Chad Moore Calgary Mortgage Broker

The movement of Mortgage rates in Canada are based on a long list of macro-economic policy decisions, locally and abroad. In today’s world, many of these policy decisions work backward from COVID.

Let’s review how COVID impacts Canadian Mortgage rates.

Asset Purchase Program

In the wake of the 2008 “Great Recession” the U.S. Federal Reserve started the current Quantitative Easing (QE) asset purchase program. Very simply, the U.S. Federal Reserve started purchasing Government bonds as a way to inject liquidity into the market, and has been ongoing since (13 years of market intervention, crazy!).

In the depths of the COVID crisis (March 2020) the U.S. Federal Reserve doubled down on QE increasing the depth and width of their asset purchase program. Today, the Federal Reserve’s monetary policy response (market intervention) remains unchanged. Think about this … the emergency financial actions taken in the deep dark, and unknown first wave of COVID, are still ongoing. The U.S. Federal Reserve is only now beginning to mention as to when their asset purchase programs might start to taper (decrease). Let’s continue to monitor the U.S. Fed’s market influence, and look for more signals of when asset purchases will pull back and when policy rates might rise. As of now, the U.S. policy rate is anticipated to remain flat until mid/late 2023.

Back in 2008 the Bank of Canada did not follow the same quantitative easing (QE) purchase program. The COVID crisis brought about a much more forceful policy response in Canada this time around …the Bank of Canada started our own asset purchase program (Quantitative Easing). Here is a link summarizing Canada’s COVID policy response.

Here in Canada, our asset purchase programs (QE) has been tapering back as we move through the economic reopening/return to normal. The Bank of Canada was purchasing $5 Billion of assets per week, then $4 Billion, and now $3 Billion. Interestingly enough, this asset purchase program matches the Federal government’s spending plan (where does the money come from? Blog post here).

The bottom line is, the Bank of Canada asset purchase program (market intervention) pins bond yields to the floor. Low bond yields allow Mortgage lenders to offer low fixed Mortgage rates. Low fixed Mortgage rates encourage people to leverage up, borrowing money to purchase homes. When people purchase homes, there is a lot of positive economic spin off etc etc. And it’s working! Do a quick Google search to see national home sales and prices explode in 2021.

Here is a look at year-to-date 10 year U.S. treasury yields. Notice the uptick in February/March earlier this year. This was the “reopening/vaccine” response in the market. I think that time also brought on an inflationary pressure scare, which seems to have subsided. Do note, the recent upward trend though.

Below is the Bank of Canada 5 year bond yield. We inherit a lot of market movement from our largest trading partners to the south.

Low Policy Rates

Above, we spoke about the U.S. Federal Reserve and Bank of Canada’s asset purchase program that results in lowering bond yields and fixed Mortgage rates (simply put). What about other interest rates in the economy?

The U.S Federal Reserve and the Bank of Canada have also lowered their key lending rate in each country to the lowest numbers in history. In Canada, this policy rate directly influences Variable Rate Mortgages, Home Equity Lines of Credit, personal lines of credit, and various other business/student loans etc. Having this policy rate at the lower bound is very stimulative.

Historically, lowering the key lending rate in Canada was enough to stimulate the economy during economic downturns. During the COVID crisis, this policy rate adjustment on it’s own was not nearly enough, hence more forceful market intervention of Quantitative Easing.

The Bank of Canada has been tapering their asset purchase program and providing more direct language in anticipating the timeline of raising their key lending rate. The latest mention of raising interest rates is mid/late 2022. This forecast is ahead of the U.S. Federal Reserve’s anticipated policy rate hike in 2023. The Bank of Canada might have a difficult time deciding to raise policy rates before the U.S. though. Why? The Loonie would appreciate, relative to the U.S. dollar, and cripple Canada’s export market, creating economic headwinds from a different direction.

Historically, movement of Canada’s key lending rate is based on keeping inflation low and stable (low and stable inflation is between 1-3%). Inflation is measured by the Consumer Price Index (CPI) which is price changes in a basket of good designated by Statistics Canada. Now the Bank of Canada is adding to the narrative on indicators considered when raising the national policy rate …not only are they basing policy decisions on inflation targeting, but now employment numbers are becoming more influencial in the interest rate outlook.

The bottom line is, the Bank of Canada is still at an emergency level central interest rates, both fixed and variable, for the foreseeable future. We are living with COVID, and that creates economic uncertainty with a “wait and see” position.

Cases

My thought when showing this image is that policy makers see this virus with economic uncertainty. If this is true, we continue to be in uncertain times with COVID cases primed to rise this Fall/Winter. Typically, uncertainty brings a “wait and see” approach. Cases are rising, so maintaining the current central interest rate policy decision is likely.

Vaccination Numbers

I think policy makers view vaccination numbers from the position of economic stability. Time will tell if this pans out to be true.

Conclusion

I get this question often … Chad, what’s happening with Mortgage rates?

For now, we have emergency low interest rates for a variety of reasons. For how long rates will remain at this level, is not entirely in focus yet.

I think all ranges of possible interest rate outcomes are not completely unreasonable to imagine. Could rates stay at this level for 24+ months. Sure. Could interest rates move higher quickly based on monetary inflationary pressures? I think that is possible. Could further policy measures be taken to stimulate the economy. Yup, that’s possible!

For me, this kind of “uncertain” future outlook is a little unnerving, especially when deciding to purchase a home. Don’t you think? However, I could go back and any point in our past, and look at a variety of future uncertain economic outlooks when planning to purchase a home. Isn’t it true there is ALWAYS something I could point to as a reason not to purchase a home? Think about it. The future is always uncertain.

I hope this is helpful in assisting a basic understanding of how/why our current interest rate environment is so low.

I look forward to helping to discuss your personal home purchase and Mortgage plan!

Cheers,
Chad Moore