The signs of economic optimism in Canada and the U.S. are becoming more prevalent as 2017 rolls along. The Canadian economy is uniquely tied to the economic performance of our American cousins. Growth in the Canadian and American economies are projected to the lead the G7, but this growth will have both positive and negative impacts on the mortgage and housing markets in Canada.
A healthy domestic economy means more Canadians will be employed and in good stead to purchase homes and maintain their mortgage payments, conditions that have a unique feel-good quality. However, the expanding Canadian and American economies can also place upward pressure on Canadian mortgage rates and housing prices… something the Canadian government is sensitive to, as it has attempted to put the brakes on our housing market in recent months.
Canada’s Economy Finally Looking Up, After Stalling for Past Few Years
For the last few years, the Canadian economy has sputtered along, hit first by the global economic crisis in 2008, initiated by the bursting U.S. housing bubble, and then the oil price crash in the fall of 2014, as OPEC flooded the market with excess supply, putting the squeeze on labour intensive Canadian production. These economic impacts have been tough on certain areas of Canada, especially oil-centric Alberta where many jobs have been lost and housing prices depleted.
These economic downturns forced the Bank of Canada to successively drop its key overnight lending rate, which correlates closely with prime mortgage rates, maintaining it at a very low 0.5% since mid-July of 2015, which in turn has helped keep Canadian mortgages rates, especially variable rates, at historic lows.
Canadian Economic Machine Starting to Hum Along with the U.S.
In early March of this year, the Paris-based Organization for Economic Co-operation and Development updated its earlier forecast for Canada’s economic growth, from the 2.1% it projected late last year, to reflect a growing sense of optimism for global economic activity, especially in Canada and the U.S.:
Canada’s economy is projected to grow this year by 2.4 per cent, equaling what’s now expected in the United States and ahead of the other Group of Seven countries, according to estimates released [March 7th, 2017] by the OECD. – CTV
There are several factors combining to fill Canada’s economic sails. Our job market is heating up, adding more than 200,000 jobs in latter half of last year, with 50,000 new jobs in December alone. The TSX has been flirting with an all-time high, not seen since last fall. In November, Canada registered a trade surplus (of $526B) for the first time in two years. The loonie is gravitating toward a healthy 75-cent level and, perhaps most significantly, oil prices are finally firming up:
One of the main drivers of growth for next year is that crude oil prices have firmed up. Although their future path is still uncertain, they appear to have reached a more balanced spot in relation to global supply and demand, and the probability of another collapse is slim. – BDC
Recent Retail Sales Growth in Canada Adding More Pressure to Variable Mortgage Rates
Our most recent retail sales figures, out for January 2017, beat what most economists were predicting with an increase in retail sales by 2.2% ($46B). These spending indicators, coupled the other positively trending economic factors, are bound to put pressure on inflation, forcing the Bank of Canada to consider raising its key lending rate:
“After a strong end to 2016, it appears as though the economy is off to a good start in 2017,” Benjamin Reitzes [Economist with BMO] said. “It’s going to be awfully hard for the Bank of Canada to look through this better performance.” – CBC
The ever-cautious Bank of Canada may well stay the course at 0.5%, at least for a while, but if the economic trends in Canada and around the globe continue to shore up their current momentum, the Central Bank will be forced to raise its rate, putting significant pressure on variable mortgage rates in Canada; oftentimes, the big banks follow suit with their prime lending rates within days, or even hours, of a Bank of Canada rate hike.
Surging U.S. Economy Raising Fixed Mortgage Rates
Many analysts are also predicting that the U.S. economy will grow faster than anticipated:
The promise of an important decrease in regulatory and tax burdens on U.S. businesses suggests that the U.S. economy will grow faster than most analysts expected. In addition, (and mostly due to internal rather than external factors), the U.S. economy will be a key driving force of other Western economies. – Forbes
The growing American economy and resulting inflationary pressure has prompted the U.S. Fed to raise its key lending rate twice in the last three months to 1%, with more rate hikes expected this year. Bond yields are also rising, putting direct pressure on Canadian fixed mortgage rates, which we’ve witnessed in recent months, and by way of comparison have made variable mortgages more attractive.
The spread between fixed and variable rate mortgages may continue to grow for a bit longer, but as both the U.S. and Canadian economies heat up, mortgage rates are bound to increase across the board… and this is not the only barrier mortgage applicants in Canada will need to contend with.
New CMHC Regulations Aimed at Slowing Housing Prices
One of the major caveats in the OECD report is the issue of rapidly increasing house prices in a handful of countries including Australia, Sweden, the United Kingdom and Canada. Canadian house price increases are especially visible in major markets like Toronto, which saw an increase of 27.7% this February compared to the same month last year. – Toronto Star
Fear of a bursting housing bubble and the economic, not to mention political, fallout are a driving force for a recent round of regulations initiated by the Government of Canada aimed at tightening the housing market, and making it more difficult for first-time home buyers to qualify for a mortgage on their own cozy nest. Increasing the cost of mortgage loan insurance, and implementing tougher stress tests for mortgage holders to prove they can maintain their payments, will put downward pressure on demand, which the Canadian Government hopes will help curtail housing prices.
Time to Hatch a Plan to Acquire Your Dream Home
At Hatch, we’re sympathetic to the real bite these measures by the government and the market forces can have on the cost of purchasing a home in Canada, especially for first-time home buyers. That’s why we do everything we can to shave our rates lower than what most Canadian mortgage brokers can offer, at any given time. By leveraging our online application process and low overhead, coupled with an intimate knowledge of the mortgage lending industry spanning more than 30 years, we can pass on considerable savings to our valued clients. Feel free to try our online mortgage application (no dress code or appointment required) and let Hatch get cracking to secure the right mortgage product for you to settle into your dream nest.
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