This year, mortgage interest rates will be the talk of the Canadian real estate market. After the conventional five-year fixed-rate mortgage remained above six per cent for four consecutive months in November, a lot has occurred in the world of interest rates. And these trends could begin saving prospective homebuyers some money.
After the Federal Reserve signalled three rate cuts in 2024 at the December Federal Open Market Committee (FOMC) policy meeting, Canadian investors immediately looked at the Bank of Canada to determine what the monetary policymakers would do this year.
However, economists and market analysts recommend investors and other observers not monitor what the U.S. central bank is doing. The BoC has its own path laid out, they say.
That said, the futures market is ebullient about the prospects of early rate cuts by the Canadian central bank. Traders are betting that the institution could begin pivoting as early as the spring amid a slowing economic landscape. However, with the annual inflation still far above the BoC’s two per cent target, some economists argue that the summer is potentially the earliest monetary authorities could begin cutting.
Whatever the time horizon is, growing expectations of the central bank loosening monetary conditions have weighed on government bond yields.
As of Jan. 11, the benchmark five- and 10-year yields have tumbled to 3.31 per cent and 3.23 per cent, respectively. Ultimately, the explosion in bond yields and the intense volatility that had been witnessed since the fall have waned.
What else has this influenced? Mortgage interest rates.
Since there is a close relationship between bond yields and mortgage interest rates, many will pay attention to what is transpiring in the realm of debt securities. Indeed, when bond yields fall, mortgage interest rates tend to slide – and vice versa. Government bonds are also affected by the Bank of Canada’s benchmark policy rate, so there is another factor that can impact mortgage rates.
Typically, the spread between a 5-year government bond and a 5-year fixed-rate mortgage is 1% and 2%
Where Are Mortgage Interest Rates Going in 2024?
By the year’s end, the nation’s five biggest banks believe the central bank’s policy rate will range between 3.50 per cent (CIBC and TD) and four per cent (BMO, RBC, and Scotiabank).
Of course, BoC Governor Tiff Macklem and his colleagues have warned that they could firm monetary policy if it is deemed appropriate. In other words, officials could pull the trigger on rate hikes if there is an upward movement in inflation.
The annual inflation rate in Canada is 3.1 per cent, and the core consumer price index (CPI), which eliminates the volatile food and energy commodities, is below three per cent.
However, one thing that economists say could make the BoC begin reversing its quantitative tightening efforts is the slowing economy. Last year, the Canadian economy hardly grew, with most months seeing a zero per cent gross domestic product (GDP) growth rate. Moreover, housing experts say that the Canadian real estate market has also slowed a bit due to the tightening efforts.
“We think the Bank of Canada will remain on hold through the end of this year  and the first quarter of next year before initiating a series of rate cuts starting in the second quarter of next year ,” said TD Economist Rishi Sondhi in a research note.
Nevertheless, economists anticipate that a five-year fixed-rate mortgage will range between four and five per cent by the end of 2024.
Our forecast is for the average five-year fixed mortgage rate to fall to 5.05 per cent by the end of 2024, while variable rates will start falling as the Bank of Canada lowers its overnight rate starting in the first or second quarter. Indeed, if the Bank of Canada lowers its policy rate to the mid-point of its preferred 2 to 3 per cent range, that would imply a long-run five-year fixed mortgage rate of 4.85 per cent and an associated qualifying rate of 6.85 per cent. In contrast, the average five-year fixed mortgage rate since 2010 has been closer to 3 per cent.
By Dec. 31, personal finance guide WOWA expects the five-year fixed mortgage rate to be 4.47 per cent.
But while some mortgage lenders are already offering rates below five per cent, some economists say that it is premature to run a victory lap because of the possibility of a renewed inflation push.
South of the border, the annual inflation rate jumped to a higher-than-expected 3.4 per cent in December, up from 3.1 per cent. The same trend could happen in Canada, possibly leading to higher bond yields, interest rates, and mortgage interest rates.
Time the Market?
Canadian real estate market prices are forecast to rise at a modest pace in 2024, whether rates rise or fall. However, industry experts assert that it is imperative that homebuyers refrain from trying to time the market if they are preparing to purchase a residential property in the upcoming year.