According to the British Columbia Real Estate Association (BCREA), mixed signals from Canadian economic data are making the outlook for the Canadian economy somewhat cloudy.
BCREA has released a report on trends and forecasts for mortgage rates, authored by Chief Economist Brendon Ogmundson and Economist Ryan McLaughlin.
Mixed signals on Canadian economy clouds mortgage rate outlook
The labour markets are still strong, but economic growth appears to have stalled in the fourth quarter of 2022, the economists write.
While inflation has decreased, it remains high compared to the previous year, with total CPI trending at 2.5 per cent annually over the past three months and core measures of inflation trending between 2.5 per cent and 3.5 per cent.
Ogmundson and McLaughlin explain these mixed data points have led to uncertainty about the economy’s direction, causing significant volatility in bond yields as financial markets try to make sense of future monetary policy decisions.
Mortgage rate forecast
BCREA’s baseline is still for a sub-five per cent five-year fixed mortgage rate by the end of the year, but “clearly, there will be much volatility on the journey there.”
According to the economists, as long as the Bank of Canada remains on hold, and fixed rates experience only minor increases, the uncommon scenario of a notable negative difference between variable and fixed rates will persist.
The table below outlines the forecast for mortgage rates in 2023 and 2024.
“Higher interest rates are clearly impacting the most rate-sensitive sectors of the economy,” they explain in the report.
“Housing investment fell 2.3 per cent in the fourth quarter and was down 11.1 per cent in 2022. As tighter borrowing conditions impact the wider economy, we anticipate that growth will slow, and the labour market will soften.”
Ogmundson says the recession probability remains high, given the recent rate hikes by the Bank of Canada.
BCREA’s model shows two quarters of negative GDP growth starting in the second quarter before a recovery begins toward the end of 2024.
As tighter borrowing conditions impact the broader economy, growth will likely slow, and the labour market will soften.
The good news— the economists point to several factors that indicate inflation may begin to normalize this year.
“Barring a significant shift, gas prices will start to subtract from year-over-year CPI inflation. Additionally, raw materials and shipping costs should benefit from a downtrend in global commodity prices and a normalization of supply chains.”
They note that a widening gap between Canadian and U.S. interest rates would put downward pressure on the dollar, which could lead to another increase in inflation.
BCREA expects the Bank of Canada will hold interest rates this year before lowering them in 2024, once inflation returns to its target of two per cent.
Read BCREA’s Mortgage Rate Forecast here.