Incoming Market Changes

You may have noticed a flurry of recent press concerning the “inverted yield curve” that we have recently moved into Canada. An “inverted yield curve” means that the long-term bond rates are actually lower than short-term bond rates. In addition, almost every Canadian government bond is now below the Bank of Canada’s 1.75% overnight rate. That’s pretty rare.

What does all of this actually mean for the economy and our real estate market? Typically, an inverted yield curve is a sign of:

• A portending economic slowdown
• Falling inflation rates
• Lower interest rates

Yield curves are practically good at predicting economic downturns. Since 1961, 10 of the last 15 Canadian yield curve inversions were followed by 1+ contraction, but the silver lining should be falling interest rates, which the real estate market definitely needs at the moment.

The Bank of Canada is currently somewhat conflicted however. While it does recognize that the inverted yield curve is a troubling development, it also means that the drag in our economy is “temporary”, citing “strong” jobs and income gains, and inflation that’s near target. That said, if further growth signals don’t materialize before its April 24^th meeting, the Bank should change to a more dovish tune.

Policy makers may also soon turn their attention to a potential revamp of the mortgage stress test that was implemented last January. The stress test has clearly affected mortgage growth (and the real estate market) in a negative way, as have punitive taxes on foreign buyers/speculators. The BCREA (among others) have been pressing the government for changes in this area.

Finally, according to rules imposed last January, all mortgages must be “stress tested” at the greater of the bank’s Mortgage Qualifying Rate (MQR) or 200 basis points above the contract rate. At the moment, the MQR stands at 5.34%.

Once the MQR finally drops, more people will buy and refinance. The big banks haven’t changed this critical rate since last May, but it is very likely that they will soon do so. That could give the housing market a small shot of adrenaline.