There’s good news on the interest rate front. In the Bank of Canada’s (BoC) most recent announcement it maintained its prime rate at 1%, however with one slight difference. 

Since 2012, the BoC’s report has included a tightening bias, warning Canadians that rates would soon rise. That bias was removed from BoC Governor Stephen Poloz’s recent report. Instead he is planning to hold the interest rate at these low levels at least into 2015. The reason? Low inflation and a slow economy.  

Inflation is sitting just above 1% (the BoC likes it near 2%) and annual economic growth is limping along at 1.6%.  Also, softer-than-expected economic growth in the U.S. also contributed to the decision. The BoC likely won’t move its rate until the U.S.  Fed moves its rate, which is not expected until 2015. 

Low interest rates will help drive investment and spending which in turn should boost economic activity, create jobs and keep assets appreciating at an ideal rate. So this means the variable rate mortgage forecast remains unchanged.  

The stimulus plan is regarded as a temporary government intervention, to be removed when the economy starts improving. The reality is the economy has been growing slowly and the BoC’s forecasts continued slow growth until the end of 2015.

The fixed mortgage rate forecast for the short term is for rates to possibly decline. When the US Federal Reserve‘s (Fed) Chairman, Ben Bernanke, hinted the beginning of the end of the quantative easing program is approaching. Markets reacted and government of Canada benchmark bond yields climbed from their previous low of 1.15% on May 1st to a high of 2.16% just this past September 10th.

This 1.01% increase in bond yields reflected a similar increase in 5 year fixed mortgage rates. This was not the result the Fed was hoping for, fearing that the spike in interest rates would further slow economic growth and undo their efforts. The Fed immediately came back with clarification that although the program will eventually end, it will remain in effect for the foreseeable future.

Skeptical markets have been slow to adjust, but bond yields have been falling and dropped to 1.83% on October 18th. This 33 basis point fall has given mortgage lenders some leeway to once again reduce fixed mortgage rates. Although there’s no expectation that bond yields will fall back to their 1.15% low, there’s still room to fall back to their 2013 average of 1.58%. For now, the banks seem content on keeping the extra yield to themselves, but the downward pressure will eventually give way to modest mortgage rate drops.

It looks as if we might get some mortgage rule changes again. Since the BoC has not been able to raise rates nor curb spending in the housing market – sales in many markets continue to grow and house prices continue to rise.  The only way the Government can control the housing market is by making changes to the mortgage guidelines.  

Finance Minister Flaherty recently said he was looking at the housing market, and talking to industry insiders but will not interfere just yet. What we have learned over the past five years is that “just yet” certainly means “it may be coming sooner than you think.” If, and that’s a BIG IF, they believe that home prices are continuing to escalate out of control, and the housing market is overheating, they may act.  But for now, let’s look at what’s happening. 

In Calgary, once again, low supply, a seller’s market and an increase condo prices are the highlights of the October real estate market in Calgary.

Sales volume is up while average days on market dropped but we are still a far cry from the market conditions experienced in the area in 2005-2007 – and, in my humble opinion, that is a good thing. Despite low supply, we are not seeing a repeat of 2006 which, as it turns out, was not sustainable.

Calgary, as a real estate market, is still very much supported by its own strong labour market, including in migration, which is contributing to the rise in housing demand. Lack of rental product and the seasonal fall peak are also contributing factors.
  
Over the next few weeks I will be watching the housing market activity in Canada to see if it is indeed tapering and also to watch the impact if fixed interest rates do drop.

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