Drummond, a former TD economist who has advised Canadian Prime Ministers, believes the ultra-low rates of the last decade were an aberration.

“A lot of people, for a lot of years, said rock-bottom interest rates were the new normal. I never believed that,” he said during Mortgage Professionals Canada’s national conference last month. “Obviously, it was a big shock when they went up.”

Variable-rate mortgages track the Bank of Canada’s overnight rate, which is now down 125 basis points since May. Fixed-rate mortgages, however, are influenced by bond yields—and Canadians shouldn’t count on those yields dropping much further, Drummond noted.

“Odds are, they will be above the bank rate, and we will have a positive yield curve. Why? Because time is uncertainty,” he said. “If you want to borrow money from me for 10 years, I’m going to want a premium because I don’t know what’s going to happen. You could lose your income over that 10 years. Inflation could take off.”

Between 1996 and 2007, Drummond said Canada’s inflation rate—when averaged out—was right on the Bank of Canada’s 2% inflation rate target.

Bond yields were stable, with the typical 10-year sitting 87 basis points above the bank rate. Drummond says that by next summer, we might see the overnight bank rate at 2.75%, with bond yields actually higher than today’s 3.00% level. This could effectively rule out any further significant reductions in fixed mortgage rates.

“The new 5-year mortgage rate could be somewhere in 4.9% to 5%, not terribly different than it is today,” Drummond said.

Drummond argues that Canada’s ultra-low interest rates from 2011 to 2019 did more harm than good. Intended as economic relief after the Financial Crisis, the prolonged low rates contributed to ballooning house prices, making homes less affordable even as mortgages became cheaper.

“You had a rock-bottom interest rate, but you had to buy a million-dollar house,” he told the audience. “How does that help anybody?”

Productivity and GDP growth remain stagnant

After breaking down the implications for fixed mortgage rates, Drummond turned his attention to Canada’s broader economic picture, particularly its sluggish productivity and stagnant GDP growth—trends that have concerned economists for decades.

In 1960, Drummond noted, Canada ranked third in productivity among the 24 wealthiest nations globally. Today, however, it sits below countries like the U.S., France, and Germany.

“People like me have felt so discouraged that our output-per-hour only increased 1% a year from 2000 to 2019, way slower than the 1960s—it used to increase 3% a year. We thought that was terrible. I would love to have that period again, because it’s been zero since then,” he said.

Drummond attributed Canada’s lagging productivity to weak business investment, particularly in software, machinery, and equipment. He also pointed out that Canada’s private sector ranks among the lowest globally in research and development efforts. According to Drummond, if Canada measured economic growth on a per-person basis rather than just gross domestic product, the country would have effectively been in a recession over the past two years.

In the past, Canada’s slow productivity growth wasn’t such a big issue because the population was only growing by about 1% a year. Now, with population growth closer to 3% annually and the economy expanding by just 1.5%, Drummond sees a real problem. This mismatch, he said, is especially worrying given Canada’s low productivity rates.

“We can never take economies for granted,” he said. “We have seen over history that great economies have become weak economies.”

Immigration stays high despite recent cutbacks

Canada initially planned to welcome around 500,000 new permanent residents by 2025, but recent concerns over housing affordability have led to a scaled-back target.

In late October, Immigration Minister Marc Miller announced that the target for 2025 would be reduced to 395,000 permanent residents.

Some economists have raised concerns that such a drastic immigration cut would harm the Canadian economy. Charles St-Arnaud, chief economist with credit union group Alberta Centre, told CBC News at the time that 2023’s population growth—driven almost entirely by immigration—was the only thing keeping Canada from a recession.

However, Drummond pointed out that even with the reduced immigration targets for next year, Canada’s intake still far exceeds the annual housing supply growth, which stands at only 250,000 units. Each year, he noted, this imbalance worsens the housing shortage. Despite the recent cut, Drummond emphasized that Canada’s new goal remains one of the highest immigration targets in its history.

Drummond ultimately believes that reduced immigration numbers would benefit both immigrants and native-born Canadians. He highlighted that newcomers who’ve been in Canada for five years or less tend to face lower wage growth and higher unemployment compared to both native-born Canadians and immigrants who’ve been in the country longer. To Drummond, these recent arrivals are clearly facing significant challenges in establishing stability.

“What should be the goal of immigration?” Drummond asked. “I don’t see a goal when it’s about increasing the population for the sake of increasing the population. You have to be trying to maximize the well-being of people—the existing population and the new population.”

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Last modified: November 14, 2024