Could there be an upside to this daunting financial news?
This March brought more than just some fresh springtime snow - it also brought the fall of one of the US’s biggest banks and a fallout of unrest in the global banking system.
But what does that actually mean for you, your money and your mortgage? Today we’re breaking down what exactly happened south of the border, explaining what it could mean for Canada and highlighting a few (yep, believe it or not) silver linings.
What happened to Silicon Valley Bank?
Essentially, when Silicon Valley Bank collapsed on March 10th it had fallen victim to a phenomenon called a "bank run, or a rush of depositors withdrawing their money simultaneously.
Just as most banks typically operate, SVB used depositor funds to buy up billions of dollars in bonds over the past several years. Generally, these investments are very secure, but as a majority were made at lower rates, their value decreased dramatically in today’s increasing rate environment.
In most cases when the value of institutional investments decreases there is minimal fallout, as they are typically held for long enough periods to see values come back up. This time, however, venture capital (especially in SVB’s client niche of tech startups) has been drying up in the post-pandemic era of inflation and financial unrest. So, when clients could no longer access new funding to continue their business development, they started to come back to retrieve their cash to stay afloat. But as more withdrawals were requested and less and less cash became available, the bank was forced to sell its assets at a loss to cover the costs. Thus began the snowball effect that ultimately led to the bank’s quick demise.
But it’s important to point out that while our economy does reflect the US in many ways, there are a few key differences. In the United States, there are about 8000 smaller banks, many of which have very specific niches (ie SVB’s investments in the tech startup sector) and all of which are unburdened by much regulation. In Canada, we mostly rely on The Big 6 - a smaller selection of large, diverse and intensely regulated institutions. Thanks to strong risk management practices, tight oversight and far less competition, the likelihood of a similar story playing out this side of the border is very unlikely.
Is inflation improving?
Even though February’s inflation numbers showed that the 8 consecutive rate hikes of the past year are beginning to have a positive impact on inflation in Canada, the Bank of Canada made clear earlier this month that it was ready to continue its aggressive campaign to get inflation back to the 2% target. So even when we were enjoying the calm of the pause, economists were already predicting another increase as soon as next month.
But that was all the calm before the collapse. After the fall of SVB and the banking sector fallout, the US Federal Reserve announced a smaller 25 basis point increase to its own key rate - a sign that it intends both to take inflation seriously while also treading lightly to avoid a potential financial crisis. In response, the Bank of Canada now has to do its own balancing act - to determine whether holding the overnight rate and assessing the impact of its previous increases on inflation or decreasing it to ease some economic pressure will have the greater advantage. We’ll see what their next move will be during the next rate announcement on April 12th.
What does this mean for your mortgage?
It’s hard to consider any silver lining when we are faced with an onslaught of bad financial news, but there actually are a few.
Despite the memories the recent news brings up, this is not 2008 all over again. Not only are the factors leading up to these recent collapses entirely different than those of the 2008 recession (a blog post for another day), but today’s economic framework is much stronger. Add to that the much smaller and more specific scale of 2023’s banking unrest along with the speed of governing body intervention and almost every expert will tell you that comparing 2008 to 2023 is comparing applies to over-leveraged oranges.
The Silicon Valley Bank collapse could be the catalyst we’ve been waiting for to see rates start to mortgage rates decrease. Since the collapse investors have rushed back to the safe haven of government bonds, bond yields have dropped significantly and taken fixed mortgage rates with them. Some lenders have already decreased fixed rates by as much as 0.60%, and if things stay this uncertain then we may see even more decreases as we head into spring.
If the upward pressure continues on bond prices and inflation continues to trend downward, the Bank of Canada may begin decreasing its overnight rate sooner than anticipated - some expect the first decrease could be as soon as this summer.
Although the forces behind them are less than ideal, decreased rates could not come at a better time for potential homebuyers and current homeowners alike. For current fixed-term mortgage holders facing a renewal this year, a dip in rates now could mean the chance to circumvent some potential payment shock. For potential buyers, it could mean the perfect opportunity to lock in a lower fixed rate with a rate hold of up to 120 days to ensure that if rates come back up in the coming weeks, today’s low rate is still available.
Of course, with such uncertainty on the global financial scale, we have no way of really knowing what lies ahead. But today we can say for certain that Canada remains relatively insulated from a potential banking crisis, that inflation is heading in the right direction, and that the mortgage rate decreases in the wake of March’s events could be a great tool for some Canadians.
If you’ve got questions about how you can take advantage of today’s rate environment before things change again, or just want to learn more about what this spring’s market could bring, connect with us below! We are here to help guide you through it all, for better or worse, and we’re so looking forward to a bit of sunshine this spring, aren’t you?
