MORTGAGE RATE FORECAST

MORTGAGE RATES STABLE IN EARLY 2010

Borrowing costs on three– and five– year fixed rate and term mortgages remained stable during the first two months of 2010, declining slightly by 10 basis points to 4.15 and 5.39 per cent in February. The BC Real Estate Association (BCREA) expects this dip to be short-lived. Mortgage rates are forecast to rise more quickly during second half of 2010 and through 2011. Despite this increase, mortgage rates will remain relatively low from a historical perspective. Mortgage rates will inevitably rise from current levels. Today’s low interest rate environment reflects the ongoing support of the economy by central banks around the world after the worst economic crisis in decades. These low short-term interest rates, combined with economic weakness, higher investor risk aversion and lower inflation expectations drove bond market yields lower and contributed to declines in administered interest rates for products such as mortgages. With global economies on the mend, and Canada recording stronger economic growth, expect the Bank of Canada (BoC) to scale back its monetary stimulus by raising interest rates from the current low levels . The BoC held the line on its trend setting policy interest rate on March 2, 2010, and reiterated its conditional commitment to keep its policy rate at 0.25 per cent until the end of the second

quarter of 2010. However, the BoC will be hard-pressed to maintain its policy rate at the current level once the third quarter rolls around despite the continued headwinds of a strong Canadian dollar and the uncertain US economic climate. Economic activity has been higher and inflation firmer than was projected in the BoC’s January Monetary Policy Report, Given these conditions, BCREA expects policy rate hikes of 25 basis points at the July and September rate announcements. A further quarter point increase in the fourth quarter will push the policy rate to 1 per cent by the end of 2010. BCREA expects this rate to reach 2.75 per cent by the end of 2011. Variable mortgage rates which are tied to prime rates will rise by the same magnitude. Fixed-rate term mortgage rates, which move closely with bond yields and deposit rates of similar maturity will edge up gradually through 2011. Increases are expected to be modest as a high Canadian dollar temper future growth prospects, and a tepid labour market and uncertainty in the global economy lower inflation expectations, moderating upward pressure on fixed term mortgage rates.

Economy Bounces Back in Q4

Recent, fourth quarter GDP statistics have provided further evidence that Canada’s economic recovery has gained traction. Annualized fourth quarter growth reached 5 per cent, the highest since the third quarter of 2000. Economic output expanded in six out of the last seven months of 2009, suggesting a sustained economic recovery. A continued, albeit grinding, rebound in the global economy and stable domestic demand at home should bode well for Canadian growth. While government expenditures have bolstered economic activity, consumers have been the backbone of the recovery. Enticed by low interest rates, a rebound in confidence, and labour market stabilization, individuals have invested in new vehicles, home renovations and

home purchases. Much of this activity has also been reflected in inflation-adjusted retail trade volumes, which rebounded to pre-recession levels in December. Improved economic activity, rebounding energy prices, and significant price level declines during the recession have led to a recent pick-up in recorded consumer price inflation. Year-over-year consumer prices rose 1.9 per cent in January, nearing the mid-point of the BoC’s

1-3 per cent inflation target. Consumer price inflation is expected to stabilize in the following quarters despite an improved economy as continued slack in the labour market leads to muted wage pressures and a high Canadian dollar keeps import prices stable. Flat price levels moving forward will be compared to a period of rising post-trough prices levels from a year ago, yielding smaller gains in inflation. Nonetheless, the return of inflation to target levels suggests that the BoC will pull back on monetary stimulus

Source Cameron Muir, Chief Economist, cmuir@bcrea.bc.ca Bryan Yu, Economist, byu@bcrea.bc.ca