U.S. Fed Chairman Ben Bernanke reminded markets last week in his “tapering is not tightening” remarks that the U.S. economy needs ongoing highly stimulative policy and that rate hikes will not automatically begin when the jobless rate hits 6.5 percent. The U.S. 10-year bond yield has come down from the high 2.60s to just below 2.50 percent as of the close on Wednesday after his latest testimony.
The market was reminded though, at the Federal Open Market Committee (FOMC) meeting in June, that the Fed is determined to “taper” its bond buying, and so one would expect upward momentum to U.S. bond yields—and, indirectly, Canadian mortgage rates.
So, in what is most likely just a temporary fall, mortgage rates—as measured by the average 5-year fixed rate of the six largest banks—has actually fallen slightly since late June. At least they have not increased noticeably.
It now stands at 4.13 percent as of July 17, as compared to 4.26 percent on June 24 after the effects of a very hawkish Fed meeting were baked in.
The gyrations in U.S. bond markets remain the biggest factor behind Canadian bond yields and, therefore, Canadian mortgage rates.
On Wednesday, the Bank of Canada announced that it is maintaining the overnight target rate at 1 percent. In the accompanying statement, the Bank said, “As long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively, the considerable monetary policy stimulus currently in place will remain appropriate.”
Rate hikes aren’t expected to begin in Canada until the latter half of next year, which would suggest that mortgage rates, for the time being, won’t be pushed higher by the domestic policy rate.
And to that point, earlier on Wednesday, in his semi-annual testimony to Congress, Bernanke sent strong dovish vibes, confirming what he spoke about last week.
He focused on the very low inflation in the U.S. and indicated that the case for scaling back bond purchases is by no means a certainty; it could change if the employment outlook dampens, if inflation does not appear to be moving back up toward 2 percent, or if financial conditions tighten so much as to jeopardize economic progress.
“If financial conditions, which have tightened recently, were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer,” Bernanke said.
“Indeed, if needed the Committee would be prepared to employ all of its tools, including an increase in the pace of purchases for a time.”
So perhaps with the Fed trying to talk down bond yields and the Bank of Canada seemingly pleased with the evolution of the household sector, mortgage rates might not rise significantly for the next couple of months.
Home Sales the Bright Spot
Home sales continue to be one of the stronger aspects of the Canadian housing market.
According to statistics released by the Canadian Real Estate Association (CREA) on Monday, the seasonally adjusted number of home sales rose 3.3 percent in June. This is coming on the heels of a 4.4 percent increase in May.
According to CREA, home sales activity is “now running 11 percent above where it stood in February.”
By comparison, home price inflation slowed in June with year-over-year growth of 1.8 percent, which is down from 2 percent last month according to the Teranet-National Bank House Price Index (not seasonally adjusted). At least this is higher than the latest inflation reading of 0.7 percent based on the consumer price index.
And housing starts fell by 2.5 percent to an annualized 199,600 in June, according to the latest CMHC update. The pullback in June homebuilding reflected decreases in all components.
According to CREA’s chief economist Gregory Klump, “Increases in mortgage interest rates likely prompted some buyers with pre-approved mortgages to jump off the sidelines and into the market in June.”
Klump goes on to discuss the possibility of sales ebbing if fixed mortgage rates continue holding where they are or at slightly higher rates.