How high will we see mortgages rates go?

In our blog, 'TNM Talks,' Dan Eisner speculates on Bank of Canada's rate-hike agenda.

We're in unprecedented times for our housing market. And sky-high inflation has ended an era of rock-bottom mortgage rates. Will rate-hikes stop short, or go long?

June 1, 2022
Dan Eisner, TNM Founder and CEO

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 broker 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

I agree with several forecasts that see the Bank of Canada (BoC) increasing its overnight lending rate by at least another 100 basis points (bps) by the end of 2022.

After today's 50 bps increase to a rate of 1.5%, we're expecting another 50 bps at the July 13 announcement, and then a 25 bps increase posted for at least two out of the three remaining dates for 2022. (Note: There are 100 bps in a percentage point.)

That would bring the BoC rate to 2.5% by the end of the fourth quarter of 2022. That's well into their targeted neutral range of 2 to 3% (intended to neither stimulate nor depress the economy at that rate). And that means a prime rate of around 4.7%, not factoring in any variable rate discounts that lenders like us may offer.

There's speculation that the neutral rate will need to top out even higher at 3% into the first quarter of 2023 — before the central bank takes a breather. Of course, that's a possibility if spending and rip-roaring inflation take too long to come under control.

But, I think the knock-on-effects of rate increases on home prices and borrowing costs are already making everyone worried about tipping into a recession, not to mention the expectation that inflation will take a sizeable bite out of consumer pockets. The central bank will want to look around and assess the impact before automatically hunkering down on more increases.

Will fixed rates hit 6% over the next year or two?

For the most part, fixed rates have already increased to meet what the central bank expects for rate moves. With our best fixed rates right now around 4%, it's possible they may pass 4.5% if the neutral BoC rate expects to settle around the 3% range.

It's easy to feel panic and unease when rates start going up, but a fixed rate as high as 6% is likely not in the cards for this cycle. The current fast pace of rate increases may have a significant dampening effect on borrowing and spending, tamping down demand and placing Canadians in the position of making exceedingly careful choices about spending their money and paying down their debt.

Once rates hit a peak, I anticipate that they'll come back down a bit as we attempt to ride this abnormally large wave of economic volatility until it eventually breaks onto a shore of more balanced markets and lower inflation.

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

That's what the BoC and financial experts have projected. There's a lot of pressure right now to keep the increases going for the next few months to get on top of inflation as quickly as possible — which hit a 31-year high in May. Pausing at an acceptable neutral rate in the first quarter of 2023 is what many are hoping for.

Will this hike pace be enough to curb Canadian spending and push down riotous inflation (which is still going despite these latest rate hikes)? Will insatiable demand for goods ease off, or lagging supply be able to catch up? Will unemployment start to rise? If all answers point to yes, then the BoC can pause at any point to carefully consider a softer approach to help keep a recession at bay. But, it will be a wait-and-watch game to see how the marketplace reacts to the new rate environment.

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

As rates go higher, that should push home prices lower. Prices are already tempering in some regions. Sales will also cool, and then inventory should come back to a more balanced state.

For the last few years, the marginal factor affecting housing has been interest rates. Usually, increasing family incomes is what drives up home prices and inflation. This time around, it was the all-time-low interest rates and a pandemic crush to buy a home that sent prices into the stratosphere. It's no surprise that home prices could come back down to earth as rate-increases attempt to recalibrate the market.

You may also see enough hesitancy from buyers — now qualifying for less home because of a still-high stress-test rate — to make sellers reassess their pricing strategy faster than expected.

How far will home prices fall? Again, we wait and watch. Home prices were 'heightened' by a period of extraordinary activity due to the pandemic — so comparing them to the peak of January 2022 isn't realistic. Even if they fall by 15%, they'll still sit higher on the historical timeline.

Mortgage transactions are slowing down.

As far as the housing market goes, it can't sustain the pace of home buying we just 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're already seeing 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.

I have more thoughts on home prices and buying vs. renting, but I'll get into that later.

Will we see a recession as a result of rate hikes? What will happen to the variable vs fixed rate spread? What else is going on with the mortgage industry right now?

Look for more 'TNM Talks' in the coming weeks.

Make sure to sign up for our newsletter to get the latest Dan Eisner updates and other mortgage insights from our leadership team here at True North Mortgage.

Have questions about where rates are going and how it may affect your mortgage or pre-approval? Give us a shout, anywhere you are in Canada. We have your best rate, expert advice and unbeatable service — with over 11,000 5-star reviews from our happy clients.

Talk to us. Save your money.