Renewal-related uncertainty "will shape 2024," company says in outlook for the year
Canada’s coming surge of mortgage renewals is expected to negatively impact economic growth and play a significant role in squeezing borrowers’ budgets, according to Manulife Investment Management.
The company’s global macro strategist Dominique Lapointe said in its 2024 outlook that the expected flurry of renewals this year – which will see scores of mortgages renew at significantly higher interest rates than their original contract rate – would put additional pressure on the economy and reduce Canadians’ discretionary spending.
“Refinancing for mortgages with a term of five years, the most common type of mortgage in Canada, will accelerate sharply over these two years,” Lapointe said. “In contrast to the United States, where most mortgages have fixed rates for 30 years, we believe that the accelerated refinancing schedule in Canada will negatively affect economic growth.”
Manulife’s 2024 outlook noted that 43% of outstanding mortgages in Canada had already renewed when the Bank of Canada began raising interest rates in 2022, according to the central bank, a proportion that’s anticipated to jump to 60% by the end of this year.
Canada Mortgage and Housing Corporation (CMHC) estimates 2.2 million mortgages are set to face interest rate shock in 2024 and 2025, a figure that accounts for 45% of all outstanding mortgages in Canada.
The prospect of borrowers facing much higher monthly payments after they renew, Lapointe wrote, is likely to see overall consumption tick downwards in 2024, “especially in the context of weaker labour income prospects.”
Housing crash unlikely – but activity set to remain mild
There’s little chance of a mortgage meltdown in the cards for this year, although a continued slowdown in housing activity is the likely outcome of the higher payment shock, according to Manulife’s 2024 outlook.
Canada's mortgage and housing markets may see an upturn in 2024, but the recovery is expected to be gradual, according to Drew Donaldson, founder and CEO of Donaldson Capital.
— Canadian Mortgage Professional Magazine (@CMPmagazine) January 10, 2024
Read more: https://t.co/yct4Txl9Z0#mortgageindustry #mortgagemarket #industrytrends #housingmarket
Lapointe pointed to a Bank of Canada survey that showed most homeowners believe they have at least some capacity to handle the impact of larger mortgage payments. “Consequently, we don’t expect widespread mortgage defaults under our base-case scenario,” he said.
“Nonetheless, higher mortgage rates will increasingly pressure housing demand in the context of rising inventories since June 2023. Therefore, we anticipate that the first half of 2024 will mark a rare occasion when home prices decline.”
Residential construction could also be hampered by tepid demand and higher financing rates for builders, he said, potentially putting further pressure on the country’s economic growth.
All eyes on Bank of Canada approach to rates
A “modest contraction” on real GDP in Canada is likely on the way, Lapointe said, with lower consumer spending and a subdued housing market among the key factors behind that probable slowdown.
Still, the economy could begin to spark back to life in the second half of the year – providing the Bank of Canada starts to trim its benchmark interest rate around that time as currently expected.
While inflation ticked upwards in December, moving away from the central bank’s 2% target, Manulife believes that development will have done little to change its course or timeline for rate cuts.
“We believe that weakening Canadian growth and labour market dynamics will prevail over sticky core inflation for the BoC and, as such, we continue to expect steady policy easing in 2024,” Lapointe said. “In turn, this will support demand in the economy and gradually ease the labour market slack generated early in the year.”
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