Why the window for affordable mortgage money may be closing
Avery Shenfeld, chief economist at CIBC Capital Markets, shared a detailed outlook on how interest rates might evolve in Canada in a report published Thursday. He suggests the Bank of Canada could start raising its key interest rate in 2027, once the housing market slows and population growth stabilizes. Such a shift would signal the end of the long period of cheap loans and create more difficulty for Canadian homeowners seeking mortgages.
Shenfeld explains that the central bank is expected to keep current rates unchanged for now, as the economy continues to benefit from the boost provided by low interest rates. However, as recovery takes hold in sectors like construction and investments, the Bank may eventually choose to raise interest rates. This move would especially impact people with variable and short-term mortgages, who may gain less for taking on the same level of risk related to fluctuating interest rates.
U.S. Debt Projections and Global Impact
According to JPMorgan, U.S. government debt is projected to reach 120 percent of GDP within the next decade, with average yearly deficits between 5 and 7 percent. In the worst-case scenario, this could push global public debt beyond $100 trillion, and the U.S. could see its borrowing costs climb to $2.7 trillion by 2036.
This large rise in U.S. debt could cause investors to question the reliability of lending money to the U.S. government. Such uncertainty might spill over into Canadian mortgage markets, as bond yields directly affect mortgage pricing. Over the past 20 years, historical data shows that when U.S. five-year bond yields change, Canadian yields follow, but to a smaller extent. Given the close economic ties between the two countries, U.S. financial problems could directly impact Canadian borrowers.
While concerns about inflation are relevant, the bigger issue is that investors are asking for better returns for holding long-term bonds. They want to be paid more for the risk involved in long-duration assets, especially in the U.S. This pattern is clear in the recent rise of the U.S. 30-year bond yield to its highest level since 2007.
Shenfeld points to various global trends, such as increased investment and the return of manufacturing to North America, as possible causes for higher borrowing costs. Plus, tech companies are borrowing large amounts of money, which could further stress capital markets. These trends could affect Canadian mortgage rates, even if the local economy seems steady.
Market Reactions and U.S. Spillover Effects
Shenfeld says the reason markets react this way is that they tend to follow U.S. trends closely: "The markets are likely picking up Canadian spillover from the same story hitting the U.S., that if the U.S. is headed for hikes, we must be too."
JPMorgan also highlighted that the shift toward less global trade could help raise interest rates. Even though international trade is still increasing, more frequent supply chain issues and the return of domestic production could increase the demand for capital, pushing up rates. Shenfeld notes that the significant borrowing by tech companies might further increase rates, with noticeable effects on Canadian five-year bond yields.
Risks of Rising U.S. Debt Costs
According to the C.D. Howe Institute, the continuous rise in U.S. debt introduces the risk of a doom-loop scenario. If investors begin to believe that U.S. debt cannot be maintained, the cost for the government to borrow could increase significantly. This could indirectly affect Canadian rates through how markets respond to such developments.
All these issues indicate that Canadian mortgage borrowers may need to prepare for a more costly borrowing environment. As global investment patterns and government budgets shift, the cost of loans in Canada could increase, even if the local economy remains stable.