Is there room for optimism in Canada's mortgage market?

Times are tough – but better days could be on the way

Is there room for optimism in Canada's mortgage market?

It’s easy to get weighed down in pessimism about Canada’s mortgage and housing markets: for most buyers and homeowners alike, 2023 has been a difficult year marked by rising interest rates, squeezed budgets and continuing affordability challenges.

The Bank of Canada’s war on inflation has seen its benchmark rate surge since March of last year, spiking by 475 full basis points in a strategy that’s thrown cold water over the housing market and ramped up the worries of scores of borrowers who’ve seen monthly payments or rates skyrocket as a result.

Meanwhile, that cooling market has brought little respite for many would-be buyers. Affordability remains stretched or out of reach for many Canadians thanks to steep stress test rates and home prices that remain resolutely high despite the recent downturn.

Still, there are glimmers of hope on the horizon – not least the expectation from many leading economists that next year is likely to mark the first time that the Bank of Canada cuts its trendsetting interest rate since the beginning of the pandemic in 2020.

When are interest rates likely to fall?

The central bank’s recent pause on rate hikes – its policy rate has remained unchanged in its last two announcements – and Canada’s worsening economic outlook has spurred suggestions that rate drops could be in the cards, likely around the middle to end of 2024.

That’s good news for homeowners and buyers, according to Ottawa-based mortgage broker Chris Allard (pictured top), who told Canadian Mortgage Professional the prospect of impending lower rates could inject some much-needed optimism back into the market.

“Many of the economists now are saying that rates could start going down sometime next summer and the ones that are maybe a little less optimistic are saying, ‘Well, maybe they’ll start going down in Q4 of 2024,’” he said.

“And I think that kind of commentary really helps borrowers have some sense of optimism or comfort. Obviously, they’re not celebrating, but it’s at least nice to hear because I don’t really think that it’s talked about that way in the media all that much.”

Could better news on inflation lie ahead?

Of course, much still depends on the speed at which inflation continues to tick down in Canada, with its current level of 3.8% still well above the central bank’s 2% target.

In its last statement on rates, the Bank remained adamant that it would be prepared to introduce further hikes if consumer price index (CPI) inflation stayed resolutely high – although that may be unnecessary, according to a leading economist, because rising mortgage interest costs are a direct result of the Bank’s rate increases to date.

Benjamin Tal, CIBC’s deputy chief economist, has long argued that with the cost of servicing a mortgage contributing significantly to overall inflation, the figure is actually much closer to the 2% target than the headline level suggests.

A spike in the cost of gasoline as a result of higher oil prices globally is expected to be a near-term contributor to inflation, meanwhile, with those prices set to tick downwards in the coming months.

That’s an important conversation for brokers to have with clients and borrowers, Allard said. “Remember, our inflation numbers are still high – but our inflation numbers include mortgage interest payments and gas,” he said. “And if you took those two things out of the equation, the inflation number’s a lot closer to the Bank of Canada target.

“So really, in my opinion, inflation numbers are actually pretty close to being in line. It’s just the way the Bank of Canada does the calculation – it includes higher mortgage interest rate payments and so naturally, the inflation number is a little higher, but I think it’s a bit of a skewed way of looking at the numbers.”

Even when having difficult conversations with clients about cashflow and budgeting, that positive news on inflation is an important point to include in the discussion, Allard said.

“We’re trying to add these additional pointers for people to say, ‘Maybe inflation isn’t as bad as we really think and yes, your payment’s going up [but] let’s talk about the different payments and saving opportunities,’” he said, “and really that’ what the conversations are about on the cashflow.”

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