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Canadians are experiencing mortgage regret

Your mortgage news update for the week of August 25, 2023

Memo 1: Many Canadians are experiencing mortgage regret

Steadily rising interest rates over the last 18 months have put the financial squeeze on many mortgage holders, especially those who have taken out variable rate-terms, or who are coming up for renewal in today’s much pricier borrowing environment.

This is leading to a growing case of “mortgage malaise” among affected borrowers, according to a survey by The Real Estate and Mortgage Institute of Canada (REMIC). The survey, which polled 1,000 random Canadians found a third (34.1%) regret the mortgage they are currently in, with just under 22% saying that rising rates have made it unaffordable. A further 12.3% indicate they currently have a “bad rate”.

Both fixed and variable mortgage rates have soared since March 2022 in response to the steepest Bank of Canada hiking cycle in history; the central bank has increased its benchmark Overnight Lending rate, which lenders use to set the pricing of their variable products, a total of 10 times, bringing it from a pandemic low of 0.25% to 5% today. As a result, the Prime rate in Canada has risen to a whopping 7.2%, with today’s lowest variable mortgage options in the 6% range. Fixed mortgage rates are also up significantly in response to the volatile bond market, as yields have surged in response to economic uncertainty.

The survey also revealed gaps in Canadians’ knowledge about basic mortgage facts; 59% could not quote the above-mentioned Bank of Canada rate, and appeared unaware of how it was currently affecting them.

“Even more disturbingly,” states the survey release, “a combined 68.4% of Canadians said they didn't know what their mortgage payments would be if the Canadian interest rate reached 5% … WHICH IS THE CURRENT RATE. 31.8% simply said they don't know, and another 36.6% said they were not sure.”

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Memo 2 : Pressure mounts on the federal government to address housing crisis

The federal Liberal government convened in Prince Edward Island earlier this week to discuss housing and rapidly eroding affordability for Canadians – but emerged from the three-day retreat without any concrete policy recommendations… at least not yet.

“We are looking forward to continue to do the work we've been doing on housing and do even more,” stated Prime Minister Justin Trudeau to reporters following the end of the gathering. “We recognize and Canadians know that there's not one silver bullet that's going to solve the housing challenges,” adding that a collaborating between all three levels of government – as well as developers and non-profit agencies – could be in the works to get more housing units built.

Such an approach would be a turnaround from recent comments made by Trudeau that housing isn’t a “primary federal responsibility,” which garnered significant criticism from opposition parties and housing advocates alike.

The downturn in housing affordability – fueled by a combination of rising interest rates, underbuilding, rising home prices and robust immigration targets – has become a major vulnerability for the current federal government. A recent survey conducted by Leger found that 40% of respondents blame the feds directly for poor housing affordability, while 32% blame their provincial government. 

A recent study from found that housing affordability declined further across Canada in the month of July, despite home prices dropping in some markets, mainly due to rising mortgage rates, which have pushed the current criteria for the mortgage stress test to an all-time high of 8 or above%. 

Memo 3: Could slowing retail sales point to a 2024 rate cut?

It appears Canadian shoppers are starting to bear the brunt of rising interest rates, as the latest data shows spending is on the decline – a key indicator that the economy is starting to soften.

According to Statistics Canada, retail sales rose by just 0.1% on a monthly basis  in June, and actually declined by 0.2% in terms of volume. That marks the second consecutive month of slower growth after what had been a surprisingly strong first quarter, indicating that rate hikes are indeed working their way through the economy.

The scant uptick was mainly due to an increase in new auto sales, which rose 2.9% higher. However, other sectors were quite soft, including general merchandise sales, and food and beverage.

According to economists, this data – along with softening jobs and overall GDP numbers – supports the argument that the Bank of Canada has done enough with its rate hiking mandate, and could even set the stage for the central bank to reverse course, with rate cuts as early as next year.

“Canada’s economy has generally outperformed downbeat expectations over the past few quarters. But more recent economic indicators have pointed to a broad-based slowing in growth,” states an Economic and Financial Outlook authored by Desjardins economists. 

“Everything from international trade and housing to real GDP and core CPI inflation have started to trend lower, suggesting that rate hikes by the Bank of Canada are having their intended impact. As a result, we continue to expect a recession to start before the end of 2023 and continue through the first half of 2024… This should prompt the Bank of Canada to ultimately begin cutting interest rates from their current level early next year, prompting a rebound in growth in the second half of 2024.”

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