B RITISH C OLUMBIA R EAL E STATE A SSOCIATION
M ORTGAGE U PDATE
E CONOMICS D ECEMBER 2008
M ORTGAGE R ATES
TO
E ASE
AS
E CONOMY S LOWS
The decline in one-year fixed mortgage rates reflects lower short-term borrowing rates for banks and low interest rates paid to depositors, which have been have been passed along to consumers in part through lower administered rates. Rates for three- and five-year mortgage products have been slower to adjust, reflecting increased risk in capital markets, and uncertainty in the path of inflation and interest rates over a longer time horizon. This has resulted in the widest gap between one- and five-year mortgage rates since late 2005. This gap, now slightly higher than the long-run historical average, is expected to persist moving forward. Lower policy rates this year and next, and a weaker economic outlook will contribute to an edging down of mortgage rates for three- and five-year terms into 2009. However, high risk premiums in credit markets will continue to limit the degree of these declines. Expect some upward pressure on the BoC’s short-term interest rate near the tail end of 2009, in anticipation of stronger economic conditions in 2010. However, an expected improvement in credit market conditions should mitigate an increase in posted mortgage rates facing consumers.
Borrowing costs on one- and five-year fixed-rate mortgages recorded significant declines in the first week of December. Posted one-year fixed rate mortgage rates fell 65 basis points (bps) from November to 5.6 per cent, representing the lowest rate since late 2005. Five-year fixed mortgage rates fell by a more modest 25 bps to 6.95 per cent. BCREA forecasts a continuation of this downward adjustment in mortgage rates for the remainder of 2008 and into the first two quarters of 2009. Weak economic conditions and low inflationary pressure will contribute to lower interest rates in Canada in 2009.
Figure 1
Mortgage Rates
1-Year Fixed Term Rate 5-Year Fixed Term Rate
Per cent 7.6
7.2
6.8
6.4
6.0
5.6 2006:01
2007:01
2008:01
Updated: "2008m11", Average of Weekly Data
Source: Statistics Canada, BC Real Estate Association
Mortgage Rate Forecast 2008 2009F Q1 Q2 Q3 Q4 2010 Average 5.60 6.60
Tempered expectations for inflation and a weak economy are expected to push the BoC to lower its trend setting policy interest rate on December 9. Futures markets are currently pricing in a 50 bps cut, which would lower the overnight rate to 1.75 per cent. Since late September, the BoC has lowered its policy rate by a cumulative 75 bps due to an upheaval in global financial markets and mounting weakness in the underlying economy. BCREA expects the BoC’s policy rate to decline to 1.5 per cent in the first quarter of 2009.
Term
Q3
Q4E
1-Year 6.79 6.15 5.50 5.40 5.40 5.40 5-Year 6.99 7.10 6.70 6.60 6.50 6.50
1
Average of weekly data
Source: Bank of Canada, BCREA Forecast
Economy Weakens, Inflation Recedes (Page 2)
P AGE 2
M ORTGAGE U PDATE
D ECEMBER 2008
Economy Weakens, Inflation Recedes
While outpacing consensus expectations in the third quarter, Canada’s recorded growth was still tepid at annualized rate of 1.3 per cent (Fig. 2). Positive growth will give way to a contraction in the subsequent quarter, reflecting a deterioration in US and global economic conditions, lower commodity prices and a slump in consumer confidence in the economy.
Figure 2
Canadian exports fell for the fifth straight quarter in September, as reduced demand from abroad weighed on the automotive and forestry sectors. Moving forward, exports will contract more steeply as declining commodity prices, due to lower global demand, cut into the value of Canadian commodity exports. The price of crude oil dropped from a peak of above $140 (USD) per barrel in July to near $45 at the beginning of December and other commodities have also experienced significant retrenchments. Growth in final domestic demand, which has sheltered the economy from the impact of declining exports, has weakened. In the third quarter, final domestic demand grew at an annualized rate of 0.6 per cent, as compared to 2.0 and 2.1 per cent in the first and second quarters of 2008, and 6.2 per cent in the fourth quarter 2007. Slower growth resulted primarily from a deceleration in personal expenditure growth and was a reflection of lower consumer confidence.
Canadian Economic Growth
Per cent, SAAR 5
4
3
2
1
0
-1 2002 2003 2004 2005 2006 2007 2008
Latest Data: "2008q3", * Real GDP (chained 2002 dollars) growth at annualized rates
Source: Statistics Canada, BC Real Estate Association
The escalation of the credit crisis since September has further weakened the US economy, and contributed to a sharper downturn in domestic spending and business investment. According to the National Bureau of Economic Research, the US economy fell into recession beginning December 2007. Employment levels have trended lower, and the unemployment rate has risen to 6.5 per cent, the highest since March 1994. Meanwhile, housing starts have dropped to the lowest level on record and real personal consumption has shifted lower since late 2007. The pull-back consumer spending and confidence have also been reflected in retail spending which was down 7.5 per cent in October from the same month in 2007. Recessionary conditions in the US, Japan, and other advanced Euro economies is now impacting growth prospects for emerging export-oriented economies, yielding conditions for a global economic recession. The near-term prospects for Canada, which counts the US as its largest export destination, have eroded.
Cameron Muir, Chief Economist, cmuir@bcrea.bc.ca
Canada will likely slip into a recession in the fourth quarter of 2008 as US economic woes and Canadian consumer spending slows. A contraction in the economy, coupled with declining commodity prices, will generate downward pressure on inflation despite higher import prices due to a weaker Canadian dollar (Fig.3). Weaker economic conditions and low inflation will provide the Bank of Canada room to further cut its policy interest rate to spur economic activity.
Figure 3
Inflation Rate - Canada
Per cent 5 Core Inflation Rate Total Inflation Rate Midpoint of Target Inflation Band 4
3
2
1
0 2001 2002 2003 2004 2005 2006 2007 2008
Latest Data: "2008m10"
Source: Bank of Canada, Statistics Canada, BC Real Estate Association
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