Will the Fed’s signalled interest rate cuts save Canada’s mortgage market? – The Globe and Mail

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Canadian mortgage interest payments have rocketed almost 90 per cent since the Bank of Canada started its rate hike marathon last year. And housing affordability? It’s partying like it’s 1982 – and not in a good way; it’s the worst its been in four decades.

If interest burden were straw, the camel’s back would almost be broken.

Buy/sell, rent/lease residential &
commercials real estate properties.

But wait. Who’s that galloping out of the mist to save the mortgage market? It’s none other than Sir Rates-A-Lot, Federal Reserve Chair Jerome Powell.

The world’s most powerful banker just pitched a curveball of hope to the Canadian housing market, flipping rate doom on its head.

How’d Mr. Powell do it? By confirming Wednesday that Fed officials are discussing monetary easing. The market forecast for rate cuts promptly went from “maybe” to “get ready to party.”

The Fed’s own suddenly more aggressive rate cut projections reinforced the jubilance, and the potential potential ripple effects are numerous.

What to look for in a variable mortgage rate, now that rate cuts are coming

Less renewal shock

The threat of rocketing renewal rates and subsequent defaults has been making headlines for months, but if these latest rate-drop vibes are for real, borrowers might just catch a break. A one-percentage-point rate drop saves roughly $4,700 of interest over five years on average per $100,000 borrowed. Meanwhile, Canadians’ average annual paycheques have been increasing by 4 to 5 per cent. It looks like the “Renewalpocalypse” might just be averted.

Floating-rate relief

For the venturesome one-third of Canadians in variable or adjustable-rate mortgages, all indicators point to a lower benchmark prime rate in 2024. You can bet a flock of borrowers will leap to adjustable-rate mortgages (ARMs), hoping their monthly payments take a dive with the prime rate. For the variable-rate mortgage (VRM) crowd with fixed payments: most who don’t refinance will stay in a holding pattern until renewal time rolls around. The silver lining is that a falling prime rate means they’re paying more principal for a change.

Stress-test relief incoming

Our bank regulator reaffirmed its stress-test policy this week, meaning today’s bank borrowers must still prove they can afford a rate that is the greater of their actual negotiated rate plus two percentage points, or 5.25 per cent.

Based on where uninsured rates are today, that means borrowers must qualify at 7.5 per cent or more. However, given the Fed’s newfound dovishness, the stress test rate is easing. The lowest effective stress-test rates are down 45 basis points from the October peak. (A basis point is 1/100th of a percentage point.)

Homebuyers get ready to rumble

There’s nothing like a boost in mortgage-buying power to inject life into homebuyers. A one-percentage-point drop in rates lowers the amount of gross annual income required for an average purchase by over $10,000, assuming 20 per cent down and a 30-year amortization.

Meanwhile, our trusty leaders keep ushering in a small city’s worth of immigrants each month, some of whom buy a home in their first year. And no one has to remind Canadians of the chronic housing shortage.

The property market might not pop like a champagne cork, but once the New Year’s glitter settles, it’ll have more fizz.

U-turn in home price forecasts

Wait for it. Like clockwork, real estate analysts will raise their home price targets now that rate relief appears incoming. However, given rising unemployment, recession risk, and the lag between now and the first rate cut, it’ll be hard to time the bottom. Moreover, with notable exceptions (e.g., Calgary, Victoria, St. Johns), median prices in most markets are down-trending, which might continue for at least a while.

What could go wrong?

Inflation, for one thing.

Unemployment remains too low, wage growth too high, fiscal spending too excessive (especially stateside), stocks are near record highs, and core inflation is still well above central banks’ 3-per-cent tolerance target. And now, as the cherry on top, we have rate drops – which are inflationary – in a housing-fuelled economy.

I don’t have a crystal ball or a time-travelling DeLorean, but it feels like the Fed pivoted too soon. There’s a chance that inflation doesn’t keep falling to target as most experts and central bankers expect. In a recent X post, Harvard economics professor Jason Furman put the chances of it reigniting in 2024 at roughly one in four. The result would be potentially higher rates, not lower, as in 1978 when inflation expectedly roared back after the prime rate dropped two percentage points.

For most mortgagors, the chance of inflation rising again isn’t significant enough to hedge with a costlier fixed rate. But for folks who can’t tolerate more payment pain, a three-year fixed in the mid-fives isn’t the worst decision.

Lock-In Lovers Rejoice: Canada’s Fixed Rates are Falling

Mortgage rates are finding gravity quickly. In the last week, almost every leading fixed term is down anywhere from five to 20 basis points.

Wednesday’s Federal Reserve bombshell will keep the party going. We expect further cuts through Monday.

Among the deals of the week:

Floating rates are all the rage. You can now find insured five-year ARMs at just 5.85 to 5.95 per cent from Nesto, Ratehub and Butler Mortgages. For less commitment, you’ll find three-year varieties from Citadel Mortgages for 6.1 per cent.

Interestingly, however, the lowest nationally available uninsured variable just went up. HSBC boosted its bank-leading variable by five bps to 6.55 per cent as floating-rate demand picks up.

The lowest-advertised uninsured bank rate we track is from HSBC at 5.69 per cent. But regional brokers like Butler Mortgage are undercutting it by 20 bps, or 5.49 per cent.

For insured borrowers who want to buck market rate-cut expectations and lock in long-term, Butler Mortgage has the lowest rate in the nation, a 4.89 per cent five-year fixed.

If you have lender commitment issues, True North Mortgage has a solid new, fully-open adjustable-rate mortgage at prime minus 0.50 per cent (6.7 per cent). It’s currently only available for default-insured mortgages and insurable mortgages with 35 per cent equity or more. It’s the cheapest no-penalty mortgage we track.

Rates were sourced from the MortgageLogic.news Canadian Mortgage Rate Survey on Dec. 14, 2023. We include only providers who advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20 per cent down payment or switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1 million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.

Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.

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