#1 - The Bank of Canada Gets Cut-Happy
The Bank's rate-cutting spree looked like a going-out-of-business sale - five markdowns totalling 175 basis points. By December, prime rate was all the way down to 5.45% as Team Macklem tried anxiously to pump up our wilting economy.
2025 outlook: No one will be surprised if unemployment tops seven percent. However, slowing population growth and a U.S.-led economic rebound (assuming we get no debilitating tariffs) should keep job losses from doing a full-on mountain climber impression. That's a positive for both mortgage arrears and originations.
#2 - U.S. Tariffs Loom Large
President-elect Donald Trump, with all the finesse of a bull in a crystal shop, has proposed a 25% tariff on Canadian goods. The concerns he cited included drug trafficking and illegal immigration into the U.S. His proposal, seen as a partial bluff by some, sparked equal parts panic, outrage and disbelief on this side of the border.
2025 outlook: Uncle Sam needs Canadian natural resources like a smartphone needs a charger, and our next government should get more handshakes than eye rolls from Trump. Moreover, trade wars would cost too many American jobs. Hence, this humble author's expectation is that tariffs—if any—should be limited to relatively short-lived 10% tariffs with carve-outs. In the event this expectation is wrong, and an all-out trade war ensues, rates could take a recession-driven dive followed by a dreaded stagflation boomerang back up.
#3 - Canadian Politics Turns into a Soap Opera
Finance Minister Chrystia Freeland's abrupt resignation in December sent Trudeau's Liberal's into a tailspin. Add that to U.S. tariff threats, more inflationary spending proposals, Trump's mockery of Trudeau, and a slew of new spending, and you get a sweeping loss of confidence in our government.
2025 outlook: A federal election should be triggered as early as late March when the House returns from break, with an actual election as soon as mid-to-late spring. A Pierre Poilievre-led government could cut spending (bearish for bond yields), slash taxes (bullish for bond yields) and improve investor sentiment (bullish for bond yields). As a base case, one can expect an economic boost that should limit the downsides of inflation, bond yields, and mortgage rates.
#4 - Unemployment Climbs the Charts
The unemployment rate ascended to a three-year peak of 6.8% in November. Despite adding 239,000 full-time jobs for the 25-plus crowd, economic vital signs remained weak. That convinced the Bank to prescribe extra rate-cutting medicine (50 bps cuts) in both October and December.
2025 outlook: Canada survived the rate hike tsunami far better than doomsayers predicted. And, despite unemployment hitting multi-year highs, average core inflation remained stickier than expected–ending the year at 2.65%. That's clearly well above the BoC's 2% target—and it's trending up—which could potentially limit the downside for rates.
#5 - Real Estate Finds Its Floor
Overall home values flatlined in 2024, as measured by CREA's benchmark national home price. Rapid household formation, falling rates, improved sentiment and rising incomes helped put a floor under prices. By year-end, real estate activity was hitting two-year highs.
2025 outlook: Real estate pundits are widely predicting home price appreciation this year on the back of falling rates, modestly better affordability, improved confidence, looser mortgage rules and rising incomes. While these first four factors are a near lock, the most important driver (falling rates) is anything but. Market-implied rate cut probabilities suggest at least one or two more Bank of Canada rate drops. The same can't be said for bond yields, however, which are largely at the mercy of Trump 2.0 and inflation.
Mute the Noise, Master Risk Management
Uncertainty in the mortgage business is nothing new. Canada's mortgage market will ride out any storms as it always has.
Borrowers should treat market noise like a bad soundtrack - mute it and focus on managing rate risk—to the extent their finances and mindset dictate. The sweet spot to start the year is the 3-year fixed. It offers a degree of protection against reinflation, lower penalty risk and attractive pricing relative to other terms. But don't overlook 5-year hybrids (part fixed and part variable). They're like custom-tailored mortgage suits, given their ability to precisely calibrate rate exposure to the borrower's risk appetite.
