Drummond, a former TD economist who advised Canadian prime ministers, believes the ultra-low rates of the last decade were an aberration.
“Many people, for many years, have said that rock-bottom interest rates are the new normal. I never believed that,” he said at the Mortgage Professionals of Canada national conference last month. “Obviously it was a big shock when they came up. »
Adjustable rate mortgages track the Bank of Canada’s overnight rate, which is now down 125 basis points since May. However, fixed-rate mortgages are influenced by bond yields, and Canadians should not expect those yields to fall even further, Drummond noted.
“There’s a good chance they’ll be above the discount rate and we’ll have a positive yield curve. For what? Because time is uncertainty,” he said. “If you want to borrow money from me over 10 years, I’m going to want a premium because I don’t know what’s going to happen. You could lose your income during these 10 years. Inflation could take off.
Between 1996 and 2007, Drummond said Canada’s inflation rate – when averaged – was exactly on the 2 per cent inflation rate target set by the Bank of Canada.
Bond yields have remained stable, with the typical 10-year rate sitting 87 basis points above the discount rate. Drummond says that by next summer we could see the overnight discount rate at 2.75%, with bond yields actually higher than the current level of 3.00%. This could effectively rule out any further significant reductions in fixed mortgage rates.
“The new 5-year mortgage rate could be between 4.9% and 5%, which is not much different from what it is today,” Drummond said.
Drummond argues that Canada’s extremely low interest rates from 2011 to 2019 did more harm than good. Intended as economic relief after the financial crisis, prolonged low rates helped send house prices soaring, making homes less affordable even as mortgages became cheaper.
“You had an extremely low interest rate, but you had to buy a million-dollar house,” he told the audience. “How does this help anyone?” »
Productivity and GDP growth remain stagnant
After analyzing the implications for fixed mortgage rates, Drummond turned his attention to Canada’s broader economic situation, particularly its sluggish productivity and stagnant GDP growth, trends that have worried economists for decades.
In 1960, Drummond noted, Canada ranked third in productivity among the world’s 24 richest countries. Today, however, it ranks below countries like the United States, France and Germany.
“People like me felt so discouraged that our hourly output only grew 1% per year between 2000 and 2019, much slower than in the 1960s – it previously grew 3% per year. We thought it was terrible. I would love to have that period again, because it’s sucked ever since,” he said.
Drummond attributed Canada’s productivity lag to weak business investment, particularly in software, machinery and equipment. He also noted that the Canadian private sector ranks among the weakest in the world when it comes to research and development efforts. According to Drummond, if Canada measured economic growth per person rather than simply by gross domestic product, the country would have effectively been in recession for the past two years.
In the past, slow productivity growth in Canada was not a major problem, as the population only grew about 1% per year. Today, with population growth approaching 3% per year and an economy growing at only 1.5%, Drummond sees a real problem. This imbalance, he said, is particularly concerning given Canada’s low productivity rates.
“We can never take savings for granted,” he said. “We have seen throughout history that large economies have become weak economies. »
Immigration remains high despite recent reductions
Canada initially planned to welcome around 500,000 new permanent residents by 2025, but recent concerns about housing affordability have led to a lowered target.
In late October, Immigration Minister Marc Miller announced that the 2025 target would be reduced to 395,000 permanent residents.
Some economists fear that such a drastic reduction in immigration would harm the Canadian economy. Charles St-Arnaud, chief economist of the Alberta Center credit union group, told CBC News at the time that 2023 population growth, almost entirely due to immigration, was the only thing preventing Canada from enter into recession.
However, Drummond pointed out that even with reduced immigration targets for next year, the number of arrivals to Canada still far exceeds the annual growth in housing supply, which stands at just 250,000 units. . Every year, he noted, this imbalance worsens the housing shortage. Despite the recent cuts, Drummond stressed that Canada’s new target remains one of the highest immigration targets in its history.
Drummond ultimately believes that reducing immigration would benefit both immigrants and native-born Canadians. He noted that newcomers who have been in Canada five years or less tend to face lower wage growth and higher unemployment than Canadian-born and immigrants who have been in the country longer. For Drummond, these newcomers clearly face significant challenges in establishing stability.
“What should be the goal of immigration? asked Drummond. “I don’t see a goal when it comes to increasing the population for the sole purpose of increasing the population. You have to try to maximize the well-being of people – the existing population and the new population.
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Last modification: November 11, 2024