What's going on with mortgage rates in 2024?

Dan Eisner's Rate Prediction

The anticipation is building for a rate drop this June or July. That would make it an over two-year break to see the sequel of an immensely popular 'lower-rate' movie, and the wait has seemed like an eternity.

The Bank of Canada, after its March rate announcement, said we should be patient. It's not like we've had much choice, enduring these continued higher interest rates while we wait for headline inflation to return to the BoC's target of 2.0%. Our economy has been stubborn in bending to the wishes of the high-rate villain.

Here's what we see in favour of the rate-drop plot (the fan favourite):

• Despite higher gas prices, core inflation in March cooled slightly
• Inflation sits at 1.4% (below target) if high shelter costs are removed (mortgage interest and rent)
• The unemployment rate is on the rise, showing that our economy isn't creating enough jobs to keep up with population growth
• As well, the number of hours worked is also declining, which points to even more labour market softening to come
• Many businesses are freezing their hiring, with some contemplating outright job cuts
• Public sector hiring is stronger than non-public (business) hiring, which doesn't fuel growth
• Both mortgage and non-mortgage debt arrears are increasing across Canada
• A growing number of small businesses and retailers are cutting prices or closing up shop
• Over 2M mortgage renewals coming in 2024 and 2025 (along with higher property taxes) will add major stress to household budgets

Yet, here are some economic factors that could be scene stealers due to their inflationary effect:

• Oil price increases could spike as a result of global conflict (cracking the $100 ceiling is the height to watch for)
• Strong Canadian wage growth continued in March, which can perpetuate higher inflation
• Worryingly, inflation in the U.S increased to 3.5% in March (from 3.2%), propelled by surging gas and mortgage prices, which could delay rate cuts in both countries
• Unexpected Canadian GDP (Gross Domestic Product) growth (like the January spurt of 0.6% we just saw)
• PPI (Producer Price Index) came in higher for March — will higher costs be passed onto consumers?
• A housing market surge could increase prices to delay (or halt) rate drops
• Increasing federal and provincial government spending and debt levels
• A recent survey suggests that some Canadians are adjusting to higher rates for an improved financial outlook (which could fuel increased consumer spending)
• Canada's rate agenda could diverge by 0.50% from the U.S. Federal Reserve if we start the drops sooner, which could negatively impact our dollar

Many experts have said that we can't hold rates at this level for too much longer. The BoC is looking for more 'confidence' in inflation's decline before starting its rate drops — which it will get if March and April's inflation readings comply. However, if the rate drops are pushed out further into 2024, the economy is in danger of being overcorrected into recessionary trouble.

What will happen at the rate meeting on June 5? I see about a +60% chance for a June rate drop right now, with a likely 100% for July (if June doesn't happen). Keep in mind that continued higher inflation readings both here and in the U.S. will impact this prediction. And right now, bond yields are on the upswing, which is a harbinger to keep us on the edge of our seats for numbers coming out in May.

Once the rate drops start, that show could go on for a while. I still believe prime rates will fall by about 1.5% into the beginning of next year — and continue in 2025 down another 0.50% (2.0% in total).

Rate cuts may speed up if the economy slows down too quickly. But at the moment, economists project an eventual higher neutral-rate resting point of 3% (up from a projected 2.5%). The 'neutral rate' range will be a moving target over the coming months — we'll keep an eye on the numbers and update the total drop estimation as we go.

Is there a danger that the prime rate will increase again in 2024? There's always that danger, though the economic softening we're seeing makes it a divergent plot twist.

A year from now, we hope to be looking at lower rates, better assessing the impact of all these hikes, and wondering where the economy will go from there.

What can affect BoC's rate decisions?

Our central bank wants to see good news in the form of cooling numbers all around to decide when to raise the curtain on its rate drop cycle:

• Good news – Despite March's headline inflation bumping slightly to 2.9% year-over-year (from 2.8% last month), it's mainly due to a recent spate of higher gas prices; in fact, core inflation (no energy or food) cooled to 2.93% from 3.15% (next inflation reading May 21)
  
  
• Good news – Our March labour market saw over 2K jobs lost for a mostly flat reading, with the unemployment rate rising (again) to 6.1% from 5.8% last month for the largest increase since summer 2022 — up 1.0% year-over-year (next reading May 10)
  
  
• Not good news – Average wage growth in March increased to 5.1% from 5.0% last month (it was 4.8% in November 2022), indicating entrenching inflation that can stall its decline (next reading May 10)
  
  
• So-so news – January's GDP came in a little warmer than expected at 0.6% with a mix of sector growth and contraction, and December's was downgraded by 0.1%; Q4 2023 increased by 0.2% (though 0.3% was expected) (February numbers come Apr 30 and Q1 2024 on May 31)
  
  
• Side-eye news – Canadian 5-year bond yields are hovering around 3.8% now after higher PPI (Producer Price Index), inflationary buzz on both sides of the border (government and consumer spending, warming growth), and the U.S. suggesting rate drops there might be pushed towards the end of 2024
  

When will fixed rates go down?

Fixed mortgage rates are steered by the Canadian bond market and (eventually) follow the movements in bond yields up or down. 5-year bond yields are the standard for setting 5-year fixed rates, and are the reference in this section and blog.

Bond yields are up around 3.8% after a higher PPI (Producer Price Index) of 0.8% vs. an expected 0.6%, suggesting that these higher prices may soon be passed on to us consumers. Both Canada and the U.S. are seeing growth engines revving, not to mention a side eye cast at global conditions which may negatively affect oil prices, and a U.S. musing that rate drops are now pushed towards the end of 2024.

Oh, one more thing. Both governments are spending like there's no tomorrow (i.e. 'election priming').

Our country's weaker job market (unemployment rate of 6.1%) contrasts with the U.S., which reported strong growth again in March, creating 303K jobs (150K growth is considered economically neutral). Yields are pointing to a rate drop here sooner than in the U.S., suggesting rate-policy divergence of at least 0.50% that could hurt the Canadian dollar (for an inflationary effect).

Yet, a strong U.S. economy that doesn't play into lowering inflation could still thwart rate drops here. Their March inflation increased to 3.5% (up from February's 3.2%), and reported stronger retail sales growth than expected. The U.S. Federal Reserve recently confirmed it may take longer to start their rate drops.

The Bank of Canada (as always) remains concerned about inflation's path, especially the potential impact of housing market activity to raise home prices.

How many more bumps in the road? Bond yield volatility along the way is considered 'normal ' when prime-rate drops are anticipated. The bond market is particularly reactive to immediate factors or sentiment, triggering bond sell-offs in a snap and a fixed-rate rollercoaster (in a tight range) in response.

If yields jump up, look for fixed rates to notch up, as well. Lenders are closely watching their costs and retaining capital to deal with the potential for increasing debt arrears.

Get a rate hold now!

If you're considering buying a home or renewing sometime in the next few months, talk to one of our expert brokers about getting a rate hold. It could protect you from rate volatility during that time, and you'll still get a lower rate if it goes down during your hold.

Can the U.S. economy affect rate hikes here?

The U.S. economic landscape seems to be gaining greenery with each passing month instead of losing it — with a frothy jobs market and strong GDP. Regional banks, however, are still at risk thanks to commercial real estate woes (high renewal rates and depressed values due to lower occupancy). U.S. Inflation seems to be more resistant to higher rates, though the U.S. Federal Reserve is still suggesting that rate cuts will come before year-end.

Why do we care? Economic conditions south of the border can pile on factors weighed by our central bank (and drive higher prices here) to affect its rate decisions.

Will Canada see a recession?

Despite the constant, distant calls of the 'recession' loon, it hasn't flown into our backyard yet. That doesn't mean the trajectory for a soft landing — meaning no recession or a very mild one — is an absolute. Nothing is ever certain in love or economics.

Back in October 2023, the Bank of Canada referred to projected economic faring as 'low positive growth' that will walk the line and possibly dip into negative territory (but not as a full-blown 'recession'). So far, that's coming true, with a bit better faring on 2024's GDP expected than initially forecast.

There's optimism that market resilience might keep our economy out of recessionary territory. Experts had projected a mild recession through the first half of 2024 — we're not out of the woods on that yet. Higher inflation or sustaining high rates for too long may jeopardize that soft landing or possibly end up in a crash landing.

A bumpy landing? It could bring lower mortgage rates sooner.

The more damage these higher rates inflict on unemployment and economic growth, the faster the BoC would back down on its policy rate, providing some budget relief when we'll likely need it most.

Stagflation isn't expected to stick a landing.

Stagflation, a period of high inflation together with a weak economy and high unemployment, is on everyone's radar. According to the BoC, "it's not where we are now" as our inflation isn't high enough, having come down to around 3% from over 8%, and the unemployment rate is still relatively low.

OSFI has added a new LTI limit for banks that may affect you

For 2024, OSFI (Office of the Superintendent of Financial Institutions) has pledged to keep its eye on lender (and homeowner) protections, not ruling out a stress test change — but it likely won't budge. With any proposals it does make, implementation likely won't happen for weeks or months, after it consults the industry and lenders prepare for changes.

• This January, OSFI proposed a possible LTI (loan-to-income) cap for lenders.
  
• In March, OSFI declared the LTI cap will go into effect for Q1 of 2025. It's aimed at preventing banks from accumulating too many 'highly leveraged' uninsured mortgage loans with an LTI over 4.5 times a borrower's income as rates decline. New mortgages won't be measured directly (like the federal mortgage stress test), but home buyers may find themselves on the receiving end of higher uninsured rates if they exceed the LTI OR a rejected mortgage approval.
  
  Learn more about how the LTI limit may affect your home buying power here.

Does True North anticipate an increase in mortgage activity?

While the higher rate environment has dampened affordability, Canadian home buyers and owners are already starting to get busy ahead of a housing-market rush, expected to occur when prime rates ease off and variable rate discounts grow.

As always, we offer great rates and specials, and we're attracting many mortgagees who look to lower their monthly costs while taking advantage of housing deals in their area.

Despite warming activity, predictions are mixed on the effect lowering rates will have on housing prices. More sellers may list to get out of restrictive rates, yet the newcomer numbers may keep demand high. Both rates and home prices are elevated enough for some to consider putting their buying intentions off to next year when the mortgage stress test is lower (with lowered rates).

Our low 6-month and 1-year Rate Relief™ products can help you bridge the gap with budget relief now to hopefully renew into lower rates — enabling your dream-home buy sooner.

Read more here about how high mortgage rates may impact the 2024 housing market.

My mortgage advice for 2024? Shop for your best rate — and consider a variable one.

Around 2M Canadians are coming up for renewal in the next couple of years. Even if rates go down in 2024, homeowners will still take a budget hit from renewing at higher rates than they had previously.

The most important thing you can do in this market is shop around for your best rate and product. Many Canadians are still very unaware that they don't have to stick to their bank for a mortgage.

We exist to do the looking on behalf of our clients, checking with several accredited and alternative lenders for the best solution and budget fit for their needs, while passing along a volume rate discount. We're fast, we speak several languages, and we're very good at what we do — which is why we have so many 5-star reviews.

First-time home buyers especially need expert advice to set them on a path to successful homeownership amid these higher rates.

Which rate should you choose? Variable rates have likely peaked and may offer instant budget savings on a climb down versus locking into a 5-year fixed rate and watching rates drop from the sidelines. You can always lock into a shorter fixed rate if you get too nervous.

Owning a home is a tremendous source of pride in Canada. I created True North to help clients appreciate having access to a better mortgage experience, saving them thousands with their best rate and mortgage choice.

Have questions about 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 15,000 5-star reviews from our happy clients.