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Canadian Mortgage Rates Jumped This Week, Pushed Up by US Yields

Why Canadian Mortgage Rates Jumped This Week

Canadian mortgage rates jumped this week, pushed up by US yields as central bankers stateside couldn’t suppress the hot US economy even after a 16-year high federal funds rate.

What’s the message: The strong US economy is fueling inflation worries, which could translate into higher Canadian mortgage rates. The US Federal Reserve’s monetary policy affects global borrowing costs. Rising Canadian bond yields have affected Canada’s borrowing costs due to inflationary concerns. When bond yields rise, fixed mortgage rates tend to increase as well.

Why it matters: The US economy keeps gaining momentum while the Canadian economy stays fragile and vulnerable. There are multiple reasons for this divergence, and we’ll lay them out here:

US mortgage rates are less sensitive to changes in short-term bond yields

US mortgage rates typically come in 25-year- and 30-year terms, while Canadian consumers are locked into 5-year or less terms. This leaves US borrowers less affected by changes in short-term rates, with most avoiding renewing or refinancing their mortgages while rates remain high.

Canada has more debt, so the BoC is more powerful when it raises rates

Since the 2007 recession, Americans have reduced their debt levels significantly, while Canadians didn’t experience a recession the same way. This has left the Canadian housing market still hitting high points until the BoC started its tightening rates in March 2021. So much of Canadian debt is in real estate that when the BoC does increase rates, the effects are more powerful north of the border.

US productivity is rising positively, while Canada’s falling productivity remains negative

US productivity keeps rising as much of the money borrowed in the US focuses on business efficiency and investments. Meanwhile, Canada’s increase of cheaper labour through its recent increase in population doesn’t need companies here to focus on capital investments. Additionally, most of the debt increase in Canada is concentrated in real estate. Debt focused on real estate doesn’t increase our productivity like business investments in the US do.

The much heftier stimulus and fiscal deficit are pushing the economy in the US

Although the fiscal deficit is more significant than the size of the US’s debt, it’s not affecting the US economy like Canada’s debts and deficits are affecting its economy. This could be due to how the money is being spent. While Canada’s was mainly used for pandemic, carbon and housing relief, the US spent a big chunk on its Chips and Science Act. Not only did it create more momentum for tech companies to borrow and spend more in the face of higher rates, but it lessened reliance on Chinese-made technology, opting to encourage more homegrown growth in the semi-conductor sector as the M7 (Magnificent 7) race to produce the best AI. All of this borrowed money is paying off and making the US richer, which may, depending on the policies adopted after the election, draw more immigration to the US, creating a more extensive tax base than in the past.

The big picture: All the debt down south continues pushing yields up. While we know that mortgage rates don’t go down in a straight line, the current issue is more about how US bond yields, rather than the BoC, are curtailing the fight against housing affordability here in Canada.

What’s next: The US economy is showing signs of slowing down, with bond markets still expecting a 100 bps (that is 1%) overall decrease in the federal funds rate while the Bank of Canada is expected to cut 150 bps (that is 1.50%) in the second half of 2024. Due to multiple factors, the BoC will likely make the first move down – especially since Canada is more at risk due to higher rates. Additionally, Gov Macklem has stated that mortgage rates are responsible for the feedback loop in the Bank’s CPI measurement for shelter costs.

The bottom line: The interconnected nature of the economies of the United States and Canada means that changes in the US market, such as interest rates, output, or fiscal policies, could have a significant impact on Canada, especially in light of the country’s fragile economic outlook and elevated debt burden.

Despite the current economic climate, securing financing in the next 4 months does not have to be a one-and-done process. The prudent choice is to avoid predicting the future and secure pre-approval to lock in a competitive rate. Locking in a rate now should protect you from the adverse effects of the economy or increasing interest rates.