Ask the Expert: Steve Garganis on how the US impacts Canadian mortgage rates

Ask the Expert is a monthly column where Steve Garganis, lead mortgage planner at Mortgage Architects and founder of CanadaMortgageNews.ca dives into what’s going on with mortgage rates and the Canadian housing market. Have a question for Steve on home buying and your mortgage? Reach out to us at media@rates.ca.

With President Trump making his return to the White House, financial markets are scrambling to make sense of what’s to come. And whatever our neighbours to the south do, Canada tends to follow. Here's how this might shape your fixed mortgage rate in the near future.

This interview has been edited for length and clarity.

How will a Trump presidency affect interest rates here in Canada?

Finally, the election is over. Maybe now we can focus on other things. How about Taylor Swift? (Just kidding).

Trump and Harris had very different economic and social policies. But one thing they do have in common is they both like to spend money. There doesn't seem to be any talk about bringing the government debt down.

However, higher government debt causes inflation.

High inflation – or annual inflation rate over 2% - puts pressure on the government to raise rates.

In the meantime, big institutional investors also make their predictions on inflation, but also the strength of the economy, consumer confidence, and price bonds accordingly. It’s this bond yield that dictates fixed mortgage rates.

South of the border, as soon as it was announced that Trump had won, we immediately saw the 10 year US treasury hit a four-month peak of 4.4% but it has since subsided.

The Canada five-year Government bond reacted likewise, peaking at 3.1%.

So, that's the immediate reaction to the Trump victory.

However, the longer-term outlook is uncertain for Canada. You see, the Canadian economy has been underperforming the US over the past several years. Our productivity is going in the wrong direction. Canada’s economy has not been keeping pace with its biggest trading partner and neighbor, the USA.

Our GDP has declined 2.8% since 2019 versus a 7% increase in the US. We haven’t seen this large of a gap since the 1960’s. In 2013, Canada was on par with the US. Today, the US is 50% higher than Canada.

As a result, the Federal Reserve, the US’ central bank, has been slow to cut their rates, dropping only twice and by a total of 0.75%. Inflation in the US is still a little high and this could mean they won't cut their rate again this year.

Meanwhile, the Bank of Canada has cut the rates in four consecutive meetings this year by a total of 1.25%. Canada has one more rate announcement date on Dec 11. Right now, we expect another jumbo rate cut of 0.50%.

Our economy is in trouble. Consumer spending is way down, and home sales are back to 2019 levels, when the population was 3 million people fewer than it is today.

I believe we will see variable rates fall by as much as another 1.5% to 2% within 12 months. Fixed rates may not fall as much. They could fall by 0.5% to 1%.

My recommendation for many is to take a variable rate today, and then be ready to lock into a fixed rate at some point mid-to-late next year.

Related: BoC cuts policy rate by 25 basis points amid trade tensions

What are your predictions for the winter housing market?

We are beginning to see signs of more activity. This will be very dependent on interest rates. Typically, our housing market is most active from around February to June. Then it slows in the summer with home prices historically falling by 5% before picking up again in late September to late November.

Right now, we are at the end of the annual buying season. I do not expect home prices to increase. December usually has slow activity, and prices will typically fall in this month. But we can look for a stronger housing market in February if interest rates keep falling. This will only increase housing affordability.

My advice to homebuyers is to get set up now with a pre-approval. Be ready to buy in the next few months or at least keep your eyes open for a good deal.

One more comment on the housing market. Much has been made about the latest government announcement to cut immigration. Some are worried that with fewer new immigrants, demand for housing will fall or collapse. I say, bring it on. We are way behind in our housing supply. We need a break. We need time to get our housing supply up to meet the existing demand. Home prices may fall slightly but I think that would be short-lived.

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