Chad Moore Calgary Mortgage Broker

Hey Guys!

I have a question for you …

How can variable interest rates go down, but fixed interest rates go up?? And why has home affordability not changed?

A Quick Recap …

The Bank of Canada cut Canada’s central interest rate by 0.50% (or 50 basis points) last week.

The central interest rate (aka the overnight lending rate) is now 3.75%.  The Prime lending rate is now 5.95%.

Rate cuts have looked like this:

June 5th 2024: -0.25%

July 24th 2024: -0.25%

September 4th 2024: -0.25%

October 23rd 2024: -0.50%

The central interest rate went from 5.00% in June, down to 3.75% in October. Tom Petty.  Free falling.

Where Are Rates Headed?

The Bank of Canada is cutting interest rates down to a “neutral interest rate.”  This is a theoretical interest rate where the economy is neither stimulated, or restricted.  

Canada’s estimated neutral central interest rate is 2.75% (this is the middle of the neutral interest rate range). 

Got it.  Variable rates are lower. 

How Can Fixed Rates Rise Then?

I find many, many people are confused by this.  

Fixed interest rates are priced from bond yields.  Bond yields do not directly move in lock-step with any central bank rate announcement.  

In fact, on the day the Bank of Canada lowered interest rates by 0.50%, bond yields went higher (upward pressure on fixed rates)!

In general, over a long enough time horizon, fixed and variable interest rates trend in the same direction.  Fixed and variable interest rates are not a direct function of each other. 

Why Affordability Stays The Same—For Now?

Why?  How?

Because fixed interest rates are still lower than variable interest rates.

A buyers maximum home affordability is still higher using a fixed interest rate.  So affordability has not changed (all else being equal). 

Conclusion:

Bank of Canada rates are down by 0.50%.  The next rate announcement is December 11th.  

There are 100% market odds of another 0.25% rate cut, and about 50% market odds of another 0.50% rate cut. 

Fixed interest rates remain about the same, after sinking earlier this Fall. 

As we know, Real Estate is rather sensitive to interest rate movements (if the buyer is not fearful of loosing their income).  The rate cuts from this Fall and early Winter could stimulate a busy 2025 Spring market?

My long-time readers saw how the end of 2023 evolved into the very busy Spring of 2024 …

Real Estate supply was starting to loosen and a trend toward balance was looking likely.  Then December 2023 was a surprisingly huge month, and thus set up a very tight Spring 2024 market. 

If you’re a buyer and value space/time to make a large purchase decision, I think you have that window now when viewing (most) Real Estate listings.  

I can’t say you’ll have that luxury of space/time in the Spring of 2025 if you wait to purchase a home?  The narrative of low rates, and looser Mortgage underwriting guidelines might stimulate demand?  

On the flip side, new lower immigration numbers, which were announced just last week, might off-set Real Estate demand?  

As we know, the Real Estate market movements are never just one thing.  I’ll have October’s housing supply data for you soon.

I hope this is helpful!

Cheers,

Chad Moore

P.S.

I played a surprise game of squash at MRU (great facility btw) this past Saturday morning.  My body is absolutely shattered—still.  I’m pretty sure I smeared myself on all four walls. 

P.P.S. 

The past two Halloween’s I have prepared for, but sadly have gotten 0 trick-or-treaters.  This year, I’m keeping candy out of my house haha!   

What are you dressing up as??