Source:  CanadianMortgageTrends.com

Over the past few months, major economists have backpeddled on their rate hike predictions.

Not long ago, the consensus of economists was projecting a July 19 increase. Now, those same analysts aren’t looking for a rate bump until this fall… or later.

A slew of factors justify a deferral of rate increases, including:

* A parade of weak economic data from the U.S. – our key trading partner
* Core inflation that remains manageable
* Global economic risks
* Debt-laden consumers that are only cautiously spending
* A U.S. housing market that’s double-dipping
* U.S. unemployment that may be structurally and permanently elevated
* A Canadian dollar that is still acting as a brake on our economy.

For reasons like these, TD Bank became the first major bank last week to predict the Bank of Canada would stand pat on rates through 2011. Depending on how the next rounds of economic data look, other banks may follow suit.

Then again, the rate picture can and does change.

BMO says: “…it is too soon to dismiss the possibility (of rate hikes in 2011).”

BoC chief Mark Carney recently said: “…The expectations, both in the medium term and sooner than the medium term, is that rates are not going to stay at these unusually low levels.”

Latest Overnight Rate Forecast

The Bank of Canada’s overnight target has a direct impact on variable mortgage rates.

Bank             2011     2012
BMO             1.50    2.75
CIBC             1.75     2.00
NBC             2.00     2.75
RBC             1.75     3.00
Scotia         1.50     2.25
TD                 1.00 2.00
Year-end Avg    1.50     2.50
Chg vs Today    +0.50    +1.50
(Figures above are year-end and rounded to the nearest 1/4 point increment.)

Latest 5-Year Government Bond Yield Forecast

Government bond yields drive 5-year fixed mortgage rates.

Bank             2011     2012
BMO             2.93     3.80
NBC             3.46     3.88
RBC             3.30     4.05
Scotia         2.85     3.35
TD                2.70 3.65
Year-end Avg     3.05     3.75
Chg vs Today     +0.89 +1.59
(CIBC’s 5-year bond forecast was not available.)

Caveats

The above projections should be qualified as follows:

1. With only four Bank of Canada policy meetings to go in 2011, some of the banks may soon defer or pare back on these rate increase estimates.

2. The Overnight index swap (OIS) market, which mirrors BoC rate expectations, tends to predict rate changes slightly better than economists. Currently, OIS prices are implying less than 50% probability of a rate hike this year. The next rate increase is not fully priced in until February 2012 (updated as of Friday’s close)! Just a few months ago, the OIS market believed rates would increase on July 19.

3. Long-term rate outlooks have margins of error as big as 1.00% or more, so use them only as a rough guide (more on this below).

Variable Rate Mortgage Forecast

Bank estimates, if accurate, imply a 4.50% prime rate by December 31, 2012. Prime rate is currently 3.00% and the 10-year average of prime is 4.33%.

Based on an 80-basis-point discount from prime, these forecasts suggest 5-year variable rates in the 3.70% range by year-end 2012. That’s slightly higher than today’s best 5-year fixed rates.

Fixed Rate Mortgage Forecast

The banks predict that 5-year bond yields will rise to 3.75% in 18 months. That level would eclipse the 10-year average of 3.61%.

Assuming a typical 125 basis point spread above yields, these forecasts imply that a deeply-discounted 5-year fixed rate mortgage could hit about 5.00% by year-end 2012.

Rate Forecasting In Perspective

The major banks spend millions to formulate accurate interest rate projections. Their economists utilize every data source, academic study, historical backtest, and analysis tool imaginable. Yet, try as they might, their forecasts are far from infallible.

Despite economists’ notorious and continuous forecast revisions, long-term rate estimates still provide a useful reference point. Part of their value is in showing what might happen if the world unfolds without global crises and major economic disruptions.

With that reference point as a “base case,” these forecasts can be useful for creating amortization models based on future rate assumptions. The key is to incorporate a reasonable margin of error in those models—one that’s big enough to account for things like hyper-growth/inflation or the aforementioned economic disruptions. Find more about mortgage rates in Canada.

Other Things to Note

Bank forecasts, like those above, are subject to frequent change. This data is therefore provided only for general interest. Always discuss your needs and risk tolerance with a mortgage professional before acting on any such information.

History has shown that it’s near impossible to accurately predict interest rates long-term, so use these figures at your own risk. That said, while economist projections are often wrong, they remain one of the better sources of educated opinion on interest rates.

“Chg” = the expected change in rates from today. In other words, Chg is the average forecast minus today’s rates. All estimates above are based on the respective year-end, except those of BMO. BMO forecasts the average rates for a given quarter, instead of the rate at the end of that quarter. Because of that, we have averaged BMO’s Q4 and Q1 forecasts to estimate the year-end 2011 figure.

Bank estimates are taken from their latest forecasts published online. Overnight rate results are rounded to the nearest 1/4 point, in keeping with the Bank of Canada’s standard rate setting increments.

———————————————————————————————————————
Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto Realtor with Century 21 Regal Realty. He did not
write these articles, he just reproduces them here for people who are
interested in Toronto real estate. He does not work for any builders.
———————————————————————————————————————