Financial Literacy

Hello everyone and welcome to this November 28th edition of Property Perspective. Today I have the pleasure to be with Matthieu Arseneau, hello Matthieu. 

Hi Simon. 

And with Andrée Desrosiers. 

Hello Simon. 

Hello Andrée. Our topic of the day, what's best for my mortgage, a fixed or a variable rate. But before we enter that interesting discussion with Andrée, let's talk with Matthieu about recent economic news that influence the real estate market. So Matthieu, a number of events have occurred since we last spoke, all of which have an impact on the economic outlook, obviously. First, what are the implication of the Republican sweep in the US presidential election for economic growth and interest rates? 

Yes, this was a big event and there will be application for that for Canada over the next four years. Higher uncertainty, we saw that with the announcement of potential tariff on Canada. We'll see. But clearly, in my mind, the big event and this has implication for the housing market in Canada, particularly for interest rates. It's the fact that there could be much more fiscal stimulus South of the border given the promises of Trump during the campaign. As you can see on that chart, while the Congressional Budget Office was expecting roughly 6% of GDP deficit, which is already very high, it could be as high as 8% if all those promises are realized by Mr. Trump. So at the moment the Federal Reserve is trying to calm inflation in the US, calm the economy. There's government that could support growth over the next few years. So before the election, the Federal Reserve started to decline rates. They did already 75 basis points. But you can see that at the same time it didn't mean that longer term rates decline. In fact, it increased because of risk of tariffs and its implication for inflation because of stronger growth, though that's something we have to keep in mind. And the problem with that increase is given a global correlation in interest rates, when you have the largest economy in the world supporting the economy and having those rates it has an impact on rates in countries with economies not as strong as the US and has to cope with those increases. And that could be difficult for a couple of other economies in the world given the increase of those of those rates. So big implication and that has implications for Canada as well. 

Very interesting Matthieu, so the ability to lower the prime rate in the US now looks more limited. What about Canada?

In Canada, so we saw that in fact for investors expectation for the policy rate in the US, it was expected at 3%. Now it's much more closer to 4% by the end of next year. So clearly investors revised their optimism for rate cuts in the US. In Canada, the situation is clearly different in our view when you look at the labour market here, I'm showing the jobless wait for the prime age workers, the 25-54, it has continued to increase over the past few months. And that's diverging with the US and it's now its highest since 2017. And we don't see stabilization over the next few months given the hiring intention of corporations. So for us that's a sign that the economy has cooled significantly and this is reflected in inflation. When you look at services, core services excluding shelter in the US, it's running at 4.4% because they didn't have that weakness that we got in Canada, it's so it's running at 1.3%. So clearly inflation is under control here. So yes, we expect the Bank of Canada to continue to decline rates. Prior to recent announcements, we were expecting policy rate as low as 2% by the end of next year. But given the transfer that was also announced by the federal government, it could lead to upwardly revise a bit. We'll see if it will be implemented. But clearly as you can see on that chart, while Bank of Canada is declining rates, 10 year rate is increasing and is essentially in its last two years average at this point. So not that much relief for long term rates. So that's something to keep in mind. But for that reason, perhaps it's another reason for the Canada to try to push down those rates by having short term rates very low. So that's our expectation at this time, OK.

Matthieu, the government has announced recently an additional break on population growth for the next three years. What are the implications of this new announcement on the real estate market?

We talked about it very often over the past few months. Housing shortage is still very acute in Canada. We see that in the rental market with rent still increasing at a tepid pace. Same thing for first time home buyers. It's where affordability is still a problem. So I think it's the good decision to calm down population growth. In fact, with the recent announcement about the declining non permanent resident to 5% of population over a 2 year. Reducing permanent resident temporarily, that will lead for— when you look at the five year period, when we look in 2028, the pace for the next 5 years will be similar to what we had prior to the pandemic level, much more sustainable and much more in line with our capacity to welcome. So, I think it's a good decision at this point given housing shortage. And we have to keep in mind newcomers have problems to integrate the labour market in the current context. So let's fix that situation and get back to normal after this three-year period of slow growth and we will be able to get back to the model we had that was benefiting the Canadian economy prior to the pandemic. 

So finally good news. Thank you, Matthieu for your very interesting comments. Let's now discuss with Andrée, hello Andrée. In the context of the anticipated drop of the interest rate by the end of this year and obviously in 2025, should we go with a fixed rate or variable rate for our mortgage?

Very good questions Simon and indeed very relevant. The choice between a fixed rate and a variable rate for a mortgage depends on several factors, especially in the context of falling rates. Our risk tolerance, financial situation and short and mid economic outlook are key, you know, considerations to look at. We must first understand the bearish rate context, however, When the Bank of Canada lowers its prime rate, financial institutions typically adjust, you know, their mortgage rates in response to that downsize. Variable rates will generally follow primary fluctuations and become particularly advantageous in the short term. Fixed rates, although often higher than variable rates at the time of subscription, offer protection against potential future increases. We must however remember that they usually follow the interest rate on long term bonds and not the Bank of Canada prime rate. Therefore, a quarter point drop in the prime rate does not mean that fixed rate will fall by the same amount. 

OK. We must therefore understand this context carefully before making our decision. You're right, Andrée. Many people assume that when there's a drop in the prime rate, all rates fluctuate in the same way. However, as we have just seen, that isn't the case since different rates are influenced by different factors. With that in mind, Andrée, what are the advantages of one or the other? 

Yeah. If we look first, you know, at the variable rate, you should consider that rate if you believe that interest rates will continue to decline or stay low for an extended period of time. You can also choose the variable rate if you're comfortable with some level of risk and can handle or afford, you know, potential payment increases if rates rise. Also if you want to benefit from lower penalties, if you decide to pay off your mortgage early or switch lenders. Also, some variable rates loans offer the option to switch to a fixed rate if rates increase. On the other hand, you should consider, you know, a fixed rate if you prefer stability and want to avoid uncertainty, if you think rates might rise in the midterm and again, if your budget cannot accommodate sudden increases in monthly payments.

So once again, Andrée, the choice does not automatically go towards one or the other. Even if we are in the context of falling rates. As you mentioned, we must make sure to take other elements into account in our decision. You are very right Simon. And we must also not forget that some lenders offer mixed rate mortgages, you know, part fixed, part variables. So this approach allows you to balance the advantages of both options and reducing risk while still benefiting partially from falling rates. So in summary, you know in a falling rate environment, a variable rate may seem more advantageous in the short term, but it remains a bet on future rate trends. If you're comfortable with some uncertainty, a variable rate could maximize your savings. However, if peace of mind is your priority, a fixed rate is the safer choice. It all depends like usual on your financial profile and financial goals. To help you in your choice as usual, do not hesitate to consider or consult a mortgage specialist to assess your personal situation and provide you the right advice for that choice. 

Thank you Andrée for sharing your insights. As you suggested, having a discussion with a mortgage specialist will help make the right decision. There's no point about that. So thank you all for watching and join us again very soon for our next edition of Property Perspective.