The Bank of Canada’s path on interest rates has grabbed headlines and dominated the news cycle throughout 2023 – but its final rate decision of the year isn’t expected to hold many surprises.

The central bank has left its policy rate, which leads variable mortgage rates in Canada, unchanged in its last two announcements, with Wednesday’s (December 6) scheduled decision expected to see no further move.

Markets appear virtually certain that the Bank will not hike rates next week amid clear signs that inflation pressures are easing as the economy continues to flatline.

Sherry Cooper, chief economist at Dominion Lending Centres (DLC), told Canadian Mortgage Professional that Wednesday’s announcement could even see the Bank deploy more dovish language than usual, depending on third-quarter GDP figures which at time of writing had not been released.

“Assuming that the numbers are quite weak, which I expect, I think [the Bank] may hint that they could be finished tightening monetary policy, which will be seen as very positive in the market,” Cooper said. “And we’ve already seen the bond yields, market-driven yields, decline quite significantly. So all of that would be very positive.”

Could the Bank of Canada signal that it’s done finishing rates?

Bank governor Tiff Macklem surprised some observers by indicating last week that interest rates may already be high enough to bring inflation back down towards the 2% target, a departure from the hawkish language deployed by Bank officials in recent months.

Cooper said Macklem may have been speaking with the upcoming mortgage renewal wave, which will see scores of mortgages renewed at much higher interest rates than before, in mind.

“It surprised me, because he didn’t need to do that and no-one expected him to. It seems really quite aggressive on his part,” she said. “Maybe it’s because they’re very concerned about all the refinancing of mortgages that’s happening even as we speak, and it won’t peak until 2026.

“So beginning to get interest rates down may be high on his list of priorities, but only if inflation continues to come down.”

On the flipside, there seems little to no prospect of the Bank actually cutting interest rates until some point in 2024, depending on how inflation plays out in the coming months. Still, odds of a further hike appear to be fading.

“[Macklem’s] certainly not going to promise that interest rates have peaked and I don’t expect them to cut interest rates until well into next year,” Cooper said. “But nonetheless, it’s certainly a positive, and I do think that there’s a very high probability that interest rates have peaked.”

Housing market outlook remains unclear as BoC mulls next steps

The Bank of Canada slashed its trendsetting interest rate to a rock-bottom 0.25% at the onset of the COVID-19 pandemic as the national economy ground to a halt amidst public health restrictions and business closures.

It kept that rate unchanged for nearly two years, with low borrowing costs helping fuel a housing market boom that saw activity and prices skyrocket in many cities across Canada.

In March of last year, with inflation beginning to balloon well past its target, it started hiking rates, beginning a path that would see its policy rate rise by 475 basis points to its current level of 5.0% – a 22-year high.

Earlier this year, the Bank’s pause on interest rate hikes spurred an unlikely (if brief) housing market resurgence, prompting the central bank to increase rates twice again over the summer to pour cold water on that uptick in sales.

With the central bank poised to leave its benchmark rate untouched for a third consecutive decision, could another prolonged pause see the housing market roar into life again?

That may not occur in the winter, although Cooper said the spring market could see higher activity than has been the case in the past if variable rates remain on hold and fixed rates continue to tick down.

“I think we will see a more robust spring season than what we’ve seen in the recent past and despite the policy rate being high, fixed-rate mortgage yields have come down, and come down quite significantly,” she said. “So I do think we’ll see a rebound in activity.”

Source CMP
By Fergal McAlinden

It’s been one of the trends of the year in Canada’s mortgage market: borrowers facing steep interest rate hikes deciding to ease some of the immediate shock by stretching out their amortization and keeping payments at a manageable level.

The option hasn’t been without its critics: Canada’s banking watchdog, the Office of the Superintendent of Financial Institutions (OSFI), has warned of the long-term risks to borrowers of extended mortgage terms, while others still view the measure as one that essentially kicks the can down the road.

Still, the dramatic spike in interest rates witnessed over the past 20 months means there’s little other choice for scores of borrowers other than to lengthen their mortgage terms – and the federal government has appeared to accept that reality in its proposals for a Canadian Mortgage Charter, unveiled in finance minister Chrystia Freeland’s recent fall fiscal update.

That charter said Canadians could expect the continued allowance of temporarily extended amortization periods for squeezed borrowers, with fees and costs associated with relief measures to be waived.

It also said it would permit financially burdened homeowners to “make lump sum payments to avoid negative amortization or sell their principal residence without any prepayment penalties,” while financial institutions would be required not to charge interest on interest in the event of temporary amortizations.

Borrowers initially wary – but ultimately open to longer terms

While many borrowers are wary about the prospect of stretching out their mortgage amortization, plenty are put at ease after a conversation detailing their options and the possibility of changed circumstances down the line, according to a Nova Scotia-based mortgage broker.

Interest rate conundrum set to continue into 2024

Activity on the purchase side of Canada’s housing and mortgage markets has slowed considerably since the central bank embarked on its rate-hiking path, with Clarke’s province of Nova Scotia seeing home sales slide 23.8% below the five-year average and 13% below the 10-year average for the month of October.

Still, prices do not appear to be plunging. In fact, the benchmark price for single-family homes rose by 8.1% last month compared with the same time in 2022, jumping to $394,600, while townhouse and row units posted a 12.3% average increase on a year-over-year basis to a $509,000 benchmark price.

That means affordability challenges aren’t easing in the current market – but with rates projected to fall at some point in 2024, buyers could see some relief in the amount of mortgage they can qualify for, potentially causing a degree of built-up demand at present.

Source CMP
By Fergal McAlinden

Toronto is the safest place to live in Canada, according to a new survey by Money.ca.

The analysis – which looked at the prevalence of incidents involving arson, burglary, robbery, and impaired driving – culled data from the Canadian Crime Index.

The study found that based on the number of offenses per 100,000 people, Toronto ranked the safest with only 286.9 offenses. This was roughly a fifth that of Lethbridge (1,190 offenses), which was found to be the Canadian city most affected by crime.

Money.ca outlined the 10 safest Canadian cities as follows:

1. Toronto – 286.9 offenses per 100,000 people

2. Quebec – 301 offenses per 100,000 people

3. Ottawa-Gatineau, QC – 318.8 offenses per 100,000 people

4. Sherbrooke – 327.4 offenses per 100,000 people

5. Ottawa-Gatineau, ON – 333.9 offenses per 100,000 people

6. Montreal – 356.7 offenses per 100,000 people

7. Barrie – 356.7 offenses per 100,000 people

8. Trois-Rivières – 366.2 offenses per 100,000 people

9. Saguenay – 396.3 offenses per 100,000 people

10. Hamilton – 420.6 offenses per 100,000 people

“The rates of safety can affect housing prices and appeal of various areas when looking to move or raise a family, with investment from individuals and government bodies alike needed to ensure more comfortable living among neighbourhoods,” Money.ca said.

“For those looking to invest in real estate in Canada, this study offers an interesting look into where may be the most appropriate place to put their money into, and what this in turn, might mean for the housing market long term.”

“The tightening of monetary policy is working, and interest rates may now be restrictive enough to get us back to price stability,” he said. Still, Macklem’s speech also reinforced the Bank’s willingness to begin hiking rates again if inflation “persists.”

His remarks arrived a day after Statistics Canada showed the inflation rate had fallen to 3.1% in October, a precipitous drop from the previous month driven by lower prices at the pump.

Flatlining GDP figures in recent months have also pointed to a slowing economy, which posted virtually no growth between August and September, according to StatCan. The national statistics agency said at the end of October that the third quarter likely saw the economy regress at an annualized rate of 0.1%.

With the Bank of Canada having left its policy rate unchanged in its last two announcements, attention has already turned to the question of when rate cuts could be on the way.

Economists generally believe the central bank is likely to begin trimming rates at some point in the second half of 2024, with five-year Government of Canada bond yields – which lead fixed mortgage rates – ticking downwards in recent weeks.

However, Macklem gave little indication on Wednesday of when the Bank is planning to lower rates, emphasizing its focus on making sure core inflation continues to fall before considering a cut.

The Bank intends to see “a number of months of clear evidence that we’re on the path to 2% inflation” before launching into rate drops, he said. The central bank is due to make its final rate decision of the year on December 6.

Source CMP
By Fergal McAlinden

Canada’s inflation rate fell to 3.1% in October, still above the Bank of Canada’s target rate but down notably from its September reading of 3.8%.

That slowdown was caused mainly by plummeting gas prices, with the cost of fuel at the pump falling by 7.8% compared with the same time last year. When gas price fluctuations were taken out of the equation, the consumer price index (CPI) grew by 3.6% last month, Statistics Canada said, down slightly from 3.7% in September.

Unsurprisingly, skyrocketing mortgage interest and rent costs continue to contribute strongly to year-over-year price growth, while grocery prices also saw another big yearly increase.

However, while wage hikes remain elevated, “the unemployment rate is on a clear uptrend, and job vacancies are also moving decisively towards looser conditions.”

This is shaping up to be a recipe for future market lethargy.

“We know of no persuasive argument that would suggest that labour market slack will fail to show up in less robust pay hikes in the coming year,” CIBC said.

CIBC cited the central bank governor’s recent statements of a rate-easing cycle being likely to take place before inflation reaches the BoC’s 2% target, should there be clear evidence of progress in “core” inflation metrics.

“The Bank of Canada’s core measures are likely to make better progress in the months ahead, particularly if food price hikes abate,” the bank said.

Canada’s central bank will have to cut interest rates faster and further than markets expect to get ahead of a wave of mortgage maturities that threaten a fifth of the country’s discretionary income, according to economist David Rosenberg.

The Bank of Canada will be forced to cut 2 percentage points from its policy rate over the next 12 to 18 months, taking it down to 3%, with the process kicking off in the first quarter of next year, Rosenberg, founder and president of Rosenberg Research, said in a telephone interview.

“It’s going to happen quicker than most people think,” said Rosenberg, who’s known for predicting the 2008 US housing crash when he was at Merrill Lynch. “The economy is going to be in a bad recession. It’s going to be late and they’ll be scrambling.”

Economists surveyed by Bloomberg last month see rate cuts unfolding a bit more slowly. The consensus view is that they’ll begin in the second quarter of next year, with the overnight rate at 3% in the second quarter of 2025. Swaps markets are pricing in three rate cuts by next October.

Though the central bank is still warning its benchmark rate, currently at 5%, is more likely to rise than fall as inflation persists above its target, other indicators cause Rosenberg to suspect the economy is already in a recession. This will force policymakers to move quickly to get ahead of a wave of mortgage renewals coming over the next few years, he wrote in a research report Tuesday.

“The macroeconomic math relating to Canada’s looming wall of mortgage renewals should be terrifying for the Bank of Canada,” Rosenberg wrote.

Around two-thirds of Canada’s mortgages by value will be coming up for renewal over the next three years, Rosenberg wrote, shifting borrowers from the ultra-low rates available during the pandemic to much higher ones. That will push the average monthly mortgage payment up by 15% in 2024, 30% by 2025, and 45% by the end of 2026, Rosenberg’s report said — if rates stay at current levels.

In aggregate, all those extra interest payments would amount to a 20% reduction in the national disposable income by the end of 2026, he wrote.

“If households are forced to funnel more of their monthly income into mortgage payments, that means less for discretionary spending on things like white goods, restaurants, and holidays,” Rosenberg wrote. “That’s an enormous hit to demand.”

And even if consumers take steps to avoid these extra payments, that would only throw up economic headwinds elsewhere, according to the report. Households that opt to restructure their debt would have to draw down their savings. Others who decide to sell their homes will put pressure on an already softening housing market, while those left with no choice but to default will put Canadian banks at risk of losses, the report said.

“If we can do this math, the economists at the Bank of Canada can too,” he added. “That means that the bank will need to switch posture relatively soon.”

Source CMP
By Ari Altstedter