Apr 245 min read

Vine Group Executive Market Commentary

Spring Market Kick-off and How to Navigate Mortgage Rates

The spring market is underway, and a notable uptick in sales activity has occurred nationwide. This could be attributed to a milder winter, but it's also noteworthy that home buyers are entering the market earlier than usual, with sales momentum for 2024 already showing an early rise.

The national benchmark home price increased for the first time since June 2023, reaching

$720,500 in February. This is up 1.80% from last month and 0.80% year over year.

In February 2024, Canada's sales-to-new-listings ratio (SNLR) stood at 55.6%, indicating a "balanced market." In this scenario, sellers receive reasonable offers for their homes, and buyers have an ample selection to consider. Usually, a high SNLR, around 60%, signifies a seller's market, meaning limited options for buyers. Conversely, a low SNLR below 40% denotes a buyer's market, where sellers might struggle to receive reasonable offers within a reasonable timeframe.

Buyers’ or Sellers’ Markets?

In the April meeting, the Bank of Canada (BOC) decided to keep its policy rate steady at 5%. Consequently, most lenders' Prime rate, which typically averages around 7.20%, also stayed the same. This decision offers some relief to those with variable rates and HELOCs.

Bank rates have remained unchanged since July 2023.

The question now is WHEN we can expect rates to start coming down. The BOC noted that they were content with ongoing data, and if it continued, we could see rate cuts as early as June-July.

Let’s look at the most important sets of data used by the BOC when assessing the direction of future rates:

GDP Growth

This measure gives us a glimpse into the health of the economy. Recent Stats Canada data shows that the national population has seen the highest growth over the last 66 years. As of Jan 1st, 2024, the nation’s population reached 40,769,890, a 3.2% increase from the previous year and the highest growth since 1957. Over 97% of this growth came from international migration, with the remainder coming from natural growth.

This population growth has impacted Canada's GDP growth. In the most recent data for January, real GDP grew 0.6%, exceeding market analysts' projections of 0.40%. Expectations are for further growth in February, with preliminary estimates at 0.4%.

As the economy grows with more immigration and, ultimately, more consumer spending, the cost of goods could start to increase as demand also increases, so this is a very important data set when assessing the next steps for the BOC.

Unemployment

This metric indicates the percentage of people without jobs in the workforce. When unemployment is too low, it can lead to inflation, so an increase in unemployment can be viewed positively in the present circumstances.

In March 2024, Canada's unemployment rate climbed to 6.10%, up from 5.80% in February. This marks the highest rate since October 2021 and exceeds market expectations of 5.90%. This aligns with the Bank of Canada's projections and strengthens the case for rate cuts.

CPI (Inflation)

One of the most important indicators for the BOC is the average price change for a market basket of consumer goods. BOC is most interested in ensuring that inflation is under control as this hugely influences their rate decisions, and they target a range of 2-3% as a benchmark for an acceptable level of inflation.

Inflation has been decreasing steadily, but most recent data shows CPI at 2.90% for March, up slightly from 2.80% in February. The good news is that this increase was expected by the market and primarily due to an increase in gas costs given the current economic climate and conflicts. Also worth mentioning is that when you remove the volatile elements in the CPI, then we’re running at 1.50%, which is well below the target.

This is within the BOC’s target range of keeping inflation between 2-3% and a positive sign that the higher rates are having the intended effect on the market.

Economic Forecasts

Economic forecasts are an excellent tool for understanding where rates could end up. These should be reviewed with caution, as data changes very quickly, but they are very helpful in attempting to predict what type of mortgage to consider.

On average, most economists from major banks anticipate a decrease in rates ranging between 0.58% to 1.00% by the end of 2024 compared to current levels. The average forecast suggests a drop of 1.00% by the year's end, with some projections indicating a potential decrease of 2.45% by the end of 2025. Currently, the overnight rate stands at 5.00%, and the Prime rate is at 7.20% for most banks. A rate decrease would be a huge break for variable-rate mortgage holders.

A 0.25% decrease in rates anticipated around June or July would translate to approximately $20 less in monthly interest payments for every $100,000 balance, providing some relief to both Canadians and businesses grappling with higher-rate loans.

Why a variable rate solution could be the best option today

Over the past two years, those with variable rates have witnessed their mortgage rates climb by nearly 5%, significantly impacting their mortgage payments. Given the roller coaster ride of the past 24 months and the conventional advice to opt for a fixed rate, the notion of considering a variable rate may seem counterintuitive to many.

Given the high likelihood that rates have peaked and the widespread anticipation of rate decreases in 2024, now could be the optimal moment to reconsider a variable rate.

If we compare the current best 5-year fixed rate to the best 5-year variable rate and apply a total rate decrease of 2.00% over the next two years (based on analyst forecasts), you could potentially save over $2,100 over a 5-year term on a $500,000 mortgage balance*. This calculation doesn't even include potential rate drops in years 3-5. Additionally, a variable rate mortgage offers several added benefits:

Ability to convert to a fixed term at any time (as long as the remaining term matches) with no penalty.
Ability to break the mortgage or refinance typically with only a 3-month interest penalty, compared to a fixed-rate penalty, which is often much higher.

*Assuming a 5-year fixed rate of 4.99% compared to a 5-year variable rate of 6.40%, with a 1.00% rate drop by the end of year 1 and another 1.00% rate drop at the end of year 2, and a 30-year amortization.

Vine Group “Hedge” Strategy

Given the uncertainty surrounding interest rates, some lenders offer the option to divide your mortgage into multiple segments. This allows you to hedge against the possibility of further rate increases, providing the flexibility to enjoy the benefits of both fixed and variable rates simultaneously.

For example:

On a $500,000 mortgage, you can have $250,000 as a 3-year fixed term and the other $250,000 as a 5-year variable term.

*Assuming a 3-year fixed rate of 5.29% compared to a 5-year variable rate of 6.40%, with a 1.00% rate drop by the end of year 1 and another 1.00% rate drop by the end of year 2, and a 30-year amortization.

The hedging strategy entails a total monthly mortgage payment of $2,925. However, if analyst forecasts prove accurate and variable rates decrease, the variable portion would also decrease, resulting in a lower monthly payment. Conversely, if rates don't decrease as expected, the fixed portion of the mortgage provides protection, ensuring savings with a lower initial rate.

Similar to diversifying an investment portfolio, this strategy enables you to spread out your mortgage rate risk, ensuring benefits regardless of interest rate outcomes while reducing your overall risk exposure.

Other strategies to consider if looking at a new mortgage or upcoming renewal:

The next Bank of Canada announcement is scheduled for June 5, 2024.

A financial review is key to ensuring you can navigate the current climate. Let’s chat and see how we can help if we haven't already.

We’re all in this together and will come out stronger together.

Sources: