The ongoing war in Iran has sent shockwaves through global markets, and its impact on mortgage rates is a fascinating development. Personally, I find it intriguing how geopolitical events can shape economic landscapes.
The war's influence on oil prices has been immediate and significant, with a 67% spike in oil prices this year. This event, which few economists could have predicted, has the potential to reshape the trajectory of mortgage rates.
Inflation is a key driver of interest rates, and oil crises can have a rapid and substantial impact on inflation. The historical precedent of oil crises in 1974, 1979, and 2022 demonstrates this, with inflation rising by a percentage point or more. This, in turn, can lead to a similar increase in mortgage rates.
The duration of the supply shock is crucial. A sustained increase in oil prices can have a lasting impact on inflation and, consequently, mortgage rates. Scotiabank Economics estimates that a $10 per barrel sustained increase in oil prices could lead to a 0.2% jump in CPI over the next two years.
The uncertainty surrounding the war's duration is a key factor. Will it be a brief conflict, or will it drag on, causing continued disruption to oil supplies? Some experts argue that a U.S. victory may not guarantee an end to attacks on shipping in the Strait of Hormuz, a critical chokepoint for global oil trade.
The potential for continued attacks by Iranian proxies or offshoots is a real concern. If these attacks persist, it could keep oil prices elevated, impacting inflation and, by extension, mortgage rates.
Global central banks are already considering rate hikes in response to these developments. Australia, for instance, with its high correlation to Canada's policy rates, is one such example.
The probability of lower mortgage rates this year has diminished significantly. Borrowers should act now to secure pre-approval rate holds and consider fixed rates over variables, especially if their financial situation leaves little room for error.
The shift in borrower behavior is notable, with many leaning towards variable mortgages. However, given the current circumstances, this preference for variables could prove costly.
Canada's two-year bond yield, a leading indicator of the Bank of Canada's policy rate, is above its 18-month moving average for the first time in 22 months. This, combined with rate simulations from MortgageLogic.news, suggests that today's lowest five-year fixed rates may offer the cheapest borrowing costs going forward.
For borrowers with job security concerns or those with variable income, locking into longer fixed rates provides stability and peace of mind. The value of a predictable fixed rate, especially with a lender offering reasonable prepayment penalties, should not be underestimated.
In conclusion, the war in Iran has highlighted the interconnectedness of global events and their impact on our daily lives. Mortgage rates, often taken for granted, are subject to a complex web of influences. As we navigate these uncertain times, it's essential to stay informed and make informed decisions about our financial futures.
