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 than first anticipated. Will the hikes stop soon?

Updated October 5, 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 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

Initially, forecasts saw the Bank of Canada (BoC) increasing its overnight lending rate to at least 2.5% (squarely in the neutral range) to take the edge off demand-and-supply inflationary pressures.

But after a dizzying pace of rate hikes from 0.25% to 3.25%, some expect them to hit 4.0 by year-end. I'm not going that far right now — but I do see another 50 basis points coming.

That would bring the BoC rate to a resting place of 3.75% as we round out 2022. It's past the 'neutral range' of 3% and well into restrictive territory. With a prime rate of 5.95% (not factoring in any variable rate discounts that lenders like us may offer), the knock-on effects will reverberate through our economy and the housing market.

(Note: There are 100 bps in a percentage point.)

Will it be enough to drag inflation back to a reasonable number? Whether the central bank holds now or not, its intended target inflation of 2.0% will still take a year or two to come back within reach.

The thing to watch? That inflation continues to decline as we go (the July report decreased slightly to 7.0% from June's high of 7.6%). If it doesn't stage a continual (or fast enough) decline, the BoC may feel the need to notch rates up again.

We're already seeing the knock-on effects of these rapid rate increases on home sales and prices, and borrowing costs. It's like watching a forklift tip over from a heavy load — right into a recession if we're not careful. Higher rates and inflation are taking a sizeable bite out of consumer pockets as we speak. So I think the central bank will want to look around and assess the impact before automatically throwing up 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 4.5%, they may come up a bit more if the BoC benchmark rate pushes beyond the 4.0% range.

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

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 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 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 so far, it's having a deflationary effect (inflation is down from a 31-year high in May 2002). 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.

But, it will be a wait-and-watch game to see how the marketplace reacts to this new higher-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 are cooling (some markets more than others). Inventory is becoming more balanced, with many sellers holding off to see where prices might land.

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

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 (bringing them down more).

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% or 20%, they'll still sit higher on the historical timeline.

Mortgage transactions are slowing down.

As far as the housing market goes, it couldn'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 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 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?

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