The once bright outlook for the Canadian economy darkened toward the end of 2018 amidst disruptions in Alberta oil production and a policy-induced slowdown in the Canadian housing market. This slowdown, along with global economic growth concerns, prompted a dramatic revision in market expectations for future Bank of Canada rate tightening. As a result, key benchmarks for bank borrowing costs plummeted, reversing course after a year of steady increases.
While those key benchmarks were falling, Canadian lenders delayed passing on savings to borrowers as the B20 mortgage stress test stifled growth in mortgage credit. However, as we move into the traditionally competitive spring housing market, mortgage rates are heading downward. The average contract rate for 5-year mortgages has declined about 30 basis points from its peak in 2018, reaching 3.44 per cent in March. Unfortunately, this still means a stress test rate of 5.44 per cent, even for the highest quality borrowers.
While contract rates are falling, the posted 5-year qualifying rate for insured mortgages has not budged in 11 months at 5.34 per cent. If 5-year bond yields sustain at their current level, a 5-year qualifying rate under 5 per cent should follow suit.
We are forecasting that lower mortgage rates will prevail for all of 2019 with the average 5-year contract rate falling to 3.30 per cent through the spring and early summer and the 5-year qualifying rate finally moving below 5 per cent for the remainder of the year. While there is an outside chance of a rate cut from the Bank of Canada, our baseline is for the Bank to remain on hold in 2019. Therefore, we are forecasting no change in the prime rate, from which variable rates are discounted.
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