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Bank of Canada Says More Easing Ahead

Bank of Canada Says More Easing Ahead

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    Following last week’s highly anticipated interest rate cut, the Bank of Canada also released its October 2024 Monetary Policy Report (MPR), outlining the economic backdrop driving the 50-basis point rate cut. A cut that brings mortgage lender’s prime rate down to 5.95%, the lowest in two years. The cut reflects growing concerns about market volatility and excess supply in the economy. The Canadian housing market remains a focal point, as these lower interest rates in Canada aim to stimulate growth and mitigate the risk of a broader economic slowdown.

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    Key Takeaways

    • Secondary suite reforms will allow homeowners to refinance up to 90% of their home’s value to build secondary suites.
    • The vacant land tax consultation will provide the federal government with feedback on the effectiveness of residentially zoned vacant land taxes in encouraging land development.
    • Unlocking 70 underused federal government-owned properties for housing development will contribute to the goal of building 4 million homes by 2031.

    Economic Growth and Inflation Outlook

    The MPR reveals that economic growth is sluggish, with GDP per person declining. The BoC predicts growth will gradually improve, reaching 2.25% by 2025-2026, driven by consumer spending and business investment. Inflation, which has returned to the Bank of Canada’s target of 2%, is expected to remain within its target range of 1% to 3%. However, global economic activity, including fluctuations in interest rates and inflationary risks from energy prices, could affect this outlook.

    Labour Market Conditions 

    The labour market remains soft, with unemployment rates rising, particularly among newcomers and youth. Although elevated at around 4%, wage growth outpaces productivity, leading to inflationary risks in services heavily dependent on labour. The Bank of Canada’s policy rate adjustments aim to stimulate employment without spurring excessive inflation.

    Impact on Mortgages and Borrowers 

    The policy interest rate reduction translates into immediate savings for Canadians with variable mortgages. Borrowers with adjustable-rate mortgages (ARM) will save approximately $30 per month for every $100,000 borrowed, and HELOC borrowers could save around $42 per $100,000 borrowed. In contrast, fixed-rate mortgage holders will not experience immediate benefits as their rates remain locked in for the term. Meanwhile, fixed rates, which rely on corresponding term bond yields, have hardly budged since the announcement.

    Residential Investment Recovery 

    The BoC forecasts a housing recovery driven by lower mortgage rates, revised mortgage insurance rules, and growing housing demand. Home renovations are expected to rise along with house prices, with the potential for a stronger rebound if rates decline further. 

    Residential real estate investment shows signs of recovery after several quarters of contraction. Pent-up demand and declining rates drive renewed interest in homeownership, although housing affordability remains challenging. Government policies stimulating housing demand, such as upcoming rules and limit changes to mortgage insurance, are expected to stimulate activity in the housing market. However, high construction costs may temper recovery.

    What Lies Ahead? 

    With market expectations of further rate cuts, the Bank of Canada could reduce its policy rate by another 100 bps over the next year, bringing it closer to the estimated neutral range of 2.25% to 3.25%. While yesterday’s rate cut provides immediate relief to many borrowers, it remains to be seen how this will impact broader housing market affordability in Toronto and Vancouver, where the stress test requirements continue to be stringent.

    Canada’s economy is showing sluggish growth, with forecasts indicating it will remain under pressure well into next year. Capital Economics predicts excess capacity will persist through 2025, exerting downward pressure on inflation. This ongoing economic slack suggests that the Bank of Canada’s recent 50 basis points cut may not be the last in this cycle. Economist David Rosenberg also highlights Canada’s unique position, where limited fiscal stimulus and the absence of long-term fixed-rate mortgages have intensified the impact of previous rate hikes compared to the United States.

    The BoC believes price stability has returned, as shown by various indicators. With Canada’s CPI inflation rate stabilizing at around 1.6% in September, the Bank of Canada is looking to bring its policy rate back to a more neutral setting, estimated between 2.25% and 3.25%. Core inflation measures (CPI-median and CPI-trim) are down to 2.3% and 2.4%. Broadly, inflation expectations from businesses and consumers are aligning with normal levels, diminishing the need for restrictive monetary policy. 

    Analysts believe that the prime rate could ultimately settle at 4.95%, offering significant relief to homeowners with variable and adjustable mortgages, who could see noticeable savings on their monthly mortgage payments. This shift may also encourage more potential buyers to enter the housing market as borrowing costs decrease further. As lower rates persist, mortgage pre-approvals for new buyers may become more attractive.

    On the other hand, the outlook for fixed-rate mortgage holders is less promising. Fixed rates have already fallen by approximately 150 basis points over the past year, but experts suggest further drops may be limited unless there’s a more severe economic downturn. With solid employment gains and continued economic growth in the US, particularly with a robust third-quarter GDP forecast, the conditions for another significant decline in fixed rates seem unlikely.

    The spread between Canada’s 5-year fixed rate bond yield and its US counterpart has widened significantly, nearing levels seen only once since inflation targeting began. While this spread might result in slightly cheaper Canadian yields, it’s unlikely to bring back the ultra-low fixed mortgage rates of recent years, such as below 3%.

    Despite these rate cuts, housing affordability remains a persistent issue in markets like Toronto and Vancouver. The qualifying rates for fixed mortgages are still lower than those for variable rates. Still, many prospective buyers find it difficult to pass the mortgage stress test in these high-cost regions, adding another layer of complexity for those trying to enter the market.

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    Mortgage Strategy Recommendations

    Variable mortgage rates fell in response, while fixed mortgage rates stayed the same, as bond yields had already adjusted in anticipation. This cumulative drop has shifted mortgage selection advice, especially for those currently in the mortgage market

    Recent declines make five-year fixed rates a stronger option, especially for conservative borrowers. The anticipated rate cuts have reduced potential savings from future bond yield decreases, making long-term rates more appealing. 

    Variable rates may offer lower borrowing costs over a typical five-year term. However, borrowers considering variable rates with an intent to switch later should be cautious about attempting to time the market. Instead, select a mortgage type suited for the entire term, then re-evaluate at renewal time.

    Final Thoughts

    For borrowers looking for the best mortgage rate, now may be the time to take advantage of even lower rates with nesto’s Prime Time mortgage offer. For those considering a new home purchase, a mortgage renewal, or a refinance, consulting a mortgage expert is essential to navigating these changing conditions for their unique needs and financial situation. Contact nesto mortgage experts today to explore your options and make the most of the evolving market.

    Are you still deciding whether to go fixed or variable or waiting for rates to drop? Nesto’s Prime Time can help you save with a discounted mortgage payment now while waiting to lock in later. Contact nesto’s mortgage experts to help you choose the best mortgage for your unique needs.


    Why Choose nesto

    At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.

    nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.

    Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.


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