I hope everyone had a restful and joyful holiday season. As is tradition on this blog, the new year begins with a review of past predictions and a forward-looking analysis of what 2025 may bring in the mortgage and real estate markets.
Table of Contents
2024 Prediction #1: The Bank of Canada (BoC) Will Substantially Reduce Its Policy Rate
Prediction Recap: “Weaker-than-expected economic data will compel the BoC to retreat to a neutral policy-rate position by the end of 2024.”
Outcome: By the end of 2024, the BoC’s policy rate dropped to 3.25%, the upper end of its neutral range. While the reduction materialized later than I predicted, it was significant enough to warrant half a checkmark.
2024 Prediction #2: Fixed Rates Will Drop, but Not as Much as Variable Rates
Prediction Recap: “Current fixed mortgage rates have already priced in substantial rate cuts, limiting their potential for further decreases.”
Outcome: Fixed rates declined by about 1.25%, while variable rates fell by 1.5% to 2%. While variable rates decreased more, the difference wasn’t as pronounced as expected, earning another half-checkmark.
2024 Prediction #3: Canadian Real Estate Markets Will Respond More Quickly Than US Markets
Prediction Recap: “Shorter mortgage terms and portability features will help Canadian real estate markets recover faster.”
Outcome: While Canadian house prices showed upward momentum in the latter half of 2024, they ended the year lower than where they started. US prices, in contrast, increased overall. This prediction missed the mark, though Canadian prices appear poised for recovery in 2025.
2025 Mortgage and Real Estate Predictions
With lessons learned from 2024, here are my top three predictions for 2025:
2025 Prediction #1: The BoC Will Substantially Reduce Its Policy Rate
The BoC’s policy rate currently stands at 3.25%, but I anticipate a further reduction of at least 1.00% in 2025. Here’s why:
- Neutral Rate Context: The BoC considers a neutral policy rate to be between 2.25% and 3.25%, but current economic conditions—including a wide output gap—suggest a rate below this range may be necessary.
- Economic Indicators: Inflation has returned to target levels, but per-capita GDP has declined for six consecutive quarters. This signals weakening economic momentum.
- Historical Trends: Over the past five rate-cut cycles, the BoC’s policy rate has bottomed out at no higher than 2%. History often rhymes, and 2025 may follow this pattern.
2025 Prediction #2: Fixed Mortgage Rates Won’t Decrease Much Further
Contrary to widespread expectations, I believe fixed mortgage rates will see little to no further decline this year. Here’s the rationale:
- Bond Yield Dynamics: Fixed rates are tied to Government of Canada (GoC) bond yields, which in turn follow US Treasury yields. Despite recent Fed rate cuts, US Treasury yields have risen due to inflationary pressures and fiscal policy.
- Inverted Yield Curve: While short-term yields may fall, long-term yields are likely to rise as the yield curve normalizes. This will keep fixed mortgage rates stable or slightly higher.
2025 Prediction #3: Canadian House Prices Will Continue to Rebound
Several factors support the continued recovery of Canadian house prices:
- Improved Affordability: Lower mortgage rates have already spurred price increases in major metropolitan areas.
- Supply and Demand Imbalance: Housing demand continues to outstrip supply, despite slowing immigration rates.
- Historical Precedent: Over the past five BoC rate-cut cycles, average house prices have increased by about 10% per cycle. Early signs in 2025 suggest a similar trend may unfold.
- Elevated Savings Rates: With a 7% savings rate—the highest since 1996—and an additional $470 billion in household savings, Canadians have the financial capacity to re-enter the market.
Canadian Mortgage Rates Rise Amid Surge in Government Bond Yields
New Mortgage Rules Take Effect; Additional Changes Expected Soon, Economist Predicts
Mortgage Rate Forecast Trends in 2025: What You Need to Know About Falling Rates
A Warning About Canadian Fixed Mortgage Rates
Mortgage Selection Advice for Early 2025
Given my forecast of substantial BoC rate cuts, variable mortgage rates are likely to outperform fixed rates over the year. However, the stability of fixed rates, which are now below their long-term average, makes them a solid choice for risk-averse borrowers.
Conclusion: Navigating 2025
The year ahead promises dynamic shifts in the mortgage and real estate landscapes. The BoC’s monetary policy decisions, coupled with broader economic trends, will play pivotal roles in shaping the market. Stay tuned for updates as we navigate these changes together.
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