How high will we see mortgages rates go?

Dan Eisner speculates on the Bank of Canada's rate-hike agenda.

In unprecedented times, soaring inflation has pushed rates higher and higher. Are the large hikes finally past us?

Dan Eisner
TNM Founder and CEO
More about Dan

As Founder and CEO of True North Mortgage, Dan is a mortgage industry innovator and an entrepreneurial machine, to say the least.

My thoughts on where rates will be by the end of 2022

All the time, I'm asked about rates. That makes perfect sense, because we've built True North Mortgage as the brokerage that can offer our clients access to the lowest rates around, with a simple, speedy service, to boot. I'm proud of how frustrated a lot of our competitors get about us — and I certainly hear about it from them.

Here's my rate prediction

Remember when forecasts saw the Bank of Canada (BoC) increasing its overnight lending rate to 2.5%? Those were the days, or at least they should have been.

Instead, we've seen a dizzying pace of rate hikes from 0.25% in March to 3.25% in October 2022. Some expect the policy rate to hit 4.25% before the central bank takes a (hopefully serious) pause. I agree with that assessment.

I think we'll see a 0.25% hike for the last BoC meeting of the year on December 7, and one more just like it in the New Year. That will likely put bank prime rates at 6.45% (not factoring in any variable rate discounts that lenders like us may offer), with the knock-on effects reverberating through our economy and the housing market.

Will that be enough to quell inflation? The central bank is facing heightened pressure from all sides to let this rapid rate-hike cycle do its work, and not pile on even more increases. We're already likely headed for a recession, which, of course, the bank has warned may happen. But at this point, the BoC also doesn't want to lose face if inflation doesn't, in fact, come down enough. They may be willing to risk more economic pain from higher rates to ensure that the economy registers the effects to bring prices and demand down, truly.

At the very least, we're hoping to no longer watch helplessly as the central bank posts another massive rate hike while we scramble to deal with the (mortgage) budget and housing market fallout.

Will fixed rates hit 6%?

For the most part, fixed rates have already priced in a 0.25% increase at the December BoC meeting. With our best fixed rates right now around 4.89%, they may go up a bit more if the BoC goes for a 0.50% increase instead.

Note: Fixed rates are indirectly influenced by the BoC trendsetting rate.

It's easy to feel panic and unease when rates are steadily going up, but a fixed rate as high as 6% is likely not in the cards for this cycle. The hike-spree may have a significant dampening effect on borrowing and spending — placing Canadians in the position of making exceedingly careful budget choices while trying to pay down their debt at higher rates.

And once rates have peaked and markets re-balance to a lower inflation trend, I anticipate rates to start coming back down the mountain, giving Canadians holding a mortgage or buying a home a needed interest break.

"Keep in mind that predicting interest rates is a 50/50 game, but if we don't attempt to forecast, we can't help prepare or protect our mortgage clients."

Will these hikes cause a recession?

Most are now in agreement that we should expect a recession within a year. While that will bring its own economic trouble (like potential job losses), the silver lining is that rates would likely have to come down in response.

Fact: A recession is technically considered an economic contraction reported for at least two financial quarters in a row, but typically a pronounced and persistent period of economic decline.

Will the Bank of Canada pause rate hikes in the first quarter of 2023?

That's what the BoC and financial experts have projected. They've already ramped up rates, and it takes time for these policies to do their job. So, pausing through at least the first quarter of 2023 is what many are hoping.

It will be a wait-and-watch game to see how the marketplace reacts and if inflation trends downward enough to satisfy the central bank's criteria to put a hold on more rate increases. With a recession expectedly on its way, there's more risk with every hike in doing further damage to the economy. But, the central bank's priority will still be to knock inflation off its (currently) stubborn course.

Last but not least, do I think these higher interest rates will bring down home prices?

As rates go higher, some areas have already seen home prices pushed lower. At the least, demand has tempered enough to put buyers in a better position.

We’re seeing that buyers and sellers have different expectations of where they see prices going. Buyers are saying, “If I buy now, will home prices be lower in 6 months?” and so many are holding off while the rate hikes continue, hoping to see prices come down further.

Sellers, on the other hand, are hoping that prices will stabilize and that if they hold off selling for a few more months, prices may be up, and they’ll get more for their home.

There are signs that inventory is still an issue and will be in the foreseeable future, which will act as a floor helping to prevent substantial price erosion. If rates do pause (some areas are already reporting slowing price drops), and buyers and sellers wade back in, it’ll likely be a more balanced market (which will also help stabilize prices).

The ‘if’ factor here is that if rates keep going up and people have to sell because they can’t afford to keep their home, but most buyers hold off due to higher mortgage costs, it could lead to increasing inventory on the market and falling home prices.

Mortgage transactions are slowing down.

As far as the housing market goes, it couldn't sustain the pace of home buying we witnessed over the past couple of years. All those people who moved homes all at once or became first-time buyers in a rush? That activity level is not likely repeatable any time soon, so I completely expect Canadians to settle into a more typical buying pace — which we already see in real-time.

People will still need to move or want to buy a home in the ordinary course. And we're here to help them with that.

Will we see home prices stabilize? Would a recession bring rates down sooner, or later? What else is going on with the mortgage industry right now?

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