We’re coming up on 2 years of mortgage rate hikes in Canada, and in this issue I will explain what factors influence rates and why I believe rates will be coming down in 2024

Understanding when mortgage rates will come down will help guide mortgage and housing decisions that will impact your financial future. This information will assist both current home owners, and those that hope to be in 2024. Knowing where rates are going is a key insight home owners need when planning their current mortgage. For will be homeowners it will guide both the opportune time to get into the housing market, and what your mortgage strategy should be when you do.

Now, let’s dive in to what I’m keeping my eye on.

Inflation, which is the year to year change in the price of things we use, is the key driver of mortgage rates. After about 2 years of steady increases following the pandemic, inflation has been on a bumpy decline since the middle of 2022.

As we all know, the cost of a trip to the grocery store or filling up the car at the gas station has never been so pricey. For mortgage rates to come down, we need inflation to slow. We don’t need the things we consume to actually get cheaper, but to stop getting more expensive so quickly. When calculating inflation we look at the price of goods from a year ago compared to today, as a result we can expect a not so great report for inflation for December 2023. However the comparison starts to really improve from there, hopefully getting us back to where we need to be by mid 2024 to support rate cuts from the Bank of Canada (BoC).

Things we need to watch that can push inflation in the opposite direction are; housing costs (the leading impact on inflation at this point; due to high mortgage rates and high rents), oil prices (which should continue to come down, barring any world political/conflict impact), any inevitable US or Global economic surprises that might quickly change supply and demand.

GDP, which is the total amount of economic activity we produce as a country, has been flat or seen small declines since mid 2023, this alone is not terrible news. However, when you look at that on a per person basis things look worse.

We’ve added about a million new people to Canada in the last 12 months, but are producing the same amount of economic output — that is concerning to me. Especially when we’re adding highly educated and highly skilled individuals looking to join the workforce. A decline in GDP indicates we’re in a recession, and a recession means lower mortgage rates eventually as it drives down inflation.

Thing to watch here, we are so tied to the US, that we also need to watch GDP south of the border as well. Things propping up US GDP are high government spending and the fact that their mortgage rates stay the same for 15 or 30 years (very different than Canada).

The percentage of Canadians that are currently out of work is starting to increase, and this will drive down mortgage rates by again — impacting inflation.

You can see this playing out today, from mass job cuts from the big five banks to layoffs at major companies in all areas of the country. Each of us doesn’t have to look far to see someone we know that’s already been impacted. As the percentage of Canadians that are out of work grows, it drives down demand for goods (read inflation as per above) and triggering the Bank of Canada (BoC) to step in and support Canadians and our economy.

With employers continuing to cut jobs, and immigration continuing to run at a high pace, look for this number to continue to increase in the early parts of this year.

This is why I believe it’s not a matter of if, but when in 2024 rates will begin to fall — and you need to factor this in to your plan!

I understand that the above doesn’t paint the most positive picture for Canada in 2024, but being prepared for what is coming ahead is what guides our future financial success. I’m not predicting doom and gloom, but rather a slowing of our economy that will obviously impact many Canadians.

My educated guess for 2024, is that the BoC will be forced to support our economy and should start to cut rates by summer/fall 2024, if not sooner. A poll of current economist predictions puts 5 or 6 cuts, 1.25 – 1.5%, on the table for 2024, which I think might be a bit optimistic. As a result we’re already seen fixed rates drop as much as 0.60%, in the last 4 weeks. Until the cuts are imminent, the BoC will keep sending the pessimistic messaging — trying to deter any early excitement and a rush back to home-buying. Whether those predictions come true or not, I think we are headed for lower rates, but not without some bumps along the way. Be prepared for some reports that things aren’t improving or are stalling, along the path to better rates.

For current mortgage decisions, like getting a new mortgage soon or one coming up for renewal in the next few months or year, I hope this gives you the confidence to understand where things are headed a bit more clearly. The key here is going to be guiding the type of mortgage you choose, and for me the winner is an adjustable rate mortgage (note; this is very different then the variable rate mortgage offered by most banks) which will give much cash flow relief in the coming months. However for those that want to opt for a safer options, if you are nervous about where we’re going and the inevitable bumps along the way, a shorter fixed mortgage (1 or 2 years), or a hybrid mortgage (part variable and part fixed) may be a better options.

For will be home owners, there is an opportunity to get into the market before wide spread buyer confidence returns. As rates come lower and peoples confidence of this builds, we will see a return of greater activity in the housing market. The mixture of larger amount of buyers coming back to the market and lowering rates will at minimum make buying real estate a much more competitive experience a few months from now, and could even trigger a jump in prices in tighter markets like Toronto. I do believe there is a unique opportunity for would be home owners to get into the market over the next few weeks vs waiting a few months.