Sky-high inflation has ended an era of rock-bottom rates. Will rate hikes stop short, or go long? Dan Eisner, True North Mortgage's CEO weighs in on what’s happening with mortgage rates in 2022.
All the time, I'm asked about rates. That makes perfect sense, because we've built True North Mortgage as the broker that can offer our clients access to the lowest rates around, with a simple, speedy service.
As Founder and CEO, I’m proud of how frustrated a lot of our competitors get about us — and I certainly hear about it from them.
Here’s my rate prediction
After this week’s fresh hike of another 50 basis points (bps), bringing the benchmark rate to 1.5 percent, I agree with several forecasts that see the Bank of Canada (BoC) increasing its rate by at least another 100 bps by the end of 2022. (There are 100 basis points in a percentage point.)
That would bring the BoC rate to 2.5 percent by the end of the fourth quarter of 2022. That's well into their targeted neutral range of 2 to 3 percent (intended to neither stimulate nor depress the economy at that rate). And that means a prime rate of around 4.7 percent, not factoring in any variable rate discounts that lenders like us may offer.
There’s speculation that the neutral rate will need to top out even higher — hitting 3 percent into the first quarter of 2023 — before the central bank takes a breather. Of course, that's a possibility if spending and rip-roaring inflation take too long to come under control.
But, I think the knock-on-effects of rate increases on home prices and borrowing costs are already making everyone worried about tipping into a recession, not to mention the expectation that inflation will take a sizeable bite out of consumer pockets to slow spending. The central bank will want to take a look around and carefully assess the impact of each hike before automatically hunkering down on more increases.
Will fixed mortgage rates hit 6 percent over the next year or two?
For the most part, fixed rates have already increased to meet the central bank's current expectation of rate hikes. With our best fixed rates right now around 4 percent, it's possible they may reach towards 4.5 percent if the BoC settles in with a neutral rate closer to 3 percent.
It's easy to feel panic and unease when rates start going up — but a fixed rate as high as 6 percent is likely not in the cards for this cycle. The current fast pace of rate increases may have a significant dampening effect on borrowing and spending, tamping down demand and placing Canadians in the position of making exceedingly careful choices about spending their money and paying down their debt.
Once rates hit a peak, I anticipate that they'll come back down a bit as we attempt to ride this abnormally large wave of economic volatility until it eventually breaks onto a shore of more balanced markets and lower inflation.
Will home prices come down as a result of higher rates?
As rates go higher, that should push home prices lower. Prices are already tempering in some regions. Sales will also cool, and then inventory should come back to a more balanced state.
For the last few years, the marginal factor affecting housing has been interest rates. Usually, increasing family incomes is what drives up home prices and inflation. This time around, it was the all-time-low interest rates and a pandemic crush to buy a home that sent prices into the stratosphere. It's no surprise that home prices could come back down to earth as rate-increases attempt to recalibrate the market.
Mortgage transactions are slowing down
As far as the housing market goes, it can't sustain the pace of home buying we just witnessed over the past couple of years. All those people who moved homes all at once or became first-time buyers in a rush? That activity level is not likely repeatable any time soon, so I completely expect Canadians to settle into a more typical buying pace — which we're already seeing in real-time.
People will still need to move or want to buy a home in the ordinary course. And we're here to help them with that
Worried about rising rates? True North Mortgage has highly-trained brokers to help you prepare for rate hikes or reduce your risk, with options that fit your situation. Talk to a friendly broker over the phone at 1-877-778-4772, follow the link to apply online, or open a chat on their website.
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