Mortgage Rate Forecast Canada 2024 – 2025

The next Bank of Canada interest rate announcement is on:

Wednesday, September 4, 2024

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Historical context: Mortgage rates in Canada are forecasted to gravitate towards historical lows for the long term of 5 – 10 years.

To help determine mortgage rate forecast, one of the best perspectives we have available is a historical one.

During the great recession of 2008, the financial system and economy as a whole required bailouts and stimulus as never before seen, just to keep running. Thankfully, the stimulus did its job, and the economy rebounded and got back on track. However, between 2008 – 2019, for over 10 years, there was very low or stagnant GDP growth, and interest rates remained low accordingly. 

During the covid pandemic, in 2020 – 2022, we witnessed a similar massive economic bailout. This time the stimulus was far greater, with over 40% of dollars ever created between 2020 – 2022. 

However, in part due to a literal shutdown of the economy and of supply chains at one point and difficulty rebooting these supply chains, combined with excess consumer demand from pandemic savings, there is much more inflation as the economy stabilizes.

This inflationary difference will be discussed in more detail below. However, the main point here is that historically, when a massive new government and private debt are layered upon already massive debt, this can perpetuate dependence on yet ever cheaper debt to stimulate the economy long term. It can lead to long term economic stagnation and, importantly, to a ‘magnifying effect’ of increased rates. 

More specifically, with 5 times more debt in the economy today, adjusted to inflation, than in the 1980s and early 90s, a single 0.25% rate increase makes an approximately 5 times bigger impact than it did when debt levels were a fraction of current levels. Accordingly, there is significant long term pressure for rates to remain low. 

From another historical perspective, when rates increased in the 1980s from a base point of 10% to a 20% high point, this represented a 2x rate increase. However, a rate increase in 2022 – 2023 from a base point 0.25% to 5% represents a 20x rate increase, which will have a much greater shock to the economy.

Finally, the ‘neutral rate‘ or ‘target rate’ at the Central Bank of Canada, which is the rate seen as neither repressing nor stimulating the economy, is currently 2.5% – 3%. Given this, we may have 2% of Central Bank rate decreases in store (5% current down to 3%), and this, too, infers fixed and variable rates to stabilize in the high 3% range.

As of July 16, the market consensus on the mortgage rate forecast in Canada is for the Central Bank to cut the prime rate by 0.25% at its July 24, 2024 meeting. 

The main tool we have when reading the current mortgage rate market is the Government of Canada Bond Yield. The Canadian bond is a government debt security that pays a return to an investor. The ‘%’ based return is called the ‘yield’ and is considered one of the safest investments because the Government would have to go bankrupt for it not to pay its investors. 

The Government of Canada 5 year Bond Yield factors in all known economic data on a day to day, and even a minute to minute basis. Simply put – when the market/ bond traders think that the Central Bank of Canada will increase rates, the Bond Yield increases. When the Bond market thinks the Central Bank rate will decrease, then the yield drops. In other words, the Bond yield trades or is priced in anticipation of where the Central Bank of Canada rates will move. The Central Bank of Canada makes its rate decisions based on how it sees the economy performing.

Currently, as of July 16, 2024, as seen in the Yield chart below, the Canadian Bonds are pricing in a confident 88% chance for Bank of Canada rate cut in July 2024 and nearly a 100% chance for an additional cut in 2024. 

Given the following economic data, it appears that the economy is cooling enough to hold inflation lower, and justify rate cuts:

• Low GDP/ economic growth
• A generally weakening labour/jobs market
• Substantial downward trend of CPI/ inflation

As we will review more closely in the next section, the economy is on track to justify rate cuts in July. From there, depending on how inflation behaves, there is a strong possibility of additional 2024 rate cuts in September and October (or December), and another cut in early 2025.

Economic slowdown, lower inflation and lower Bond Yields. What does this mean for mortgage interest rates?

With lower spending comes a slowing economy, lower inflation, and lower mortgage interest rates.

Current high rates will lead to lower rates – by design.

Here we take a closer look at how the economy is slowing, and how this will affect mortgage interest rates in 2024 and 2025 more specifically.

As of July 2024, the Canadian economy is on the brink of recession, with only population growth and government stimulus keeping Canada out of a technical recession at this point.

However, if we look at Real GDP per capita, or Canadas economy divided by the population size and removing the effects of inflation (inflation is not real economic growth), Canada is well into a recession.

More specifically, given this Real GDP per capita measure, there has been over a year and a half of economic decline – Canada has seen no Real GDP growth since March 2014. In other words, that’s over 10 years of economic growth erased.

It is known in economics, and as recently mentioned by the Central Bank of Canada, that it takes 12-24 months for a single interest rate hike to ‘trickle through’ or have a full effect on slowing an economy. While the first small 0.25% interest rate hike in Canada happened in March 2022, as of July 2024, we have only started to see the full effects of the rate hikes of 2022.

As 2024 pushes onwards, we will likely see the effects of 2022 and 2023 rate increases build momentum. For example, as mortgages renew into higher rates and as already extreme rents push higher, this pulls discretionary spending out of the economy.

So it is important to keep in perspective that:

(1) The previous rate hikes we have seen have not had their full effect on slowing the economy, and we are already seeing a recession.

(2) It is a matter of how long Canada can withstand such high rates before more significant negative economic impact.

Accordingly, the question is now focused on how long these high rates will remain.

As of July 2024, given this exceedingly weak ‘beneath the surface’ economic performance in Canada, the financial markets think there’s room for 1.75% of additional rate cuts over the next 2-3 years.

Also, according to the Central Bank of Canada, interest rates can be cut if inflation proves to be on firm footing, and declining within the 2% range. Given that in Feb, March, April, May and June 2024, inflation has held under 3%, this suggests we have found that ‘firm footing’ for inflation.

Financial Markets and the Central Bank of Canada more aligned in their thinking

The Bank of Canada stated in its February 2024 meeting that it believes it will take until the summer before inflation drops firmly into the 2% range. This is in line with what the financial markets are currently projecting for a second July 2024 interest rate cut.

Although the Central Bank of Canada is still not providing specific guidance for its next rate cut, this is the closest information we have from them. Also, Tiff Macklem, Governor of the Central Bank, has said loosely that he thinks rate cuts will happen in 2024.

However a July 2024 rate cut is not guaranteed…

Why the next interest rate cut might not happen until September or even October 2024…

(1) The Bank of Canada will be considering the timing of the first US Federal Reserve (FED) rate cut.

The US is in a much stronger economic condition compared to Canada, it is projected that the US will not cut their Prime Rate/overnight rate until September 2024. The Bank of Canada needs to be careful not to cut too much earlier than the FED because this would send the Canadian Dollar lower and promote re-inflation.

(2) The Bank of Canada (BoC) may want to see more confirmation of lower inflation before cutting interest rates.

Although there is ample evidence that the Canadian economy and inflation is stalling out, the BoC only has one shot at getting the rate cutting cycle right, or risk a potential re-inflation as was seen in the 1970s. BoC Governor Macklem is on record stating that he would rather err on the side of holding rates too high for too long, than risk a premature cut.

A slower than anticipated rate cutting cycle would provide downward inflationary assurance, reducing the risk of a 1970s style inflation rebound.

Given these considerations, even though financial markets have locked in their forecast for a July 24 Bank of Canada rate cut, there is still a chance the Bank of Canada could hold off until the US decides to cut rates in September, noting there is no August Bank of Canada meeting.

So, what does this mean for mortgage rates?

What goes up to slow the economy will eventually come down to stimulate the economy.

The Central Bank of Canada (and the Federal Reserve in the USA) is determined to fight inflation, which is why they are seen as slamming the breaks on the economy as a whole. There is no doubt this, unfortunately, will be painful for many. However, low inflation is needed on a foundational level to enjoy another long-term run of low interest rates.

However as we move further into 2024, Central Banks around the globe have begun cutting rates to start supporting economic growth again – or at least, slow the pace of decline. This means the start of a trend for lower mortgage interest rates.

While the variable rate mortgage is directly affected by the Central Bank decisions, we will likely see fixed rates as determined by bond yields, generally trend lower throughout 2024 – but not in a straight line and weighted towards the second half of the year.

Mortgage rates will not normalize at the lowest levels seen during covid. However, as fixed mortgage rates are currently hovering around the mid 4%  – low 5% range, the expectation is that mortgage rate normalization may occur in the high 3% – low 4% range. This reflects the current mid-high ‘neutral rate’ range as set by the Bank of Canada as discussed in the first part of this article. 

But what does ‘getting to the high 3% – low 4% range’ look like?

The CIBC Capital Markets projection from April 2022, seen just below, illustrates a good representation of this forecasted rate trend. However, given stubborn inflation, the Central Bank rate peak will clearly be higher than in the numbers indicated in the chart:

Major Bank Prime Interest Rates Canada

Central Bank of Canada Prime Rate

4.50%