What's going on with mortgage rates in 2023?

Here's my rate prediction

I'm not seeing a rate hike for the BoC's June 7 meeting, despite the increasing odds (and calls) for one based on warmer inflation and GDP growth than expected.

That will leave its policy rate at the current 4.5% and most bank prime rates at 6.7%, not factoring in any variable rate discounts that lenders like us may offer.

I'm reluctant to agree that a rate hike is coming this summer.

We're still seeing some economic steam and recently-higher fixed rates but that doesn't mean the bank's policy rate hikes aren't grinding away behind the scenes.

The central bank also realizes that inflation is being driven by higher interest rates and rent costs — and that an increase in prime would only fuel that part of the CPI basket (thwarting its efforts to bring inflation down).

There are signs everywhere that a slowdown is already underway — Canadian banks are tightening their credit and lending standards, the labour market (a lagging indicator) is softening, and companies already have less appetite for expansion and investment.

It takes time for these rate hikes to do their work — from 12-24 months to work their way down through to everyday spending decisions. It's a slow, painful process, and I predict that rates will stay paused through the summer as we wait out the numbers.

What can affect the BoC pause in rate hikes?

Our central bank would rather avoid further rate increases after such a fast tightening cycle, hoping to see convincing numbers to stay on the sidelines. We're watching for signs of a slowing economy:

• April's inflation numbers increased to 4.4% (March was 4.3%), the first acceleration since June 2021 and higher than the expected 4.1% (next reading on June 27)
• Job numbers for April were up (+41k), the opposite direction they should be going, with the unemployment rate unchanged at 5.0% (next reading June 9)
• Average wage costs for April rose to 5.2%, a concerning sign pointing to entrenched inflation
• March's Canadian GDP (Gross Domestic Product) is unchanged from February, though Q1 2023 rebounded with unexpected growth compared to Q4 2022
• Canadian bond yields are on a tight rollercoaster, trying to anticipate when rates may start to drop

When will fixed rates go down?

I see fixed mortgage rates swinging up and down within a tight range over the next few weeks — you may see them fall again if May's inflation numbers (coming out June 27) post disinflation.

Fixed rates are tied to Canadian bond yields — the market is seeking direction and is easily pushed around by the next economic factor, such as the inflation rate, oil price changes, or U.S. bank instability.

In fact, fixed rates aren't usually this volatile. These fluctuations reflect the mayhem caused by the pandemic and resulting home-buying fervour, and right now, the world is trying to get market conditions back to some state of normal. We're not there yet, so I don't expect fixed rates to be stable or headed in just one direction.

For the rest of 2023? If the Bank's policy rate stays paused, I see room for another 0.50% decline in fixed rates as the year plods along, but they won't stray much further until the Bank of Canada starts cutting its policy rate in earnest.

Will financial antics in the U.S. affect rate hikes here?

Recent U.S. volatility has pressured both countries' central banks to carefully consider any further rate increases as the rapid rate-tightening cycle reverberates, pushing hidden economic fractures into the light.

A soft landing is a magical thing.

I think all the numbers and rate hikes could still come together to produce a softer economic touchdown — with no recession or a mild one at the most. The market resilience we've seen may actually work to keep our economy out of the red.

Canadians would (mainly) keep their jobs, though the unemployment rate would presumably normalize from current lows. Inflation would come down, and home prices would normalize.

Some economists would call that magic, especially amid all the market turmoil and concerns that financial policies could push already-tight budgets over a cliff.

Does the bond yield 'curve inversion' mean we'll experience a recession? I see a different reason.

I agree with economist Campbell Harvey that the inversion may simply be anticipating lower interest rates as a result of declining inflation, rather than a forced drop due to a recession. Companies are already adjusting to avoid that scenario (i.e. increasing capital as a buffer, slowing hiring and wage growth now).

However, if the Bank of Canada continues to hike rates at any point this year, we still may land with a hard (recessionary) thud. It would come with better news for mortgage rates, as the bank would finally have good reason to back down, perhaps quickly, providing some rate relief when we'll likely need it most.

Be on the lookout for a 'rolling recession.'

There's another possibility for the Canadian economy — a rolling recession. The U.S. has seen certain sectors contract since the end of 2022, and sectors here, such as manufacturing and accommodation and food service, are seeing enough slowdown on the horizon that could spell periods of recess. Yet, other sectors are showing strength, such as technical services, mining and the public sector. Or, certain Canadian centres may see a more pronounced contraction than others.

A rolling recession ... does not impact the entire economy equally. It hits different market sectors at varying times. This means that while the economy as a whole might not be in a recession, people in certain areas or particular industries could feel like they are in a recession.

– Forbes, Feb. 14, 2023

Will the mortgage stress test get harder?

In January 2023, OSFI (The Office of the Superintendent of Financial Institutions) proposed changes that would further tighten the required mortgage stress test and its rules.

If they go through (likely in the 3rd quarter of 2023), lenders would apply more stringent qualifying limits and have even less flexibility to make case-by-case exceptions to federal stress-test regulations.

More potential home buyers would be locked out of prime mortgages with regulated lenders. That means those buyers on the cusp of affordability would either have to consider alternative sub-prime lending with higher rates or continue renting longer.

If rates come down at some point, it could help offset these mortgage-muzzling rules. But we here at True North wonder why OSFI is considering these increased restrictions when banks are already well-prepared for future rate or mortgage default increases.

Want to hear more? Listen as I discuss OSFI's proposal with Ben O'Hara-Bryne on his January 13, 2023 podcast, A Little More Conversation.

Does True North anticipate more mortgage activity?

Spring is typically a busy market season for us, with warmer weather better for shopping, viewing properties — and moving, for those who find the home they're looking for.

Our transactions have picked up considerably, though it remains to be seen if sellers are too reluctant to move (facing possibly higher mortgage rates, unless their rate is portable). A lack of listings will stymie home-buyer hopefuls combing the listings and neighbourhoods, looking for their home-sweet-home.

Home prices are showing signs of stabilizing across Canada with increasing sales and buyer activity. Higher immigration, increased interest from first-time buyers perturbed by higher rents, and lower housing inventory available may combine to push prices up in some regions.

We may also see a bump up in housing market activity ahead of possible OSFI restrictions coming later this year.

A better outlook for home buyers in 2023.

I do see a more positive year after weathering these fast rate hikes (fortunately, many are hanging on — and we've helped several clients realign their mortgage budgets and needs).

Many Canadians will start to feel more comfortable as they adjust to rates as they are now (assuming the BoC is truly done pushing them up), and cautious buyers and sellers will eventually enter the market once again, thinking that the 'worst' may be over.

Where home prices go will depend on the housing inventory available to meet an uptick in demand we expect to see. Presently, we're seeing prices increase nationally as listed inventory remains at 20-year lows — sellers are still sticking to the sidelines, but for how long?

What we really hope is that home buyer conditions on purchase offers stay in 'vogue' (no mad resurgence of no-condition or bully offers, or fierce bidding wars), so Canadians can better protect themselves from financial surprises or setbacks.

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.

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