1. March 2011
Mortgage Rate Forecast
OIL SHOCKED?
sustained rise in oil prices, yields will move gradually higher
HIGHLIGHTS throughout the year as markets price in improving economic
• Improved economic outlook putting upward conditions and higher inflation expectations. Rising yields
pressure on rates will in turn lead to higher mortgage rates, likely in the realm
• …but geo-political risk threatening recent of 4.35 per cent for a 1-year and 5.90 per cent for a five-year
optimism fixed rate mortgage by the end of the year.
• Mortgage rates slowly getting back to “normal”
Growth and Inflation Outlook
Sentiment about the US economic outlook has improved
Mortgage Rate Forecast dramatically in the two months since our last forecast. This
2011 2012 is very good news for the Canadian economy and also very
good timing as the economy is likely to face some headwinds
Term Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F in 2011 from potential consumer restraint, exchange rate
1-Year 3.45 3.70 4.00 4.35 4.65 4.90 5.20 5.40 pressure on exports and slowing residential construction.
However, the increasingly positive economic outlook is
5-Year 5.35 5.60 5.75 5.90 6.00 6.20 6.35 6.55 already in danger of being swept aside by a looming crisis
Source: BCREA Forecast (all forecasts are the average for the quarter) in the Middle-East and North Africa (MENA) region that
is threatening spill-over to global markets and Canadian
Mortgage Rate Outlook
interest rates.
Mortgage rates have thus far evolved in-line with our
Canadian Economy Growing Faster than Expected
December 2010 forecast, with the 5-year fixed rate reaching
Per cent, SAAR
5.44 per cent and the 1-year rate hitting 3.50 per cent in 6
mid–February. Mortgage spreads (the difference between a
fixed mortgage rate and the yield on Government of Canada 4
bonds) have returned to historically normal levels and we
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expect these spreads to remain fairly stable in subsequent
quarters. Therefore, the path of future mortgage rates will 0
be largely determined by changes in government bond
yields, which have moved significantly higher in recent -2
Forecast
months but are currently being pushed lower by world
-4
events. We anticipate that, barring a growth depressing and
Real GDP %Change. QoQ
-6 Real GDP %Change YoY
5-Year Spread has Returned to Normal
Frequency
50 -8
2006 2007 2008 2009 2010 2011 2012
Latest Data Point: 2011Q1, * Real GDP (chained 2002 dollars) growth at annualized rates
Source: Statistics Canada, BC Real Estate Association
40 Current 5-year Spread =
280 basis points
An improved outlook in the United States has prompted us
30 to revise our forecast for Canadian real GDP growth from
2.1% to 2.8% in 2011, which we anticipate will be followed
20 by 2.7% growth in 2012. However, evolving geo-political
events in the MENA region may provoke a re-assessment of
growth expectations. While events in Egypt and Tunisia had
10
little economic ramifications, potential disruptions to global
oil supply from Libya and other oil-producing countries has
0 the potential to prompt serious market disruptions through
50 100 150 200 250 300 350 400 450 500
escalating oil prices.
Spread: 5yr Fixed Mortgage Rate - 5yr Govt. Canada Bond Yield (Basis Points)
1
2. BCREA Mortgage Rate Forecast March 2011
The dynamics of how oil impacts the Canadian economy are Core Inflation Subdued but Expectations Rising
complex. As an oil exporting country, higher energy prices
can have a positive impact on growth. However, the negative
impact of high oil prices is two-pronged. First, high oil prices
(beyond $120 per barrel) have been shown to significantly
reduce US economic growth. Moreover, the Canadian dollar
has for years been tied to the price of oil. As oil rises, so too
does the loonie, which may present a serious challenge for
Canadian trade. Therefore, the negative impact of an oil
shock likely outweighs any positive effects for the Canadian
economy.
Loonie Soars Along with Oil Prices
Note: Expected inflation measured from the difference between Real-Return and Long-Term Government Bonds
Source: Bank of Canada
Interest Rate Outlook
As expected, the Bank of Canada held its overnight rate at
1 per cent at its March 1st meeting. In absence of nascent
geo-political risk and the soaring loonie, the stronger than
expected pace of economic growth may have alone been
enough to push the Bank to raise rates at its next meeting
in April. However, the risk posed to the global economy by
a still evolving situation in the MENA region along with the
anti-inflationary (and potentially growth-subduing) impact
of the loonie’s rise will likely see the Bank erring on the
side of caution and therefore holding rates steady until the
summer. Once the Bank resumes rate increases, we expect
Regarding inflation, our view remains that inflation is the overnight rate to rise from one per cent to between 1.75
not likely to be a problem in the medium term. However, and 2 per cent by end of 2011.
inflation expectations have ticked higher in recent months,
A much improved economic outlook has prompted a
a result of both positive incoming economic data and some
steepening of both the Canadian and US yield curves, with
pricing pressure from soaring food and energy prices. So
large movements occurring in the 5-10 year maturities.
far, the sharply higher food and energy prices that have
However, some of the increase has been offset by growing
been pushing headline CPI inflation higher have not found
risk aversion as investors flee back into safe assets to wait
their way through to core-measures of inflation watched by
out events in the MENA region. The unpredictability (in both
Central Banks. Moreover, as an oil producing country, much
the severity and duration) of this still developing situation
of the inflationary impact of an increase in energy prices
should translate to volatility in bond yields going forward,
tends to be offset by an appreciation in the loonie – which
but we maintain that Canadian interest rates will ultimately
has hit a three-year high of $1.03 US as oil prices pushed
end the year higher.
over $100 US per barrel.
Send questions and comments about Mortgage Rate Forecast to:
Cameron Muir, Chief Economist, cmuir@bcrea.bc.ca; Brendon Ogmundson, Economist, bogmundson@bcrea.bc.ca.
Additional economics information is available on BCREA’s website at: www.bcrea.bc.ca.
To sign up for BCREA news releases by email visit: www.bcrea.bc.ca/publications/subscribe.htm.
Mortgage Rate Forecast is published quarterly by the British Columbia Real Estate Association. Real estate boards, real estate associations and REALTORS® may reprint this
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BCREA makes no guarantees as to the accuracy or completeness of this information.
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