Mortgage Rates Forecast in Canada

Plan Your Home Buying Journey: Mortgage Rates Forecast in Canada for 2024

Embarking on the journey of homeownership is a significant step, and one of the pivotal factors influencing this venture is the trajectory of mortgage rates. As prospective homebuyers, having insight into the mortgage rate forecast for Canada in 2024 can be instrumental in making informed decisions. In this blog, we will delve into forecasts, offering you a glimpse into what to expect on the mortgage rate landscape.

Factors Influencing Mortgage Rate Forecasts

Before we delve into the forecast for 2024, let’s take a moment to assess the current state of mortgage rates in Canada. As of November 2023, mortgage rates in the Canadian market are influenced by various factors, including economic conditions, inflation rates, and global financial trends.

Economic Conditions

The economic climate plays a pivotal role in determining the current state of mortgage rates. Canada’s economic indicators, including GDP growth, employment rates, and inflation, contribute to the overall financial landscape. A robust economy often corresponds to favorable mortgage rates, while economic uncertainties can lead to fluctuations.

Global Financial Trends

In an interconnected world, global financial trends have a ripple effect on local markets, including mortgage rates. Factors such as international trade, geopolitical events, and global economic health can impact investor sentiment and influence the trajectory of interest rates.

Central Bank Policies

The policies set by the Bank of Canada wield significant influence over the country’s financial environment. The central bank’s decisions regarding the benchmark interest rate have a direct bearing on mortgage rates. Adjustments made to steer the economy can trigger shifts in borrowing costs.

Inflation Rates

Inflation, the rise in the general price level of goods and services, is a crucial metric monitored by financial institutions. Central banks often respond to inflationary pressures by adjusting interest rates. The relationship between inflation and mortgage rates shapes the financial landscape for homebuyers.

How Do We Create A Mortgage Rate Forecast In Canada

To gauge the market sentiment regarding the trajectory of interest rates, an assessment is made considering risk-free options available to financial institutions. Both depositing money with the Bank of Canada (BoC) and purchasing treasuries are deemed riskless choices. In order to uphold liquidity, Canadian financial institutions opt to park their cash in either of these options, seeking the one offering a higher yield. Consequently, the yield on a Canadian T-bill is anticipated to equal the average of the expected BoC rate until the T-bill’s maturity, a principle known as the expectation hypothesis.

This hypothesis allows for the utilization of yields on money market instruments to extrapolate market expectations for the BoC target policy rate. Among the various interest rates prevalent in the market, some serve as more convenient indicators of the market’s anticipation of future interest rates.

An example of such rates is reflected in the pricing of BAX contracts, which conveniently signal expectations for future changes in interest rates. The BAX is a futures contract with the three-month reference Canadian Bankers’ Acceptance rate as its underlying price. The Investment Industry Regulatory Organization of Canada (IIROC) publishes the reference rates for 1-month and 3-month Canadian Bankers’ Acceptance (BA) Rates, relying on actual transactions in the market. Notably, major market participants, such as financial institutions, are obligated to report their trades to IIROC.

Bankers’ Acceptance (BA) involves a loan extended to a corporation but repaid by a commercial bank, typically from the corporation’s line of credit with the bank. Due to the short-term nature of BAs and the guarantee of repayment by a commercial bank, BAs are considered low-risk money market instruments.

The price of a BAX contract indicates the market’s expectation for the BA interest rate on the maturity date of the contract. The variance between this rate and the current BA rate implies the expected movement in short-term interest rates on Canadian dollar debt.

Alternatively, another convenient method for estimating the market’s expectation of potential changes in the BoC benchmark rate involves using forward contract rates for the 1-month Canadian Dollar Offered Rate (CDOR), as reported by Chatham Financial.

Bank of Canada Rate Forecast for 2023: Remaining at 5%

Canada has experienced a fluctuation in annual inflation, ranging between 2.8% and 4% over the past four months. Despite a downward trend from the peak of 8.1% in June 2022, this descent has reached a standstill. The Bank of Canada (BoC) attributes this development to past increases in the target overnight rate, the effects of quantitative tightening, the rise in bond yields, and the intricate disentanglement of supply chains. In the absence of unforeseen developments, the BoC is likely to maintain its policy rate at the existing restrictive level of 5%, awaiting a decline in inflation towards the 2% target.

The BoC’s ongoing assessment of the neutral policy rate, designed to facilitate stable economic activity without inducing a slowdown or acceleration, remains at approximately 2.5%. This calculation comprises a 2% inflation rate and a 0.5% real interest rate. Notably, there are indications that the neutral rate is gradually increasing.

With the current overnight rate standing at 5% and an inflation rate of 3.8%, the real overnight rate is calculated at 1.2%, signaling a likely restrictive monetary stance. However, over the past year, different levels of government have increased debt by $45 billion, injecting a stimulatory effect on the economy and mitigating the impact of rising interest rates on the Consumer Price Index (CPI).

Since March 2021, Canada has consistently witnessed inflation levels surpassing the BoC’s 2% target. This prolonged period of inflation exceeding the target poses a risk of unanchoring inflationary expectations. Consequently, there is a growing belief that the Bank of Canada may need to raise its policy rate again in 2023.

However, the repercussions of higher interest rates are gradually permeating the economy, particularly as individuals renew their mortgages. Further rate hikes, under these circumstances, could potentially exacerbate an impending recession. The BoC is navigating a delicate balance between the risks of over-tightening and under-tightening, opting to maintain current rates while concurrently pursuing quantitative tightening and hinting at potential future increases in the overnight rate if deemed necessary.

Bank of Canada Rate Forecast for 2024: 0.5% Decrease in the Overnight Rate

The reverberations of the current restrictive policy rates are anticipated to ripple through the Canadian economy in 2024, exerting downward pressure on both the demand for goods and services. This trajectory is expected to prompt a reduction in inflation, steering it towards the target range of 1%-3%.

The diminishing aggregate demand is set to exacerbate the decrease in job vacancies, intensifying the challenges in the labor market. The elevated inflation experienced between 2021 and 2023 may strain household finances, potentially compelling families to seek additional income sources, thereby raising labor force participation rates. This, coupled with lower job vacancies and sustained immigration, is likely to contribute to an increase in unemployment.

As inflation trends towards the targeted range and the job market weakens, the Bank of Canada is poised to gradually adjust its policy rate towards the neutral level. A projection is made that the policy rate will reach 4.5% by the conclusion of 2024, reflecting a strategic move to balance economic dynamics in response to evolving demand, employment, and inflationary pressures.

Importance of Mortgage Rates

The current state of the Canadian real estate market places the average price of homes at a two-year low, yet it still hovers over $600,000. For a prudent homebuyer who has diligently saved close to 20% for their down payment to mitigate risk and save on mortgage insurance premiums, the required mortgage amount would be approximately $500,000.

In the existing interest rate landscape of Canada, advertised mortgage rates span from 4.5% to over 7%. A rate of 5% is deemed attractive for those in pursuit of a mortgage, contingent on the specific features of the mortgage arrangement.

WOWA’s mortgage interest calculator offers valuable insights, indicating that a conservative approach to acquiring an average house with a competitive mortgage rate would result in a monthly mortgage payment of $2,900, with initial interest costs amounting to $2,100.

It’s noteworthy that the median after-tax income for a Canadian family stands at $67,000 per year, approximately $5,600 per month. The significance of the mortgage expense becomes evident as it emerges as the most substantial financial commitment for Canadian families. This expense is particularly pronounced for those residing in the cost-intensive Canadian population centers of the Greater Toronto Area (GTA) and the Greater Vancouver Area (GVA).


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