Lower Mortgage Rates on the Horizon? Here’s Why That Could Happen (February 2, 2015)

Dave Larock in Monday Interest Rate UpdateMortgages and FinancesHome Buying

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Government of Canada (GoC) bond yields continued their free fall last week, with the most recent plunge being fuelled by a disappointing GDP release from Statistics Canada on Friday.

The latest GDP data estimated that our economy contracted by 0.2% in November. The impact of sharply lower oil prices was evident in the detail, which showed a 1.5% decline in the sector defined as mining, quarrying, and oil and gas extraction. When we remember that a barrel of West Texas Intermediate (WTI) oil was selling for $75 in November and that that same barrel now sells for closer to $45 today, it is easier to understand why the BoC felt that an emergency rate cut was in order (even if our major banks didn’t entirely agree).

In last week’s post I said that “the most immediate impacts [of the oil-price shock] are expected to be negative as oil-patch investment dries up and our import purchasing power weakens. The longer term benefits of a strengthening U.S. economy and a weaker Loonie will take longer to accrue, and are thus less certain.”

That view proved consistent with the latest GDP data, which showed that at least so far, the cheaper Loonie has yet to buoy our manufacturing sector, where activity declined by 1.9% in November. To put that decline in context, it marked the worst monthly performance for the manufacturing sector in more than five years.

The lagging benefits of the cheaper Loonie are further delayed in the current environment because this recovery isn’t just a matter of Canadian export manufacturers ramping up production to meet rising demand. The Great Recession dealt a broadside to our manufacturing base and wiped out companies altogether, so many of the export manufacturers that would otherwise exploit the competitive advantage of a cheaper Loonie still need to be invented (or reinvented).

Speaking of the Loonie, it closed at 78 cents on Friday, in part based on widespread speculation that the BoC will cut its overnight rate again in March, which would bring it down to 0.50% and within reach of the 0.25% level we saw at the depths of the 2008 financial meltdown. But before we get too excited, let’s remember that there now appears to be no guarantee that more BoC rate cuts will translate into lower variable mortgage rates, at least without another round of hue and cry from borrowers if lenders once again choose to pocket the extra spread instead of passing it on to their customers as interest-rate savings. Time will tell.  

The U.S Bureau of Economic Analysis also released its latest GDP estimate for the fourth quarter of 2014, and while U.S. GDP grew by a more impressive 2.6%, that marked a sharp slowdown from the 4.6% U.S. GDP growth seen in the second quarter, and the 5.0% growth that we saw in the third quarter.

David Rosenberg estimates that the U.S. is now headed for 2% GDP growth in the first quarter of 2015, and while that growth rate is still the envy of most of the developed world, it may also be an indication that the surge we saw in the middle of 2014 was just a temporary spike, rather than an early signal that the start of the next great U.S. growth boom was now at hand.

At the same time, lower oil prices and the surging Greenback are dampening inflationary pressures in the U.S. and when these factors are combined with slowing GDP growth, the odds of a near-term rate hike by the U.S. Fed are fading fast. In fact, there is now speculation that the next U.S. Fed rate hike could well be pushed out to sometime in 2016. Haven’t we heard this tune before?

Five-year GoC bond yields fell another sixteen basis points last week, closing at 0.60% on Friday (a new all-time low). Lenders are gradually dropping their fixed-mortgage rates, but most continue to adopt a cautious wait-and-see approach to the recent bond-yield volatility. Five-year fixed-rate mortgages are offered in the 2.79% to 2.69% range, and five-year fixed-rate pre-approvals have dropped to 2.79%.

Five-year variable-rate mortgages are still available in the prime minus 0.65% to prime minus 0.80% range, depending on the terms and conditions that are important to you. Most lenders have now dropped their prime rates by 0.15%, lowering them from 3.00% to 2.85%.

The Bottom Line: The latest U.S and Canadian GDP data show slowing economic momentum in both countries. While not encouraging on an overall basis, the data do imply that fixed and variable mortgage rates are likely to either remain at current levels, or fall again, in the near future. We’ll call that the silver lining on an otherwise cloudy economic day.

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

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