Mortgage Rates Fall Helping Debt-Laden Households

Steve Saretsky -

It wasn’t long ago we were discussing the horrors of rising mortgage rates and what was sure to be the inevitable death knell for home values. The Bank of Canada had turned suddenly hawkish and borrowing costs were surging. On October 05, 2018, the Canada 5 year bond had touched a cycle high of 2.48%. Then everything fell apart.

Canada 5 year bond yield
Canada 5 Year Bond Yield

The economy started to stumble and the bond market hit the panic button. With the Bank of Canada’s Poloz on hold, borrowing costs have been falling ever since. You can now get an uninsured mortgage for basically 3%, down nearly 60 basis points from the peak. That’s not to say rates can’t rise from here, but I think we are definitely in a lower for longer period. One in which global Central Banks have cornered themselves in a hole. We live in a world with over $11 trillion in negative yielding debt, with no real exit strategy. Kind of like Japan for the past two decades.

negative yielding debt
Value of Global Negative Yielding Debt is over $11T

There are still some concerns with mortgage rates in Canada though. Economist David Doyle of Macquarie believes there are troubles brewing in 2020. A lot of homeowners who took out 5 year mortgages in 2015 will be renewing next year at 75 to 80 basis points higher, assuming rates stay where they are now. Of course wages have risen during that period so that will offset some of the pain. That’s assuming Canadians have budgeted for the rise in payments, which is probably unlikely.

Canadian household debt servicing ratios are currently at record highs despite near record low rates. They also haven’t been saving for a rainy day either. The current household savings rate in Canada sits at only 1.1%, which is 86% below the long-term average. Of course this doesn’t matter because home prices never fall, and rates never go up. At least not in Canada anyways. 

Canada household savings
Source: Capital Economics

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