Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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Five years bond yield is recently showing signs of life. From its historical lows in 2012 – it has recovered more than 100 basis points. Therefore, if our theoretical understanding is correct – that should signal a rate hike. Unfortunately financial market does not exactly follow theory. There are more to it. Say, for an example – profit, demand, and competition to name a few. five-year-bond-yields-broker-comp

Last august, when bond yields started to go up, some lenders were forced to maintain the low rate due to aggressive competition and cut back on mortgage brokers commission to compensate for the loss.

Five months later, bond yields did not show any sign of weakness but the same lenders started to increase brokers commissions. What does that tell you? Obviously it is the rule of demand and supply in action here. Does not matter how expensive your product is – it will one day sell for less if there are no takers.

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The next obvious question that comes to mind – how long will it last? A recent forecast says that US feds will start to raise rates in mid-2015 which will then eventually push Canadian overnight higher. It seems odd that only few months ago we were talking about a rate rise by the end of 2013.

The reasonable explanations of this sudden turn was – effects of weak inflation, weak Canadian crude oil sector, gap in output, departure of Mr. Carney and last but not the least – mortgage rule tightening.

None of those issues can be improved overnight, so, the overnight rate has to wait for many more nights. Add to that renewed European economic trouble – recovery (not sure what that means) is a distant dream. We have now started to believe that until there is recovery – mortgage rates also have no chance to go up.

We would like to think that they are wrong because a low interest rate also effects our future earnings and erodes our savings faster. Unfortunately that is just a wishful thinking. Another false positive note was the yield curve – it did move higher in October 2012, but inflation took a dive in November and that might have influenced the yield outlook for November too. The data is not available yet. With housing market going steadily down – our areas of hopes are also limited.