Lock in now, economist advises brokers

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The author of a recent B.C. Real Estate Association report is putting his money where his mouth is when it comes to predicting interest rates.

“Rates are going up,” says Brendon Ogmundson, a Vancouver-based economist with PwC and author of the BCREA June report predicting interest rates will finally begin their upward movement in 2014. “I just renewed my mortgage, locking it in for 2.99 per cent for five years.”

It is a message that brokers should be telling clients now, Ogmundson argues.

“Long-term mortgages are very attractive to clients right now,” he told MortgageBrokerNews.ca. “It’s good to lock in now.”

The report – released last week – predicts interest rates rising 25 basis points in late 2014 – early 2015.

“Our forecast for the Canadian output gap, like that of the bank, implies that the economy will return to full capacity sometime in 2014, with inflation gradually returning to its 2 per cent target,” says Ogmundson. “As inflation returns to its target path, the bank will begin to withdraw some of its current monetary stimulus. Our modelling suggests interest rates rising 25 basis points sometime in early 2015, if not late 2014.”

Ogmundson expects the rates on a 5-year mortgage to move from 5.22 per cent in Q1 2013 to 5.34 per cent in the same quarter next year – eventually reaching 5.65 per cent in Q4 2014.

“Generally, rising medium and long-term interest rates result from one of three scenarios,” he says. “Markets may be concerned about government debt burdens and therefore demand higher interest rates. In addition, comments by central bankers may drive the market to perceive a more hawkish stance for monetary policy, which would push long rates higher.

“Finally, markets may be pricing in a more positive global economic outlook and therefore a return to a more normal shaped yield curve.”

The Bank of Canada welcomes a new Governor this month but remains in the status quo, caught between the rock of a somewhat muddling economy and the hard place of mounting household debt. In spite of inflation falling near the bottom of the Bank’s  1 to 3 per cent target range, its most recent interest  rate announcement reaffirmed the Bank’s bias for higher interest rates, once again noting that current monetary stimulus would be appropriate for an ambiguous “period of time.”

Ogmundson sees the Canadian economy struggling to perform amid continuing concerns over personal debt.

“The outlook for the economy isn’t great,” he says. “If it weren’t for the debt concerns, we would be performing better. If the Bank of Canada moves early to stimulate the economy, and the U.S. sustains their recovery, it will drive our own recovery.”

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