Tyler Johnston and his wife, Dominique, bought a home in Halifax recently and spent more than they wanted as a result of fast-rising prices. COURTESY OF FAMILY

Low mortgage rates are housing’s great enabler.

A recent home buyer named Tyler Johnston wonders how long this can last. He and his wife bought a home in Halifax recently and spent more than they wanted as a result of fast-rising prices. What made the purchase possible was aggressive saving for a down payment and a terrific five-year fixed mortgage rate of 2.19 per cent.

“I realize you simply do not have a crystal ball and that five years is a reasonably long time horizon,” Mr. Johnston, a millennial, wrote in an e-mail. “But it seems the fiscally responsible thing to do is to try and plan for a rate increase rather than being ambushed by it in five years. Are there economists or statisticians who take on this type of question?”

One who does is Beata Caranci, chief economist and senior vice-president at Toronto-Dominion Bank. Her view on rates five years from now should comfort Mr. Johnston and other recent buyers because it’s pretty low on drama.

In fact, the most alarming aspect of Ms. Caranci’s rate outlook isn’t where borrowing costs themselves are headed. Rather, it’s that there are signs the recent rise in consumer spending on goods is more than just a snapback from COVID-19 lockdowns. We could be entering a period of higher spending that degrades household budgets in a similar way to interest rate increases.

Ms. Caranci set the scene for her rate outlook by noting that rates are coming off their pandemic lows. “It’s very unlikely we will still be here in five years,” she said. “It would take the economy to be in a recession to be where we are today.”

A recession is a possibility, she added. “But I would put that at a lower probability than Canada being in an expansion. The predominant state of the economy is to be in expansion.”

Rates on the five-year fixed mortgage Mr. Johnston and his wife have are influenced, to a large extent, by the yield on the five-year Government of Canada bond. That yield has already jumped this year to 1.5 per cent in late November from 0.4 per cent in early January.

Ms. Caranci said this increase is a function of financial markets adjusting to a rising rate outlook. How much higher could rates go? TD, a rarity among big financial institutions in publishing a long-range economic forecast online, sees an average five-year Canada bond yield of 1.95 per cent for 2026 and 2027.

One of the big unknowns in rate forecasting right now is how big a problem inflation will be in the years ahead. The cost of living hit an 18-year high of 4.7 per cent in October, which compares with a 30-year average of 1.9 per cent. If inflation is a result of temporary pandemic-related supply-chain issues, then it shouldn’t be a long-term influence on rates.

But Ms. Caranci also sees a demand-related side to inflation, which is that people are spending and buying goods at a surprising clip right now. “We are consuming more in terms of durable goods – cars and electronics and things like that – than we would have predicted would be the case back in 2019,” she said. “This hasn’t shown any kind of tendency to significantly ease.”

Inflation may have more staying power if spending stays strong, and that, in turn, could result in higher interest rates. The Omicron variant of coronavirus is still new and not fully understood, but it’s worth highlighting as a factor that could restrain rate increases by hurting economic growth.

Mr. Caranci said new home buyers should take some comfort from the fact that they were stress-tested by their lender to ensure they can afford higher mortgage rates than we have now. Future pay increases would also help offset higher mortgage costs. Recent trends for wages suggest they’re starting to rise faster than we’ve seen in a while, as a result of inflation.

One final thought from Ms. Caranci is that five years of mortgage payments at today’s low rates mean home owners renewing in five years will have built a solid amount of equity in their homes. If their payments on renewal are a strain, they can de-stress their finances by lengthening their amortization period a little.

The Globe and Mail, November 29, 2021