Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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What we are experiencing right now is not the right indicator of future.  What future has for us in its bag can be predicted (with median confidence) using some indicators. There are many factors which influence interest rate but only a handful of them have the most influence.Canadian core inflation and US Dollar exchange rate  

The factors are not the same every time but you can judge by yourself by looking at some of them.

Let us look at the factors which are in favour of current low mortgage rates:

Weak Housing

A fragile housing market will keep everyone at an indecisive state because of the fear of any negative impact of their actions. Canadian banks, beyond any doubt, heavily rely of mortgage lending which is directly correlated with state of housing market.

A sinkhole in housing activity is enough to create a draft to pull out all the hot air from the mortgage balloon. So, the banks will stay in a compelling position to keep mortgage rates low.

Canada has many overseas investors who bought home or condos in major metropolitan cities – as investments. Those investment condos are staying empty as of now. At the first sign of a real-estate crash those will be the ones to be listed for sale first.

Strong support from the government

After few years of rhetoric lip service against public debt, now the government has started to show some of its claws and teeth. Although it still remains a show business – it may very soon turn into real actions.

Weak inflation

Bank of Canada has only a mandate to keep inflation under 2%. Whatever you may think, the bank is unable to take any action till inflation shows some signs of life.

All the global talks and GDP philosophies are just the lame attempts to explain the reasons of inflation staying so low, so long.

Those three are the major player in the market right now. There are many more but often those are the main movers.

Now let’s see what factors may influence a raise of interest rate:

Soaring inflation

Thus far inflation stayed tame over the years. Few spurious peaks faded away without any intervention from BoC. inflation and USD exchange rate shows sings of close correlation Regardless of the present condition – we all know that without a healthy inflation there will be almost no growth.

Therefore, in order to bring the pressure back in the cylinders we need a healthy inflation. It should not be far when we shall start to see some real inflation otherwise we shall become part of another ailing economy which is unable to recover for a long time.

Canadian zero coupon bond curve BOC November 2012 - shows no signs of improvement yet

What always confuses me that in spite of low inflation – goods in dollar-stores became more expensive and to borrow a shopping cart in most of the grocery stores – now costs a dollar deposit, not the quarter – a few months ago.

Weak Canadian Dollar

Finally the dollar is falling making our products cheaper. This will have few potential negative effects.

  • Foreign investors will try to sell as the net value in terms of exchange currency will fall.
  • Foreign homeowners will think about selling and buying somewhere else.
  • The goods we pay for will cost more as the buying power of the Canadian dollar will dwindle.

Withdrawal of federal money

The government cannot run a deficit budget for ever. It has to either raise taxes or reduce expenses. Our federal government is already tightening its belt for a while.five-year-bond-yields-canada-BoC-March-2013

Right now it is reducing its own fat but once it has done it (the holes will remain though) – it will look around for further sources of reductions.

The first sign of such withdrawal is new regulation with CMHC and asking banks to not engage in any rate war.

It is for you to judge now what comes next. Housing will stay weak but to balance that odd the government will also pull out of the market. Now it will all be based on the inflation factor.

The signs are that once government withdrawals starts – inflation may stay at its current level as the withdrawal means a raising interest rate.