2023 market: Another eventful year ahead, broker suggests

The direction of a number of key trends will dictate how the market fares this year, says Ontario executive

2023 market: Another eventful year ahead, broker suggests

It’s an oft-repeated mantra in the mortgage industry that nobody has a crystal ball to see what’s coming down the line in the market – but that doesn’t mean mortgage professionals aren’t weighing up some of the trends that could pan out in 2023.

Having a clear understanding of the turns the market could take this year is particularly essential for brokers and agents in advising their clients how to navigate turbulent times for borrowers – and that advice varies depending on the scale of customers’ optimism about the future of the economy, according to an Ontario-based mortgage broker.

Chris Bargis (pictured top), broker and team lead at Mortgage Edge, told Canadian Mortgage Professional that his team was advising clients to go with a short-term fixed or long-term variable based on their level of risk tolerance and belief about the direction of the Canadian economy this year and beyond.

“One-to-two-year fixed makes a lot of sense in the current environment, but even those rates have increased due to bond yields and heavy demand for that product category over the past few months,” he said. “Three-year fixed remains attractive but may be too long a commitment period.

“We believe our economy is expected to see contraction with a possible recession looming over us, and depending on how much national production levels ultimately decline, don’t think fiscal stimulus from the Bank of Canada is off the table.”

What happens in the event of a Canada recession?

If a significant national economic downturn transpires this year, that could result in the central bank unleashing a round of quantitative easing (QE), Bargis said, which would likely see fixed rates decline and give variable-rate holders an opportunity to exercise their convertibility feature and explore more favourable fixed options.

“With the net interest rate on variable-rate mortgages being very comparable to one-to-two-year fixed right now, accepting risk for rising interest and payments in the short term means placing a bet on economic contraction during that same period – otherwise, it would only make sense to go fixed,” he said.

With the Bank of Canada having signalled in its January policy rate decision that it’s likely done with rate hikes for now, much attention will be focused on the real estate market and whether national home prices continue to tick downwards or see some revival this year.

Bargis said that while “calmness” was currently prevailing in real estate prices, multiple offers remain a potent factor because of the oft-mentioned lack of housing inventory in the market – although the higher cost of borrowing due to rate hikes has also weighed against demand.

“With anticipated changes to the mortgage stress test and an introduction of underwriting restrictions from OSFI [the Office of the Superintendent of Financial Institutions, Canada’s banking regulator], whether we see continued calmness remains to be seen,” he said.

“While we may see a halt in increases to the overall cost of borrowing, introducing rules that would otherwise make it more difficult to obtain a loan could still result in further downward price pressure.”

Are further changes from OSFI on the way?

While the banking regulator has opened the door to potentially introducing further qualification requirements for Canadian borrowers in the mortgage space, Bargis said his team was also keeping a close eye on whether the stress test changes in the event of a Canadian recession.

“We think it’s likely they will make the stress test less stringent, which would give first-time homeowners more of a fighting chance in an otherwise high-rate environment,” he said.

The Canadian debt-to-income ratio has spiralled in recent years – jumping from 177% in Q3 2021 to about 183% in 2022’s second quarter – and imposing loan-to-income restrictions might help counterbalance that, Bargis suggested.

“While we seem to be headed in the direction of a recession as high inflation brings about contracted levels of output, the lower unemployment rate is still reassuring,” he said. “Time will tell how things develop, and for now we’re waiting patiently from the observation deck.”

How are you expecting the mortgage market to play out in 2023? Let us know in the comments section below.