The complex interactions between Brexit and Canadian mortgage rates

by Ephraim Vecina29 Jun 2016
The “leave” vote in the U.K.’s Brexit polls would induce a downward stress on Canadian mortgage rates, but the same pressure might also lead to less-than-stable household incomes, according to an analyst.
In Dave Larock’s June 27 column for Move Smartly, he said that while the present turmoil won’t lead to a crash similar to the 2008 financial crisis, Canadian finance policymakers and industry players should remain vigilant.
“[We] should resist the urge to celebrate because the same Brexit-related volatility that helps keep a lid on our future borrowing costs might also weaken the incomes we need to pay them,” Larock wrote.
“While Friday’s outcome was unexpected, everyone had time to see the Brexit vote coming and to think about its possible impacts. And thanks in part to the lessons learned from 2008, the global financial system was better prepared this time around,” he added. “This is why Friday’s initial market reactions gyrated within the bounds of what would be considered normal volatility.”
Larock pointed at investors’ tendency to fly to safer havens—such as the relatively more stable Canadian bonds—as an added layer of protection to fixed-rate policies.
“Even if GoC bond yields were to fall precipitously going forward, it is unlikely that our lenders will respond with any immediate rate cuts,” he explained. “Using the 2008 financial crisis as an example, when GoC bond yields plummeted, our lenders held rates steady, citing their reluctance to respond to heightened volatility with knee-jerk reactions (and enjoying fatter short-term profit margins as a reward for their prudence).”
On the other hand, variable-rate mortgage holders “should pay attention to what the Fed says because the U.S. and Canadian economies are deeply linked and Canadian monetary policy tends to move in the same direction as U.S. monetary policy over the longer term.”
“I don’t see the Fed contemplating rate hikes now, at least until the Brexit’s impacts are more clearly understood,” Larock stated.
Overall, Larock predicted that Brexit would not have any ruinous effects on Canadian borrowers, at least for the foreseeable future.
“Over the longer term, while the Brexit heightens global financial risks and raises the potential for increased volatility in financial markets, any related flare ups should trigger a capital flight to safety that would be expected to put downward pressure on our bond yields and therefore our mortgage rates,” the analyst concluded.

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