BCREA Mortgage Rate Forecast by gabyion


									                            B RITISH C OLUMBIA R EAL E STATE A SSOCIATION

                                            E CONOMICS     S EPTEMBER 2009

Prospective homebuyers took advantage of historically            Figure 1
                                                                                                            Mortgage Rates
low mortgage rates through the summer months, fuel-                   Per cent

ling a rebound in housing activity in BC and across                  7.6

                                                                                          1-Year Fixed Term Rate
                                                                                          5-Year Fixed Term Rate
Canada. The BC Real Estate Associations (BCREA)                      6.8

expects a low interest rate environment to persist                   6.4

through 2009 and into 2010. Mortgage rates are fore-                 6.0

cast to fluctuate within a narrow range near current                 5.6

levels for the remainder of the year, before rising                  5.2

modestly through 2010 as the economy improves.


Declining interest rates since late 2008 have been the               4.0

product of the worldwide economic downturn which                     3.6
                                                                                 2005                2006               2007        2008        2009

led to a global coordinated effort to mitigate further              Latest Data Point: 2009m8, Average of Weekly Data
                                                                    Source: Statistics Canada, BC Real Estate Association

damage through fiscal and monetary stimulus. The
resulting cuts to short-term central bank interest
rates, when combined with continued economic               quarter of 2010. This will keep borrowing costs on
weakness, higher investor risk aversion and lower ex-      variable rate mortgages flat until the second half of
pectations of inflation lowered bond market yields and     2010. A gradual 1 percentage point increase is forecast
contributed to declines in bank administered interest      for the latter half of next year as prime rates rise to
rates for products such as mortgages.                      meet BoC’s rate hikes. Fixed-rate term mortgage rates,
                                                           which move closely with bond yields and deposit rates
Precluding discounts offered by lenders to clients with    of similar maturity will likely edge up later this year
preferred credit histories, posted mortgage have set-      and next. These increases are expected to be modest as
tled at decades-low levels during the last few months.     the stronger Canadian dollar and weaker labour market
The borrowing cost on a fixed-rate one-year term           temper inflation expectations despite signs of economic
mortgage remained stable at a record low of 3.75 per       growth. This will moderate upward pressure on bor-
cent in August, after declining 320 basis points (bps)     rowing costs for fixed-rate term mortgages.
from August 2008 to June 2009. In contrast, the fixed
-rate 5-year term mortgage rate gradually edged up to                                       Mortgage Rate Forecast
5.85 per cent in June after declining to an April low of                                2009                                    2010F            2011
5.25 per cent (Fig.1). Despite this increase, the rate
remains near record lows and continues to support          Term             Q2          Q3E           Q4F Q1                   Q2   Q3     Q4          Ave
home-ownership demand.                                     1-Year 3.99                   3.75         3.85 4.00 4.25 4.40 4.75                     5.50
BCREA’s outlook reflects continued monetary stimu-
     lus from the Bank of Canada (BoC). On Sep-            5-Year 5.44                   5.75         5.85 6.00 6.10 6.25 6.50                     6.95
     tember 10, the BoC reiterated its conditional         1
                                                               Average of weekly data
     commitment to anchor its policy interest rate         Source: Bank of Canada, BCREA Forecast
     at 0.25 per cent until the end of the second
                                                           The Recovery Stage (Page 2)
P AGE 2                                                                         M ORTGAGE R ATE F ORECAST                                                                   S EPTEMBER 2009

The Recovery Stage                                                                                       Figure 3
                                                                                                                                                 Canada - Inflation
                                                                                                              Per cent
Recent data suggests that Canada’s economy is emerg-                                                          4
                                                                                                                                        Core Inflation Rate
ing from recession. Despite a 3 per cent annualized                                                                                     Total Inflation Rate
                                                                                                                                        Midpoint of Target Inflation Band

contraction of in the second quarter (Fig. 2), there was                                                       3

a sliver of economic growth recorded in the month of                                                           2
June. This marked the first monthly expansion in real
economic activity since July 2008 and suggests a tech-                                                         1

nical end to the Canadian recession.
The massive government response to the financial cri-
sis appears to be working. Public spending initiatives                                                        -1

and low interest rates have fast-tracked public infra-                                                                     2006
                                                                                                            Latest Data Point: 2009m7
                                                                                                                                                 2007                       2008                  2009

structure projects and fuelled an uptick in consumer                                                        Source: Bank of Canada, Statistics Canada, British Columbia Real Estate Association

spending. Retail activity, while down 4 per cent year-
over-year, is trending higher after sharp declines in                                                  cludes volatile components like energy, remained stable
2008, due in large part to increased vehicle sales.                                                    near 1.8 per cent (Fig.3). Headline inflation is expected
Meanwhile, industries related to the residential real                                                  to revert to 1-1.5 per cent in coming months, but la-
estate market such as insurance and finance have bene-                                                 bour market concerns and excess capacity will limit
fitted from rebound in home sales. Other factors such                                                  inflation pressure and interest rate hikes.
as a rebound in commodity prices and an improvement                                                    While the labour market has shown signs of stability,
in global financial conditions are also supporting do-                                                 employment continues to edge lower. The national
mestic demand in Canada.                                                                               unemployment rate climbed to 8.7 per cent in August,
   Figure 2
                                                                                                       the highest since January 1998. With unemployment
        Per cent, SAAR
                                           Canada - Economic Growth                                    not expected to peak until early 2010 and stagnant or
                                                                                                       declining wages, growth in domestic demand and infla-
         4                                                                                             tion will be modest.
                                                                                                       The BoC will begin to reverse some of its monetary
         0                                                                                             stimulus as the economic recovery progresses. BCREA
        -2                                                                                             forecasts a rise in the BoC overnight rate to a still very
                                                                                                       low 1.25 per cent during the second half of 2010, with
                                                                                                       further increases in 2011. Nonetheless, interest rate
                                                                                                       hikes will be gradual as the BoC attempts to normalize
                   2004             2005             2006             2007             2008     2009
                                                                                                       rates amidst a fragile economic recovery and a higher
      Latest Data Point: 2009q2, * Real GDP (chained 2002 dollars) growth at annualized rates
       Source: Statistics Canada, BC Real Estate Association
                                                                                                       Canadian dollar. A prolonged economic recovery,
                                                                                                       dampened inflationary expectations and relatively low
                                                                                                       short-term rates will mean a continuation of low mort-
Despite signs of economic growth and recovery, con-                                                    gage rates for homebuyers over the next year.
tinued excess capacity in the economy will limit up-
ward pressure on interest rates as inflation operates                                                                                                              Bryan Yu, Economist
closer to the lower bound of the BoC’s 1-3 per cent
target. July headline inflation fell below zero for the                                                                                                                        604-742-2796
second consecutive month, primarily due to year-over-
year energy prices declines. Core inflation, which ex-

                 Cameron Muir, Chief Economist, cmuir@bcrea.bc.ca                                                   Bryan Yu, Economist, byu@bcrea.bc.ca
The information contained in this report has been drawn from sources believed to be reliable, but the accuracy or completeness of the
information is not guaranteed, nor in providing it does the British Columbia Real Estate Association assume any responsibility or liability.

                                                        B RITISH C OLUMBIA R EAL E STATE A SSOCIATION

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