Mortgage rates expected to remain high in B.C.: BCREA

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Canadian homeowners should not expect to see a lot of relief on mortgage rates in the coming year, according to the BC Real Estate Association

A new mortgage rate forecast from the British Columbia Real Estate Association (BCREA) expects mortgage rates for British Columbians to stay high and potentially get higher by the end of the year.

The report, released Sept. 22, highlights the volatility in financial markets that occurred over the course of the third quarter. Findings show that bond yields were on a “rollercoaster” but mortgage rates remained flat.

In addition, the Canadian yield curve has inverted, which means that long-term interest rates, 10-year bond yields, are lower than short-term borrowing.

According to Brendon Ogmundson, chief economist with the BCREA, this indicates that the economy is going to slow.

“It has had some false positives, but generally, when the slope of the yield curve is negative it is taken as a sign of perhaps an impending recession,” Ogmundson said.

He says some key takeaways for Canadian homeowners are that they won’t see a lot of relief on mortgage rates in the coming year, and that there will remain a lot of uncertainty about the state of the economy in 2023.

Despite volatility in government bond yields, five-year fixed rates have remained relatively calm. They are currently at around 5.19 per cent with the expectation that they will rise to 5.3 per cent for the remainder of the year, “with the possibility of falling should recession fears amplify next year,” the report stated.

In the case of variable rates, the report said they are expected to increase to 5.55 per cent in the fourth quarter as the Bank of Canada continues its tightening cycle.

“A lot is pretty uncertain, except for I think, rates are going to be pretty high for a while. This is where the recession part comes in, that the bank has a very difficult problem ahead where it has to thread the needle of bringing inflation down to its two per cent target,” Ogmundson said.

“What the yield curve is telling us is that financial markets don't believe the Bank of Canada can pull that off.”

The BCREA report also notes that the unemployment rate in Canada has “ticked higher” in recent months.

“The Canadian labour market has shed about 115,000 jobs over the past three months, a potential sign the economy is slowing,” the report said.

This slowing will likely continue in interest rate-sensitive markets like housing as the Bank of Canada continues with tightening.

“How much further the bank will go and how long rates will stay above neutral depends entirely on the trajectory of inflation going forward,” the report said.

It is expected that the Bank of Canada will raise its policy rate one more time this year, and settle on a rate somewhere between 3.5 per cent and 3.75 per cent.

The question is whether the bank can engineer a soft landing back to two per cent. Ogmundson says that the Bank of Canada does not have the best track record and historically has not been able to get inflation down from high levels without a recession.

“There's a chance they could get inflation back to target without significantly damaging economic growth. It's just that the track record is not strong. So usually, it's taken a recession to bring inflation back down,” he said.