Why are mortgage rates REALLY falling? Will this increase home prices?

A recent article posted on CBC Business News was entitled “Why worries about the coronavirus are pushing mortgage rates down.”

Below is the explanation:

Fixed-rate loans are highly influenced by bond yields, because a mortgage lender makes money on the spread between the bond rate and what they offer to consumers. If the five-year bond yield goes up, they can just pass that cost on to consumers. If it goes down, as it is now, the lender’s cost of borrowing goes down, so they can turn around and lower their rates for consumers to drum up new business.

Blame the coronavirus (as the press is doing) if you will, but in reality markets are incredibly complex.  If you’ve read my other posts, you’ll be aware that there are signs of an imminent recession, in spite of the record highs recently enjoyed by stock markets.  The reason bond rates are falling is that the yield curve is inverting.  An inverted yield curve occurs when short term interest rates (for government or corporate bonds) are higher than long term rates.


Why is this unusual?  It means lenders are reluctant to provide short term loans due to perceived near term risks.  Borrowers have to offer higher short term returns (interest rates) in order to get access to funds.  Long term lenders are anxious to lock in any return they can for as long as they can, so will sacrifice return for this certainty.  In just a little more than a month, the Canadian yield curve has shifted (inverted) dramatically.  So what does this mean?  An inverted yield curve is one of the most robust signals a recession is underway.

CAN Yield Curve Feb10

Yes mortgage rates decline in tandem with bond rates; since a mortgage has a five-year term (after which it is renegotiated) the rate offered is at a premium rate to the 5 year-Canada bond rate (often referred to as the risk-free rate, since governments aren’t expected to ever default on their obligations to repay).

Does this mean real estate is a good investment since the mortgage rate is so attractive?  Maybe, and maybe not.  It depends on a number of factors.  If the recession is deep and causes job losses, then potential buyers and renters may not be able to pay.  The slowing economy might put a dent in the demand for new construction.  In which case real estate prices might decline.  However, because there seems (aging demographics in developed countries) to be a shortage of workers, real estate valuations may be able to withstand a downturn and actually improve.  It is difficult to say with any real conviction which scenario will play out.

Bottom line?  Cash in your stock market investments (I know it’s hard when they’ve done so well) before interest rates climb again buy a property.  The price might still be too expensive, but if you can lock in your rate at these low levels you’re doing okay.



About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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