Mortgage Rate Trends and Forecasts for 2024
Decreasing or increasing: what will be the evolution of mortgage rates in Canada in 2024 and for the following years? In the coming months, experts rather expect a decrease in mortgage rates, let’s see why.
Following the Bank of Canada’s announcement on October 23, 2024, this trend seems to be confirmed.
An Important Indicator
The successive reports from the Canada Mortgage and Housing Corporation (CMHC), say a lot. The news about the periodic adjustment of interest rates for mortgages is a subject that attracts the attention of many Canadians:
- in 2024, about 85% of borrowers – mostly first-time buyers and consumers in the 25 to 34 age group – conduct research beforehand before committing to a mortgage. For more than half of these future homeowners, the mortgage interest rate remains the main concern, at 58%, preceding other important topics such as mortgage terms (for 22% of them) or closing costs (for 15%);
- the evolution of mortgage interest rates in 2024 is also the subject of permanent observation among borrowers whose real estate loan is up for renewal during this year. A rise or fall in the Bank of Canada’s key interest rate – which influences mortgage rates – indeed impacts the overall economy after a period of up to one year. Approximately 45% of outstanding mortgages will be renewed during the 2024-2025 period in Canada, which is roughly 2.2 million contracts.
For these mortgage borrowers, following the news around the interest rate is crucial, as every change generates various consequences on the amortization of their mortgage.
Are you considering taking out a mortgage to buy a home in the coming weeks and are wondering about the evolution of mortgage rates? Is your mortgage coming to its term and you are about to renew it? Discover the trends and forecasts for rates in 2024 with your broker.
Current Mortgage Interest Rate: July 2024 Update
Like many countries, Canada is experiencing a widespread increase in prices following various significant events of the early 2020s, such as the coronavirus pandemic and the war in Ukraine. Monetary policy is oriented to put a brake on inflation.
The most recent decision by the Bank of Canada regarding the adjustment of the key rate is that of July 24, 2024. The target for the overnight rate continues its decline, now at 4.50%.
Based on CMHC data, the interest rate for conventional mortgage loans, renewable after a 5-year term, was 5.91% in July 2024. The trend for mortgage interest rates is thus downward for the first 7 months of 2024: in January, it was 6.31% according to the institution, falling to 5.98% in June, to drop to 5.91% in the seventh month of the year.
The Context of Mortgage Rate Evolution
The Central Banks of several countries have been multiplying corrective measures for a few months. To curb the harmful effects of successive crises shaking the planet, the heads of these monetary institutions make regular decisions to stop inflation. The adjustment of the key rate is one of the strong measures adopted.
In Canada, as in European Union member countries and the United States, the level of this indicator is thus adjusted regularly. These decisions are made because the effects of various major global events have repercussions on the country’s economic life. Various news items are notably pointed out as the cause of this inflation, such as:
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The Israeli-Palestinian Conflict
The evolution of the Israeli-Palestinian conflict since 2023 is accompanied by several potential risks for the global economy. The situation is already causing an increase in oil prices, which have risen from $85 to nearly $90 per barrel in recent months. Experts predict a possible stabilization around $100, which could accentuate global inflation. Saudi Arabia, however, has declared it is ready to increase its production if necessary, a decision that should mitigate this possible price increase.
Growing geopolitical tensions and the uncertainty linked to the conflict also risk causing increased volatility on global financial markets, making investments more uncertain. Faced with this instability, investors might turn to assets considered safe, such as gold, the Swiss franc, the currencies of oil-producing countries, and bonds from states deemed stable.
The International Monetary Fund also expresses concerns about the impact of the conflict on an already fragile global economy. The persistence of rising oil prices could slow down economic growth on a global scale.
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The War in Ukraine
Even though the Ukrainian economy represents a relatively small share of global trade, the Russian-Ukrainian conflict also has the consequence of disrupting certain global supply chains. The costs of certain raw materials from the region have thus soared. This disruption of the raw materials market has an impact on global trade, leading to a widespread increase in prices on a planetary scale.
It is with the aim of stemming this global price increase that Central Banks decide to adjust their key rate. This kind of decision has the direct effect of also increasing or reducing the mortgage interest rate.
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The Economic Situation in the United States
The transition from a policy of increase to a strategy of decrease is about to mark the context of the evolution of interest rates in the United States in August and September 2024. The US Federal Reserve or Fed, faced with falling inflation, but a labor market showing signs of weakness, finds itself facing a dilemma and must find the right balance to support the economy without reigniting inflation.
In previous months, the US Federal Reserve applied a policy of raising interest rates to counter galloping inflation. This inflation, which reached about 7% during the Coronavirus pandemic, pushed the Fed to raise its key rate several times, bringing it to its highest level in 25 years, between 5.25% and 5.50%.
The situation has nevertheless evolved in recent months, leading the Fed to consider a rate cut. Inflation in the United States has indeed significantly decreased, reaching 2.5% in June 2024. Although the labor market has been robust, signs of a slowdown are appearing, with an increase in the unemployment rate to 4.3% in July 2024. The Fed fears that maintaining high rates will worsen this situation and cause a rise in unemployment.
The institution is also increasingly confident in its ability to bring inflation sustainably back to its 2% target. This confidence allows it to consider an easing of its monetary policy. Although the rate cut seems certain for the coming weeks in the United States, its magnitude remains uncertain for now. Markets anticipate a reduction of a quarter point or half a point in September 2024.
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The Situation in Canada
In June 2024, the Bank of Canada announced a first reduction in its key rate in over four years, bringing it from 5.00% to 4.75%. This decision was motivated by the slowdown in inflation, which reached 2.7% in April 2024, and by the weakening of the Canadian economy.
Many observers predict that the Bank of Canada should continue its policy of monetary easing in the coming months. The main reasons for this prediction are the weakness of the economy and the continuous slowdown in inflation. The latter indeed fell to 2.5% in July, its lowest level in 40 months. Economists thus expect the Bank of Canada to lower its key rate again in September, October, and December 2024, and then a few times in 2025.
The central banks of other countries, notably the US Federal Reserve, the European Central Bank, and the Bank of England, are also reducing their key rates in 2024, creating an international context favorable to a rate cut in Canada. Although the downward trend in rates seems well established, the magnitude and pace of future cuts remain uncertain. The Bank of Canada indicates that it will make its decisions on a case-by-case basis, depending on the evolution of inflation, economic growth, and labor market conditions.
The Real Estate Market in Quebec at the Beginning of 2024
A vigorous recovery in sales in a market favorable to sellers marks the real estate situation in Quebec in the first quarter of 2024. The market reveals strong growth in real estate activity after a period of slowdown in previous years. This recovery is accompanied by a rise in prices, particularly for single-family homes and plexes.
The Quebec real estate market recorded 21,337 residential sales in the first quarter of 2024, marking a 17% increase compared to the same quarter in 2023. This double-digit sales evolution is a first since 2021 and is observed in most metropolitan regions of Quebec.
The recovery in activity is attributed to several factors, including buyer confidence in the downward trend of inflation and the prospects of falling interest rates in 2024. The median price of single-family homes in Quebec increased by 10% in the first quarter of 2024, reaching $439,000. Plexes saw an even more marked increase, with a median price up 15% to $520,000.
This price increase is partly explained by the strong demand for this type of property since the beginning of the year. Condominiums also saw their median price increase, but at a more moderate pace, about +5%, reaching $365,000.
The Quebec metropolitan region stands out with an even more marked increase in sales, +21% in the first quarter of 2024, exceeding the historical average for this time of year. This situation contributes to a strong increase in prices in the region. In April 2024, the number of sales in the Quebec region continues to grow, with +18% of transactions compared to April 2023.
Image: https://elements.envato.com/fr/agents-are-calculating-the-loan-payment-rate-or-th-TELB5EW
What to Watch in 2024?
Following the trends and forecasts for mortgage rates for the year 2024 involves regularly informing yourself about several important points. Even if no tangible indicator predicts the future rise or fall of the key rate, several key factors should be checked periodically, including:
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Economic Growth in Canada and the United States
Strong economic growth, both in Canada and the United States, stimulates the demand for funds from companies seeking to finance their expansion. This increased search for funds forces mortgage lenders to offer higher interest rates to investors to attract capital. Mortgage rates then end up increasing, as lenders must pass on this higher financing cost to borrowers. Conversely, weak economic growth or an economic slowdown leads to a decrease in the demand for funds, which can lower interest rates, including mortgage rates.
Canadian and American financial markets are also closely linked. Canadian banks often borrow funds on US markets. US interest rates thus have a direct impact on the cost of financing mortgage loans in Canada. For example, when interest rates rise in the United States, Canadian banks must offer higher rates to attract investors, accompanied by an increase in mortgage rates in Canada, even if Canadian economic growth is moderate.
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The Job Market:
The job market is an important factor that can influence mortgage rates in Canada. A robust job market can lead to an increase in rates, while a weak job market can lead to a decrease in rates. The Bank of Canada takes the job market into account in its decisions on interest rates, seeking a balance between price stability and economic growth.
The Canadian labor market has been slowing in recent months, with an increase in the unemployment rate. This slowdown in the job market, combined with the decrease in inflation, is thus leading the Bank of Canada to lower its key rate in June 2024 and probably in the coming months.
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Inflation
Inflation is a crucial factor to consider when following the evolution of mortgage rates. This indicator indeed influences the Bank of Canada’s decisions on interest rates, with a direct impact on mortgage rates. The institution uses adjustments to the key rate as its main tool to control inflation. When inflation is high, it can increase the key rate to slow down the economy and bring inflation back to its 2% target. Conversely, when inflation is low, the Bank of Canada can lower the key rate to stimulate the economy and lead to a decrease in mortgage rates.
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The Evolution of the Real Estate Market
The real estate market is also an interesting indicator that can give an idea of future mortgage rate conditions and housing affordability. The Bank of Canada takes the real estate market into account when making decisions about the key rate. It closely monitors its evolution, because an overheating real estate market can contribute to inflation. If the Bank of Canada judges that the real estate market is overheating, it can increase the key rate to curb borrowing and cool the market. These rate increases are then reflected in mortgage rates. By being attentive to the real estate market, you can then anticipate potential interest rate increases and adjust your borrowing plans accordingly.
The housing crisis affecting the entire country can also have some repercussions on the real estate market. The cost of housing, both for purchase and rent, is indeed increasing at a much faster pace than incomes, making it increasingly difficult for Canadians to find adequate housing. The construction of housing is not keeping pace with population growth and the country’s needs, creating a significant imbalance between supply and demand. This lack of supply fuels price increases and makes the search for affordable housing even more difficult.
Bank of Canada Announcement Dates
The Bank of Canada has publicly presented its annual calendar to rule on the key rate during the years 2024 and 2025. These meetings are generally followed by a measure regarding the key rate. Mortgage rate trends could therefore change after:
- January 24, 2024;
- March 6, 2024;
- April 10, 2024;
- June 5, 2024;
- July 24, 2024;
- September 4, 2024;
- October 23, 2024;
- December 11, 2024;
- January 29, 2025;
- March 12, 2025;
- April 16, 2025;
- June 4, 2025;
- July 30, 2025;
- September 17, 2025;
- October 29, 2025;
- December 10, 2025.
The Latest Bank of Canada Announcement (Updated October 23, 2024)
The Bank of Canada reduced its key rate by 50 basis points, bringing it to 3.75%. This decision was motivated by a slowdown in inflation, which fell to 1.6% in September, well below the Bank’s 2% target.
This slowdown in inflation can be explained by the following 3 factors:
- Moderation of real estate prices: Price growth in this sector has slowed, contributing to lower inflationary pressure.
- Excess supply: Supply exceeding demand in various sectors has also curbed price increases. If companies want to sell their stock, they will have to lower their prices. This is a sign of an economic slowdown but experts seem little concerned about economic growth (source: https://www.lesaffaires.com/opinions/la-baisse-de-linflation-nest-ni-surprenante-ni-inquietante/).
- Decrease in global oil prices: This decrease has had a direct impact on energy costs and, consequently, on overall inflation.
The next Bank of Canada announcement on rates is scheduled for December 11, 2024.
Source: https://www.banqueducanada.ca/2024/10/fad-communique-2024-10-23/
Mortgage Rate Forecasts for 2024
Various perspectives suggest that mortgage rates could experience some stability in 2024, with a downward trend in the second half of the year. The Canada Mortgage and Housing Corporation (CMHC), as well as organizations like the Canadian Real Estate Association (CREA) and the Association des professionnels de la construction et de l’habitation du Québec (APCHQ), anticipate a decrease in mortgage rates during the second half of 2024, following the Bank of Canada’s decision to start reducing its key rate. This decrease is motivated by the anticipation of an easing of inflationary pressures and an economic slowdown.
These organizations consider that mortgage rates could remain relatively stable at the beginning of the year, before starting to decrease as the Bank of Canada adjusts its monetary policy. This decrease in mortgage rates should stimulate activity in the real estate market, with an increase in sales and a recovery in price growth. Buyers who have delayed their purchase due to high rates might then return to the market, stimulated by better affordability.
sources:
https://www.apchq.com/download/19b7d4661440acd37baadbf87fbe10c24df8fc8b.pdf
Downward Forecast for Mortgage Rates from Major Canadian Banks
To inform their clients and help them make informed decisions, Canadian banks like Scotiabank, TD Bank, and BMO also regularly analyze the evolution of the key rate, which directly influences mortgage rates, and issue forecasts for the coming months and years:
- Scotiabank forecasts that the key rate in Canada will decrease, from 5.00% at the end of 2023 to 4.00% at the end of 2024 and to 3.25% at the end of 2025;
- TD Bank anticipates a peak of 5.00% for the key rate in the third quarter of 2024, before falling to 2.50% in the fourth quarter of 2025;
- BMO for its part estimates that the key rate will average 4.77% in 2023, 4.56% in 2024 and 3.17% in 2025.
Conclusion
With the aim of realizing a real estate purchase, many individuals are informing themselves about mortgage rate trends. Many uncertainties surround the trends and forecasts for mortgage rates in 2024. For the most part, experts in Canada expect a relaxation of the Bank of Canada’s monetary policy during 2024, but major doubts remain regarding a possible situation of stagflation.