Interest rates are going up. Guaranteed. They can't go any lower. Bet on it.
How many times have we heard this mantra How many times can it be wrong At least in 2013 it turned out to be partially true – rates went up on the long end but started falling again towards the end of the year.
On the short-end of the interest rate curve — something that impacts variable rate mortgages tied to prime which track the Bank of Canada's overnight rate — it's starting to look like they'll never move. Economists are conceding as much with many predicting the key rate will not budge until 2015, which would make for five years with no movement.
“I certainly do feel like the little boy who cried wolf because for several years I kept predicting that interest rates would go up and then every year we find out interest rates were lower than where we started the year,” says Craig Alexander, chief economist with Toronto-Dominion Bank.
To be fair, Mr. Alexander has hardly been alone in predicting a rising interest rate environment. The banks pitched their advertising and customer service most of the year to get consumers to lock into the safety of a five-year fixed rate closed mortgage which dropped as low as 2.99% at some major banks.
Those warnings were right — for a period. Rising bond yields, which mortgage rates are tied to, saw the banks abandon those deals. Bank of Montreal which started the great battle that saw Finance Minister Jim Flaherty issue a warning to the financial institutions about discounting too much, is now offering 3.89% for a five-year fixed rate mortgage.
The rise in mortgage rates started when financial markets anticipated the Federal Reserve would taper its bond buying program and that thinking influenced rates around the globe.
Government of Canada five-year bonds rose almost as high as 2.2% but by September economic data wouldn't support the Fed tapering its buying program and bond yields pulled back about 30 basis points. Most Canadian banks have yet to pass on the reduced rates but in the discount mortgage market, rates are as low as 3.25% again on a five-year closed fixed rate mortgage.
“They pulled back but not quite to where they were before,” says Mr. Alexander, about long-term rates. “When tapering does occur, I do think bond yields will once again raise in the United States and that will push up yields in Canada as well.”
His concern is that even the smallest increase in bond yields seems to spook markets. “People have become so used to interest rates being so low,” says Mr. Alexander. “In the past, small moves in bond yields wouldn't even have been worth mentioning except maybe in small way in the financial press. But it became a big story.”
The fear of rising mortgage rates was credited with driving consumers back into the Canadian housing market as many would be buyers jumped ahead with purchases fearing that wouldn't be able to get the same interest rate later in the year.
Some consumers' fears that they could be wiped out by higher rates are probably just, given debt levels in Canada have never been higher. Statistics Canada said in December the average level of consumer debt to annual income reached 163.7% in the third quarter.
Scott Hannah, executive director of the Vancouver-based Credit Counselling Society, doesn't think that rates are going to rise dramatically in 2014 but nevertheless he feels 2013 may have caused some procrastination from consumers about paying down their debt.
“We are just not as focused about taking care of our financial picture and we are worried that consumer debt, excluding mortgages, is continuing to rise,” says Mr. Hannah.
Credit agency TransUnion reported in November that average consumer debt was back on the rise in the third quarter. Average debt, excluding mortgages, rose to $27,355, albeit it was only up a tiny 0.83% from the previous quarter. Auto debt is one of the fastest rising categories with the average owed up 3.17% in the third quarter from a year earlier.
Delinquency rates across all types of loans remain well under 1% for most types of borrowing but there is a fear in some quarters that consumers are just treading water by making minimum payments and that a rise in interest rates would send them towards bankruptcy.
“We believe in a couple of year's time there will be increases in interest rates but people aren't taking action today to address that,” said Mr. Hannah. “I think a lot of people can't comprehend mortgage rates beyond 5%.”
The past year also further cemented the idea that you can't really earn any money keeping your cash in the bank with conservative instruments like guaranteed investment certificates. “There just isn't a lot of motivation to save at these rates,” he says. “So no savings leaves them no cash to pay down their mortgages.”
Ted Rechtshaffen, a certified financial planner and president of TriDelta Financial, says the talk of rising rates probably is creating skepticism among clients since it hasn't come to fruition.
“When everybody says rates are going to up, it doesn't mean they are going to go up,” says Mr. Rechtshaffen. “What we learned this year is that until there is real inflation, it's not inevitable that rates are going to go up.”
He adds everybody can predict we'll see some sort of inflation in the future but if you can't say when, how useful is the information Clients no longer ask him to structure their finances for the inevitable interest rate hike.
“This year clients are asking are they going up or down” said Mr. Rechtshaffen. “They are less worried today than they were four months ago.”
One thing that shook a few clients was bonds actually being worth less because of the rise in long-term rates. “It's the first time bonds [values] have been down in quite some time so there were some people that learned bonds can lose money,” said the planner.
Kelvin Mangaroo, president of ratesupermarket.ca, notes the message of rising rates seems to be one we've started the new year with since 2012.
“It would be Jim Flaherty's worst nightmare if the mortgage consumers didn't get the message,” he says. “There is a possibility people get used to [low rates] but there is enough messaging out there that [record low rates] are an aberration and eventually it will change, it's just taking longer than expected.”
At some point rates go higher. It just didn't happen all that much in 2013. Again.