Canadian Housing Market, January Recap: Mortgage Rate Cuts Unlikely for Upcoming Spring Season

Under the Fed decision, as mentioned, Powell announced that a March rate cut is unlikely. The January 31st CNBC article also stated that the Fed won’t be confident enough by its March rate decision meeting to justify defeating inflation. Powell’s message to not expect imminent rate cuts stands in stark contrast to what was broadcast in December, when Investor’s Business Daily reported that the Fed mentioned anticipating three rate cuts in 2024.

Given that Canada’s interest rates traditionally run nearly 60 basis points higher than those of the U.S., it is unlikely that the BOC will cut rates at its March decision meeting, either. According to a January 31st Bloomberg article, later-than-expected rate cuts were also echoed by Beaudry, who said that if core inflation remains sticky, the BOC probably won’t rush to cut rates until midyear, maybe even July.

This makes sense. According to a January 24th Wall Street Journal article, Canada’s core inflation rate has remained high, reducing the likelihood of the BOC cutting rates in the near future. And it wasn’t just central bankers dowsing hopes of rate cuts. According to a January 31st Yahoo! Finance report produced during the same time as the rate meetings, Canadian GDP data came in hotter than expected, pushing back expectations that the BOC would cut rates anytime soon.

According to a January 31st Financial Post article, the BOC said the GDP data should be taken with a “grain of salt,” also noting that the BOC doesn’t expect to see any rate cuts until June, either. Within the article, Douglas Porter from the Bank of Montreal echoed this point, stating that GDP data could push back the BOC’s plans to cut rates. Also, in a January 31st Canadian Mortgage Trends article, TD’s Marc Ercolao reiterated that “a heating up of the Canadian economy may push expectations for a first cut further down the line.”

In the financial realm, if even the banks, which are often wrong, are overly optimistic about the pace and severity of rate cuts, it can probably be assumed that rate reductions are highly likely in the near future. Even BOC Deputy Governor Carolyn Rogers hinted as much during the January 24th monetary press conference, noting that the BOC is well aware that rising house prices (which experts admit will happen if the BOC cuts rates) will put upward pressure on inflation.

However, there are also a few glaring similarities between the markets of 2024 and 2023. First, mortgage rates. According to the Royal Bank of Canada (RBC) at this time last year going into the spring market, a decent five-year fixed insured rate was sitting at 5.04%, and today a five-year fixed is at 5.14%. So, the cost of borrowing and mortgage qualifications are basically where they were at this point in 2023.

Additionally, according to a February 14th Canadian Real Estate Association (CREA) report, prices are also very close to last year with the December 2022 benchmark home price sitting at $724,000 versus $730,000 in 2023. On February 1st, 2023, Storeys reported discussions on bidding wars, with listings intentionally priced low. Experts are pointing out similar news propagated throughout digital information channels to ignite this year’s spring real estate market.

So, is this year going to be any different from last year, which saw the benchmark house price rise $42,000 within a few months? There are a few distinctions. According to MarketWatch, in March 2023, bond yields plummeted just in time for the beginning of the spring real estate market. To visualize this, next to the Advanced Charting tab, change 1D to 1Y in the drop-down menu. According to a March 10th, 2023, Barron’s article, bond yields fell because of the U.S. banking crisis, sending the five-year fixed rate from 4.9% down to 4.62%.

According to a January 24th Bloomberg article, the Bank Term Funding Program (BTFP), which the Fed used to calm down the crisis last year, is set to expire in March. That being said, the Fed could extend the life of the facility, or alternatively, the banks utilizing it could be in better shape this year, as bad treasuries have been removed from their books. Also, events in the Middle East could send a surge of investors into treasuries at any point in time. As highlighted in an October 11th, 2023, Bloomberg article, significant events in the Middle East prompt investors to flock to treasuries, sending prices upwards and bond yields down, hence putting downward pressure on mortgage rates.

According to a January 26th Financial Times article, the Middle East conflict has the potential to send gas prices, and subsequently inflation, upward. Furthermore, a January 26th Bloomberg report indicates signs of stress in Canada’s balance sheet plans, particularly within the banking system. As a result, the BOC may end quantitative tightening earlier than expected, which would add another buyer of government bonds into the system. This would exert upward pressure on bond prices and downward pressure on bond yields, resulting in a decline in mortgage rates.

Further complicating matters, a January 31st Financial Times article reports the U.S. is set to issue a large amount of debt over the next three months. This, all else being equal, would exert upward pressure on bond yields and thus cause mortgage rates to rise. Not to mention, a January 16th Yahoo! Finance article notes persistent inflation levels that continue to surpass expected economic numbers.

With several competing variables influencing mortgage rates in the coming months, the outcome remains uncertain. It will be interesting to see what happens. While interest rate cuts for the spring market seem unlikely, the real estate landscape in 2024 is in a similar position to that observed in 2023. HAVEN will continue to track Canada’s real estate as events unfold.