rite of spring. The Bank’s choice of language about household imbalances is essentially right on cue - the first steps of a familiar dance.
The BoC commentary wasn’t the only economic news making headlines last week. We also received the latest U.S. and Canadian employment reports, and here are the highlights from each:
The U.S Non-Farm Payroll Report for November
The Canadian Labour Force Survey for November
Interestingly, when the U.S. and Canadian employment data were released on Friday, five-year Government of Canada (GoC) bond yields surged six basis points higher, which was a counterintuitive market response to the weak Canadian report. This happened because the strong U.S. employment report, and the uptick in U.S. bond yields that it caused, had more importance to Canadian bond-market investors than our own weaker-than-expected domestic data.
If you’re surprised by that, you shouldn’t be. There has always been a relatively high correlation between U.S. and Canadian bond yields but since the start of the Great Recession, GoC bond yields have basically followed changes in their equivalent U.S. treasury yields in lockstep.
Thus, if you are in the market for a mortgage, remember that today’s fixed rates are primarily determined by changes in U.S. economic momentum, whereas variable rates are primarily a bi-product of our domestic economic performance (because they are based on the overnight rate, which is directly controlled by the BoC). If the momentum gap between our two economies widens over time, expect the gap between our fixed and variable mortgage rates to widen with it.
Five-year GoC bond yields rose eleven basis points last week, closing at 1.49% on Friday. Five-year fixed-rate mortgages remain in the 2.79% to 2.89% range, and five-year fixed-rate pre-approvals are offered at 2.99%.
Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.80% range, depending on the terms and conditions that are important to you.
The Bottom Line: The BoC maintained its neutral policy stance last week, and in doing so, gave numerous examples of where sources of positive economic momentum were being roughly offset by negative equivalents. On Friday, the latest U.S. and Canadian employment reports provided another illustration of these countervailing forces at work, with U.S. job strength being matched by Canadian job weakness. If that divergence continues, expect fixed mortgage rates to rise while variable rates lag behind.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog, Move Smartly, and on his own blog: integratedmortgageplanners.com/blog Email Dave