The recent failure and near-failure of some U.S. and global banks have sent shock waves through bond markets.
Earlier this week, some bond yields tumbled more than they have in decades. It reflects a new market outlook, one that portends more economic risk, fewer remaining rate increases from the U.S. Federal Reserve and the end of hikes from the Bank of Canada.
Ultimately, this week’s developments could push mortgage rates lower, sooner than expected in Canada, providing at least near-term support for home values.
On the rate front
The price you pay on a fixed mortgage reflects lenders’ cost of funds in the fixed-income market. That’s why falling bond yields generally lead to lower fixed mortgage rates.
Five-year government yields are down about half a percentage point in nine days. They may bounce a bit but it’s unlikely they’ll exceed this year’s high given the slowing effect of rate hikes and heightened risk in the global banking system.
McLister: This week’s lowest fixed and variable mortgage rates in Canada
The bank that triggered this recent collapse in yields, Silicon Valley Bank, suffered a serious run on its deposits this month. Deposits at many of the more than 4,600 smaller banks in the United States also fled, and there’s risk it could happen again.
Despite government backstops, confidence has been damaged. Many of these banks could experience restricted access to funding, resulting in tighter credit availability. That has economic implications for us as well, given our close ties to the Americans.
In turn, this all raises the probability of a North American slowdown, which markets were already pricing in. If inflation follows economic growth lower, as anticipated, rates will drop sooner than most predicted just a week ago.
Providing lift to real estate
You might have noticed an uptick in headlines about real estate bidding wars lately. That’s no coincidence.
In Canada’s hot and oversold housing markets, prices are more reasonable, inventories are below normal and buyers are back.
People are thinking the worst is over for mortgage rates, and they know hundreds of thousands of immigrants will flood our biggest cities for years to come.
Add falling rates to that mix and you have a bullish recipe for real estate.
Here come the specials
Spring is prime time for mortgage sales, the season when lenders put their best foot forward.
Take MCAP for example. It just dropped a new four-year fixed special on Thursday, starting at 4.64 per cent. That made it the lowest fixed rate of any national lender.
“Until last year, most fixed-rate borrowers didn’t even consider anything other than a five-year term,” says MCAP senior vice-president Megan McDonald. With a four-year, “You take one year off your commitment and you get a market-leading rate – which leads to a market-leading payment.”
Ms. McDonald says that, “With everything costing more, Canadian consumers are looking for payment relief.” And that relief will be key to a strong spring real estate market.
Her firm’s four-year special also entails two more benefits.
For one, it reduces penalty risk. Most five-year borrowers last only about three-quarters of the way through their term, on average, before they negotiate and/or break their mortgage. A shorter term reduces the chance they’ll need to pay a penalty by exiting a mortgage contract early.
Second, having the lowest widely available fixed rate means MCAP’s offer comes with the lowest stress test rate, as low as 6.64 per cent. That compares to stress test rates of 7.14 per cent or higher on most other terms. Qualifying at a half-point lower rate allows for about 4 per cent more buying power.
(Regulators require most mortgage borrowers to prove they can afford a payment based on their actual rate plus two percentage points, or 5.25 per cent, whichever is higher.)
If we see more hot deals like this one in the next month, and it’s distinctly possible, more buyers may come out of the woodwork this spring.
Yes, there’s some serious recession and unemployment risk ahead, but as I reported last month, housing fundamentals have historically been strong enough to power housing through tough times. That’s unlikely to change as rates fall and household formation continues to outpace construction.
Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
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