The misery of an extended winter and the lingering effects of rising interest rates over the past year and a half, coupled with the mortgage stress test, have put a real damper on the Canadian housing market, especially in pivotal areas like the GTA, where sales have been flat in the first quarter of 2019. Housing starts are down across the country and home sales were at their lowest level in January, since 2015. GTA home prices were still holding in March as the supply of listings is also down, and the market is relatively balanced between sellers and buyers.
Now that the weather is changing and spring looks like it has arrived, there are winds of change in the real estate market as well. Bond yields have continued to fall since late 2018, plummeting in March and directly resulting in fixed-mortgage rates declining significantly in recent weeks. Variable rates are also facing downward pressure, as the Bank of Canada gives pause to further increases in the face of low inflation and changing economic conditions on both sides of the border. These factors may not bode well for the prospects of the Canadian economy, but mortgage applicants will certainly get a much-needed boost, just in time for what remains of the crucial spring real estate season.
Lower Bond Yields Driving Down Fixed Mortgage Rates
Most Canadian mortgage applicants opt for the security of a fixed rate mortgage. Fixed rates are heavily influenced by the bond market, where banks and other lenders go to borrow the money they lend out in mortgages. The yield for 5-year bonds has been falling since late 2018.
A few weeks ago, the yield curve on long-term lending vs. short-term lending inverted. This is a clear economic signal that investors, in the risk-averse bond market, believe the prospects for economic growth in Canada and the US seem to have dimmed rather significantly in the first quarter of 2019. This metric is often an indicator that a recession could be lurking just down the road; however, experts are urging some caution before jumping to a conclusion of economic doom and gloom:
“There’s all kinds of technical forces, and it is not necessarily the case that tomorrow we’ll have a recession,” CIBC economist Benjamin Tal said in an interview… “However, the yield curve slowing down is a clear signal … we have to listen to. We have a conflict between the stock market, which is more optimistic, and the bond market which is more pessimistic.” – CBC
Regardless of the direction the economy may be headed, this shift in the bond market that has resulting in lower fixed mortgage rates is good news for homebuyers and likely to provide a boost to the Canadian housing market. There also appears to be some relief happening for variable rate mortgage holders as well:
About three quarters of Canadian homeowners opt for the security of a fixed rate loan, Tal says, but the trend toward lower rates is happening in variable rate loans, too — albeit for different reasons. – CBC
Economic Conditions in Q1 Giving Bank of Canada Pause for Further Rate Hikes in 2019
Unlike fixed rates, variable mortgage rates are greatly influenced by the decisions of the Bank of Canada regarding its key overnight lending rate. These decisions are in turn influenced by the economic prospects of Canada and the rate of inflation. In the summer of 2017, our central bank started raising interest rates, for the first time in 7 years, as a hedge against inflation and to help put the brakes on an overheated housing market. However, since January 2019, our central bank has revised its outlook for Canada’s economic prospects:
Canada’s once-hot housing market has softened since the start of last year, weighed by tighter mortgage rules and five interest rate hikes from the Bank of Canada since July 2017. [In mid-March] the central bank said it expects the Canadian economy will be weaker in the first half of 2019 than it projected in January, and that it was watching developments in household spending, oil markets and global trade. – Globe and Mail
Lower household spending has been reflected in recent retail sales data, especially in the auto sector, where the higher costs of financing new vehicles has had a negative impact on sales:
Statistics Canada reported [March 22] that retail sales fell 0.3 per cent to $50.1 billion in January, the third consecutive move lower as falling sales at motor vehicle and parts dealers weighed on the results. – CTV
Other critical sectors of Canada’s economy, such as residential construction for new housing starts have also declined:
“As a leading indicator of economic activity, February’s steep decline in housing starts may raise some eyebrows in Ottawa,” Fotios Raptis, senior economist at TD Bank, wrote in a report. The slowing housing starts come as sales of existing homes has also been slowing. The Canadian Real Estate Association reported home sales posted their weakest January since 2015. – Financial Post
Residential construction and automotive assembly and parts manufacturing are huge segments of our economy, employing a great many Canadians. Troubles in these sectors, such as the pending closure of General Motors flagship assembly plant in Oshawa, are taking their toll on Canada’s GDP, which actually shrank at the close of 2018.
Compounding this economic and employment uncertainty is the cumulative effect of successive interest rate increases over the past year and a half, making many types of consumer credit, including mortgages, more expensive. This situation has put increased pressure on many Canadians who are just trying to make their payments and keep their heads above water:
Equifax Canada says consumer delinquencies climbed higher in the fourth quarter of 2018 and the credit monitoring company warns that rising delinquency rates are likely to become the norm this year. – Huffington Post
In this economic reality, it’s no real surprise that the Bank of Canada is holding at its current interest rate level, with its prime rate at 1.75 per cent, and widely expected to hold this rate, through 2019, mirroring the holding pattern taken by the US Fed:
“The main message for the Bank of Canada is that with core inflation holding steady just below the two per cent target and the broader economy struggling for any growth in the opening quarter, rates are in lock-down mode for the foreseeable future — not unlike the Fed,” said Doug Porter, chief economist at the Bank of Montreal. – CTV
One bright spot for our resource-dependent Canadian is economy is that due to supply shortages, the price of oil is on the rise:
The price of oil, one of Canada’s major exports, rose as U.S. crude inventories unexpectedly fell and an official forecast of crude oil supply growth from the world’s top producer was revised lower. U.S. crude oil futures settled 2.4 per cent higher at $58.26 a barrel [March 13]. – Globe and Mail
Impact on Canadian Housing Markets in Key Areas Like GTA
So how will this economic landscape affect Canadian housing markets? Lower interest rates for both fixed and variable rate mortgages will certainly add some incentive for buyers who’ve been sidelined, and conditions will make areas like the GTA less of a sellers’ market than they have been in recent years, while adding fuel to other markets that are heating up:
After years of prices going through the roof in Toronto – and across the country – they’ve cooled somewhat. Based on expected market conditions, the seller’s market in Toronto isn’t going to be as hot as it was months prior. And it’s certainly not as strong as it currently is for other markets across the nation that are gaining steam, like Ottawa and Montreal. – Toronto Storeys
Home sellers will get some relief now that our long winter finally seems to be melting away and prospects will be more enticed to get out there and view what’s available on the market. Pent up demand might even spur a bit of a spike in activity in the second quarter of 2019.
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