Welcome to Mortgage Rundown, a quick take on Canada’s home financing landscape from mortgage strategist Robert McLister.
We’re potentially seeing the gravest central bank policy error since the dawn of inflation targeting. And mortgage holders could pay the price.
Canada is now dealing with not only one pandemic, but two. COVID and inflation, the latter being a virus that spreads just as fast. Canadian families know full well how contagious inflation has become, permeating all aspects of their lives and feeding on itself for months.
The Bank of Canada’s response thus far? One measly 25 basis point rate hike. Its rate tightening has come so late that it seems like the punchline of a joke.
How do we know it’s late? Because the central bank has never before begun a rate hike cycle:
- With consumer price index inflation an eye-popping 300 basis points above prime rate;
- with both a pandemic and war limiting supplies of goods and services and spiking commodity prices;
- with unemployment near long-term lows;
- with consumers expecting rampant inflation (Those expectations “have been completely de-anchored from the 2-per-cent target since late 2021,” Scotiabank Economics wrote on Tuesday.);
- with U.S. inflation approaching the unthinkable: double-digits;
- with towering corporate profits – earnings for S&P 500 companies rocketed roughly 50 per cent in 2021, as firms used “supply chain” constraints as excuses to gouge consumers;
- with Ottawa spending a historic half-trillion dollars of debt-financed fiscal stimulus since 2020 – further fuelling inflation;
- after quantitative easing artificially kept rates lower;
- with such widespread upward pressure on wages;
- after such an obscene run-up in home prices;
- with the Bank of Canada’s credibility running so low – its string of missed inflation forecasts over the past 18 months have rarely been equalled.
If you feel like you’re being “punked” by central bankers, you’re not alone.
The Bank of Canada’s “flexible inflation” targeting scheme purports to keep inflation “low, stable and predictable.” But with inflation at three-decade highs and mounting, “flexible inflation” targeting seems like something belonging on a meme.
In the last serious inflation shock of the 1970s, central bankers were forced to jam up rates more than 13 percentage points to kill soaring prices. Fortunately, economists expect inflation to peak this spring “only” in the 6-per-cent range.
But the central bank still has to bring it all the way back near 2 per cent. It may only be a matter of time before more economists start forecasting an overnight rate in excess of the bank’s 2.25-per-cent neutral rate estimate.
How will Canadian mortgage rates react to Putin’s war, nuclear threats and oil shock?
Do’s and don’ts of borrowing against your home equity to invest
Former U.S. Treasury secretary Larry Summers predicts that U.S. short-term rates – which strongly influence Canadian rates – may have to rise to 5 per cent or more to control inflation. That’s an “almost unimaginable” prospect, he wrote in Tuesday’s Washington Post.
Without a doubt, central banks have left the barn door wide open. The inflation horse has now run down the road. Those who weren’t around in the 1970s and ‘80s don’t know how hard it is to bring it back in the stable.
That’s why less financially endowed mortgagors should practise sensible risk management. That means biting the bullet – despite tantalizing variable rates such as 1.64 per cent or less – and locking in at least part of their mortgage.
For those who need financing for five-plus years but don’t want to pay 2.94 per cent to 3.34 per cent for a five-year fixed, hybrid mortgages (half fixed and half variable) are still near 2.29 per cent.
HSBC holds its leading rates
Fixed and variable rates continued escalating at most major lenders this week, but the lowest nationally advertised five-year rates did not. That’s thanks to HSBC, which at the time at writing has left its leading uninsured five-year fixed and five-year variable rates as is – at 2.94 per cent and 1.64 per cent, respectively. That’s despite banks facing soaring yields and liquidity (risk) premiums in the bond market.
In April, variable rates will rise again. But fixed rates will hinge on that which the market fears more: inflation (bullish for bond yields, and hence fixed mortgage rates) or war escalation (bearish to neutral for fixed rates if investors buy bonds as a safe haven; bullish if the commodity/supply shock continues).
This & that
According to a new survey from Mortgage Professionals Canada, 72 per cent of respondents say they can afford mortgage payment increases of “more than 20 per cent.” If you’re a homeowner in that other 28 per cent, plan carefully for the next 18 to 24 months. Budget for at least 200 basis points of rate hikes, even if we don’t get them. For those with adjustable mortgages or those coming up for renewal in 12 to 24 months, a 200 bps rate surge would lift monthly payments about $100 per $100,000 of mortgage.
Robert McLister is an interest rate analyst, mortgage strategist and columnist. You can follow him on Twitter at @RobMcLister.
