It is most assuredly not good news that an indicator of where mortgage rates are going has fallen quite a bit this fall.
Real estate agents and mortgage lenders may disagree, but then they only get paid when houses are bought and sold. For everyone else, the falling interest rate on the five-year Government of Canada bond is a reason for caution in making big money decisions.
Rates are still low by historical standards, but increases over the past two years have helped to quiet down the housing market in many parts of the country. We get national figures for November on Monday, but Toronto and Vancouver have already announced big year-over-year sales declines for the month.
Until a month or two ago, it was widely expected that rates would keep grinding higher in a steady but undramatic way. Falling oil prices and talk of a slowdown in the global economy have reined in these expectations.
You can see all of this documented in the bond market. Riding a wave of anticipation of stronger growth and inflation, the yield on the five-year Canada bond surged from 1.89 per cent at the beginning of the year to a multiyear peak of 2.48 per cent in early October. By late this week, these bonds had a yield of just over 2 per cent.
Five-year federal government bond yields set the trend for five-year fixed-rate mortgages, which so far haven’t reacted to falling bond yields. Lenders are probably waiting to see if the dip in bond yields is temporary or something bigger.
For borrowers, this reversal in the five-year bond yield at the very least means that pressure for rising mortgage rates has evaporated for now. Rates for all types of mortgages have increased quite a bit in the past 18 months, and now we pause.
Toronto home sales in November fell 14.7 per cent on a year-over-year basis, but prices still managed to rise 3.5 per cent. In that context, a pause on rate hikes is important. Rising prices and mortgage rates are affordability killers.
But falling bond yields and stable mortgage rates are only good for housing if the economy remains strong enough to sustain consistent growth in jobs with regular pay increases that exceed inflation.
Even as rates were rising in the past 18 months, we’ve only had middling success with these objectives. If the economy loses momentum, expect to hear more about job losses and declining wage growth. In fact, wage growth is already down from peak levels earlier in the year.
Housing affordability is helped if mortgage rates remain stable or fall, but your job security or income may suffer. Over the past 10 years, we’ve lost the ability to make distinctions such as this about rates.
We forget that low rates are, on balance, a negative for the country. They suggest an economy that can’t sustain consistent growth without support and they’re a plague on people seeking a half-decent reward for having the good sense to save.
Rising rates would suggest economic growth that gets oil prices moving higher, that gets wage increases trending ahead of the inflation rate, that persuades companies to hire young people full time rather than on contract and that increases tax revenues for governments so they can start reducing their deficits.
But all we can think of when it comes to rising rates is the impact on borrowing. Higher rates are to be feared because they’ll make it more expensive for people to afford mortgages, loans and lines of credit. Lower rates are a big win because debt is cheaper.
Canadians were programmed to think this way over the past decade; it doesn’t come naturally. When the global financial crisis hit, central banks around the world slashed interest rates to get consumers and business to support their economies by spending.
It’s time to snap out of it. Falling interest rates on five-year Canada bonds suggest a possibility that economic prospects are trending down. Mortgage rates may stabilize or fall, and that’s helpful if you have to renew a mortgage or will soon buy a home. But the greater good in this country is served if interest rates rise.
Rob Carrick