What's the interest rate outlook in Canada for the year ahead?

The direction of rates will have huge influence over Canada’s housing and mortgage markets in 2024

What's the interest rate outlook in Canada for the year ahead?

Dropping interest rates on both the fixed and variable fronts are expected to be among the big trends of the year in Canada’s mortgage market, although there’s little consensus as to when both rates will start to fall in earnest – and how far they’ll slide.

Fixed rates have already been on the way down in recent weeks, with top banks cutting in response to plunging bond yields, while all eyes are on the Bank of Canada and a possible date for the beginning of cuts to its benchmark rate, which leads variable mortgage rates.

In its newly released forecast for the year ahead, digital mortgage brokerage nesto noted that each of Canada’s five leading banks anticipate a lower central bank policy rate by the end of the year.

The company highlighted that Bank of Montreal (BMO), Royal Bank of Canada (RBC), and Scotiabank all believe the Bank of Canada’s trendsetting rate will have fallen to 4.0% by the end of the fourth quarter, while Canadian Imperial Bank of Commerce (CIBC) forecasts a 3.50% rate by then and National Bank see it sitting at 3.25%.

What effect would rate cuts have on the housing market?

With scores of would-be Canadian homebuyers reportedly sitting on the sidelines and waiting for rates to drop before they push ahead with their purchasing plans, a Bank of Canada cut would spell welcome news for the mortgage market.

Still, it’s also worth noting that too steep or dramatic a cut could propel a big upsurge in market activity, nesto’s co-founder and principal broker Chase Belair (pictured) told Canadian Mortgage Professional – one that could also herald a spike in home prices.

“It should bring some fuel to the market, but it’s a double-edged sword at the same time because if you have a lot of borrowers with new access to high mortgage amounts or properties, then it’s going to put upward pressure on home prices again,” he said.

“Our real estate market is quite fragile with the amount of homebuyers we have on the sidelines and the shortage of homes that we previously had available, where I was slightly concerned that there could be a surge in home prices if rates go down too quickly or too much.”

What the mortgage industry and borrowers should be hoping for, Belair said, is a “soft balance” between affordability and a modest increase in home prices, with price data throughout the year set to present an intriguing indicator of whether stronger market activity is eroding affordability further.

How has the latest news on inflation and housing impacted the BoC’s thinking?

With inflation trending upward at last reading and Canada’s housing market posting a surprisingly resilient end to 2023, there seems little chance that the central bank will consider rate cuts early this year.

BMO chief economist Doug Porter said the fact that core inflation appeared to be lingering around the mid-threes was “unsettling” and reiterated the bank’s stance that rate cuts are unlikely to arrive until the June meeting.

“Given that wage trends are also stuck in the 4%-to-5% range, and now even housing may be showing a pulse, suggests that the Bank of Canada will doggedly maintain a cautious stance at next week’s rate decision and MPR [monetary policy report],” he wrote.

That’s likely to mean the subdued activity that characterized much of last year’s housing and mortgage markets could continue at least for the opening months of 2024 – although Belair said those with homebuying intentions could still benefit from moving sooner rather than later.

“That doesn’t mean that someone who wants to buy today should wait until June,” he said of the prospect of a cool market in the first few months of the year. “I think it means almost the opposite. It means everyone will be ready by June. Everyone waiting for one more sign before they go on into the housing market is going to get their sign by June.

“If you wanted to try and be an early adapter or get ahead of the market or find value before everyone else, there’s a window, and that window is now. It comes with its own risk, though, because if the data goes the other direction or inflation goes the other direction, then it’ll push the Bank of Canada’s forecast and, of course, the rate drop forecast.”