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On January 24th, The Bank of Canada announced its decision to maintain the Policy interest rate at 5.00%. With 4 consecutive rate holds, markets and the Central Bank believe there’s clear evidence pointing to slowing demand and increased probability of a looming recession, led by slower consumption growth and a decline in housing activity, while still maintaining their hawkish and precautionary stance. Markets and Senior Economists are largely convinced there are no more rate hikes in the pipeline for Canadians and expect the first rate drop to come as soon as April or June. The Central Bank forecasts a continued cooling of the economy, aiming to bring inflation back to its two percent target by early 2025.
Commentary from Perch’s CEO and Principal Mortgage Broker, Alex Leduc:
March is essentially the mid-point between the last two quarters, which reflects expected cuts to begin in the second half of 2024 at a pace of roughly 0.25% per quarter into 2026. Cumulative rate cuts of 2% are still expected between mid-2024 and the end of 2026. Inflation has been stickier than expected in the last few months, which has tempered expectations of earlier rate cuts.
Key Takeaways
- The Bank of Canada has paused rate hikes for the time being, with the next announcement scheduled for March 6th.
- For the month of March, we anticipate fixed rates will continue to drop and variable rates will remain the same.
- Today’s best mortgage rates are 4.79% for 5-year fixed and 6.00% for 5-year variable.
- For first-time home buyers, there are some great opportunities, sellers are coming to terms with tapering price growth as higher interest rates have barred many from entering the market, inventory is low, but will edge up in the early months of 2024, before really ramping up in the Summer.
- For homeowners who are coming up for renewal, continue to monitor our rate forecasts, it would be wise to see what rates Perch may be able to offer above and beyond your existing Lender, as they’re typically less aggressive on their rate offerings.
- For homeowners who would like to see the benefit of switching lenders and breaking their mortgage early, Perch automatically calculates the net benefit once you input your existing property and mortgage details in your Perch portfolio.
What’s new in the mortgage world this month?
For the month of March, we anticipate fixed rates will continue to decrease and variable rates will remain the same. National sales activity continued to climb in January, +3.7 month over month, building on the +8.7% jump we saw in December, however, sales in January were still 9% below the 10-year average. On a year over year basis, sales activity is up 22% from January 2023, which was the worst start to a year in the past two decades.
Canada’s inventory edged up by 1.5%, nowhere near inventory levels we’ve seen in the middle of 2023, thus, the sales-to-new listings ratio increased to 58.8% in January, up from 57.8% in December, in comparison, this ratio peaked at 67.9% in April. According to CREA, a ratio between 45% and 65% is generally consistent with a balanced housing market. “Sales are up, market conditions have tightened quite a bit, and there has been anecdotal evidence of renewed competition among buyers; however, in areas where sales have shot up most over the last two months, prices are still trending lower. Taken together, these trends suggest a market that is starting to turn a corner but is still working through the weakness of the last two years,” said Shaun Cathcart, CREA’s Senior Economist.
The Bank of Canada is continuing to hold interest rates steady
On January 24th, The Bank of Canada published their decision to continue to hold their Policy interest rate at 5.00%. With 4 consecutive rate holds, markets and the Central Bank believes there’s clear evidence pointing to slowing demand and increased probability of a looming recession, lead by slower consumption growth and a decline in housing activity, while still maintaining their hawkish and precautionary stance. Markets and Senior Economists are largely convinced there are no more rate hikes in the pipeline for Canadians and expect the first rate drop to come as soon as April or June. The Central Bank projects the economy will continue to cool down, bringing inflation back to its two per cent target some time in early 2025.
The strength of the Canadian economy
Canada’s real gross domestic product edged up 0.2% in the fourth quarter on the back of higher exports of crude oil and crude bitumen (+6.2%), as well as reduced imports, following a decline of 0.1% in the third quarter. According to Statistics Canada, “The lower growth in the fourth quarter of 2023 reflected slower wage growth in services producing industries relative to the previous quarter, as well as declining wages in the goods-producing industries,”
Q4 negative GDP data released on February 29th shows that on an annualized basis, the Canadian economy grew at a rate of 1.1%. “Growth appears to have been driven largely by an easing of previous supply constraints helping exports and car sales, rather than necessarily an improvement in domestic demand,” Andrew Grantham, an economist at CIBC Capital Markets, said.
While this technically means Canada is not yet in a recession, as we have not yet had two consecutive contracting quarters, growth stalled, remaining essentially unchanged and coming in below expectations for the year. The central Bank forecasts GDP growth of 0.8% in 2024 and 2.4% in 2025.
Key Terms:
GDP: GDP or Gross Domestic Product refers to the total dollar amount of goods and services produced in a country. It is an overall measure of the strength of our economy.
CPI: The CPI or Consumer Price Index is a measure of inflation tracked by Statistics Canada. It attempts to track the spending habits of the average consumer with a basket of typical goods and services.
Consumer price index (CPI)
January consumer price index, the measure for year over year inflation, came in at +2.9%, following December’s +3.4%, a result of the base-year effect since gasoline prices fell more on a monthly basis in January 2023 than they did in January 2024. Excluding gasoline, the headline CPI slowed year over year, from 3.5% in December to 3.2% in January. Canadians continued to battle elevated shelter costs (+6.2%) and mortgage interest costs (+27.4%) in January and beyond, notably, mortgage interest rates has been and continues to apply the highest upward pressure on the CPI since December of 2022. The Central Bank sees tightening household discretionary spending as their most viable tool to halt consumer spending on goods and services and attain their 2% inflation target, the CPI dropped below the 3% mark as we predicted in our previous monthly report, we’re expecting further drops until the 2% mark is reached around May, after which the Bank of Canada will need to move quickly, the next slated CPI announcement will be on March 19th.
Job vacancies and Unemployment Rates
Job vacancies continued to hold steady, with three months of little change, and a year over year decline of -24.7%. There were 2.0 unemployed persons for every job vacancy in December, up from 1.9% in each of the last three months, indicating the labour market tightness has eased, which will potentially reduce upward pressure on wage growth.
Strong population growth continues to fuel demand
Canada’s population saw an increase of 430,635 (+1.1%), from July to October 2023, the highest growth rate Canada has experienced in any Quarter since the baby boom, in 1957 (+1.2%). Strong population growth continues to add both demand and supply to the Canadian economy, newcomers are helping ease the shortage of part time workers while also boosting consumer spending and driving up demand for shelter. Ottawa plans to level out the number of new immigrants it accepts in 2026, however will maintain their goal of attracting 500,000 newcomers annually in both 2024 and 2025. Many arriving in Canada’s major markets are searching for shelter amidst the home unaffordability crisis, driving up rental cost (+7.9%) in January. Provinces rely heavily on Canadian investors to supply rental apartments in the form of investment homes, however, as higher interest rates and mortgage costs have worked to deter existing and would be landlords, the supply of rentals has steadily declined which has driven up rents across the country.
Recommended reading: How does population affect the housing market?
Bond yields move downwards
Canada’s 5-year bond yields have continued to move downward since they reached 16-year highs during the month of October. Canada’s mortgage rates tend to track five-year bond yields at a premium and with a lag. Yields dropped due to a growing consensus that interest rates remaining elevated long than anticipated and a hard Canadian recession fear all but diminished as the Canadian economy is now expected to be in a mild recession after a negative Q3 and flat Q4 results.
If you’re looking to buy a home in Canada:
Our current best 5-year fixed rates is 4.79% and 5-year variable rate of 6.00%.
For first-time home buyers, there are some great opportunities, sellers are coming to terms with tapering price growth as higher interest rates have barred many from entering the market, inventory is low, but will edge up in the early months of 2024, before really ramping up in the Summer.
For homeowners who are coming up for a mortgage renewal, continue to monitor our rate forecasts, it would be wise to see what rates Perch may be able to offer above and beyond your existing Lender, as they’re typically less aggressive on their rate offerings.
For homeowners who would like to see the benefit of switching lenders and breaking their mortgage early, Perch automatically calculates the net benefit once you input your existing property and mortgage details in your Perch portfolio.
Homeowners
