Mortgage rates are likely to peak this week, economists say – and could start falling by the end of the year

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Mortgage holders across Canada can breathe a sigh of relief: Fixed and variable mortgage rates are likely to peak this week, economists say, and could start to decline again until the end of the year.

Many expect Wednesday’s expected Bank of Canada rate hike to be the last rate hike of the year, marking the end of a rate hike cycle for the holders of adjustable rate mortgages.

“After this next rate hike, variable mortgage rates, which are linked to the Bank of Canada overnight rate, will go back up to 6.25 per cent,” said Robert Kavcic, chief economist at BMO Capital Markets. But he expects this will likely be the last rate hike for the year.

According to Kavcic, fixed-rate mortgage holders also finally have a break.

These mortgages are tied to the bond market and other factors, but also typically rise and fall with interest rates. Five-year bond rates are falling now, so Kavcic expects five-year fixed-rate mortgage rates to follow soon.

“We’ve seen five-year bond yields fall significantly, and that should translate into five-year fixed-rate mortgages over time,” he said.

If this is likely enough for increases in mortgage rates, the question now is how long we have to wait for them to fall back.

“This is really the question for the next two years,” said Kavcic. “If the Bank of Canada eases its tightening cycle, where will rates sit?”

Since March 2022, the Bank of Canada has raised the overnight interest rate seven times to help cool rising inflation.

But in 2023, adjustable-rate mortgages are likely to remain around 6 percent and fixed-rate mortgages in the 4.5 to 5 percent range, economists say.

“We see that the inflation panic has peaked and the bank is more optimistic that it can control inflation,” said Benjamin Tal, deputy chief economist at CIBC Capital Markets. There will be no free fall in the five-year fixed or variable rate, he added, because inflation is still above the 2 percent target.

“The bank probably won’t lower its rate until early 2024,” Tal said. And rates in the three percent range are unlikely to return to pre-pandemic levels.

“There are now many inflationary pressures that will force the Bank of Canada to keep the overnight rate higher than before the pandemic,” he added.

David Macdonald, senior economist at the Canadian Center for Policy Alternatives, said he was unsure whether Wednesday’s Bank of Canada rate hike would be the end of 2023.

While headline inflation has eased since peaking in June, core inflation – the change in prices of goods and services excluding the food and energy sectors – did not fall b in a similar way, he said.

However, Kavcic said he thinks this is likely to be the last rate hike, giving home owners and buyers confidence that the interest rate hike has finally reached its peak. -the peak, which should alleviate the “negative sentiment” in the housing market.

“If the Bank of Canada says their tightening cycle is over, that would really help,” he said. “But interest rates at this level will be tough. It’s going to be difficult for a lot of people and it won’t help with affordability.”

Macdonald hopes that rates will fall before the end of 2023, especially if there is a significant reduction in inflation, which is possible, he said.

Meanwhile, homeowners and buyers alike are in a tough spot.

Currently, higher interest rates are not being offset by lower home prices, Macdonald said, which means prices will have to fall further to relieve some of the pressure felt by those higher mortgage rates.

With adjustable-rate mortgages, most have fixed monthly payments, but repayment periods lengthen as interest rates rise – when the homeowner meets the rate of their activation, the monthly payments increase.

“There will be no relief if interest rates fall quickly,” Kavcic said. “At least not in 2023.”

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