INTEREST RATE SPREAD between the Bank of Canada Bank Rate less the posted 5 year Fixed Mortgage; also CPI, the Real Bank Rate and the TSX RE Index. See also the Real Long Rate and the Real 10yr Rate and the Canadian Yield Curve
The chart above shows the September 2020 spread (purple plot line) between the Canadian Bank Rate now at a Covid 19 boot stomping low of 0.5% and another push to incite consumption by the Bank of Canada as it posted the survey of residential 5 year fixed mortgage rates and stress testing at 4.79%.
From April 2015 to June 2017 (27 months),
the 5 year fixed was at the historic low of 4.64% except for a 2 month head fake at July 2016 when the BoC survey ticked up to short lived 4.74% followed by the September freak-out back down to 4.64% which was the Stress Test number that weak hands had to qualify at before the retail lenders would in theory, sign off. (You’ll need to qualify for the higher of two rates, the Bank of Canada qualifying rate (now 4.79%), or your contracted rate plus 2%." CMHC).
RateHub.ca on October 12, 2020 has discovered rates for a 5 year fixed mortgage as low as 1.64%. So much for stress testing if you don't need a CMHC high ratio debt/income mortgage.
The TSX Real Estate Index (green plot line) has been derailed off its climb up the 11.5 years of a wall of 'what me worry' and has returned to coiling about its new downtrend.
In January 2009 the Canadian Bank Rate (grey plot line) was chopped to 1.25% by the state and the more they whittled away, the more our housing prices surged on a giddy speculation. The bank rate increased to 2% in October 2018 and had remained there until March 2020 when it was chopped to 1% and in April 2020 it was boot stomped to 0.5% where it remains this month. Welcome to Bank of Canada Freak Out 2.0.
Cheap credit led to the awesome real estate, fixed income, equity and commodity boom and that flood of leverage left savers on the sidelines as their neighbours waged a fantastic bidding war.
Promoters swept the risk of excessive debt under the rug of the tax paying public's CMHC insurance scheme while preferred lenders hawked their lowest rates and governors finger-wagged the consumer class to be more mindful of their historic debt levels even as consumption was being driven by additional debt.
Negative rates have been the incentive to chase capital gains, and the big national Canadian banks don't need much in the way of a vigorish on high ratio tax payer insured loans; they can unload the narrow spread "conventional" paper to the securitized derivative markets, (CMBs, REITs) to avoid the risk of holding to term when comparative rates could be higher and the collateral value lower.
My case study of what a Vancouver investor is facing when contemplating the purchase of an average condo for the purpose of rental revenue demonstrates that although interest rates may be low, the capital cost according to my 2013 case study was at least 25% too high. What is it now?
As borrowing costs rise fractionally, the incentive to hold a revenue property becomes irrational unless there is a significant yield to be had.
5 Year Bank of Canada Benchmark Fixed Mortgage