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Soft July GDP supports October rate hold

Your mortgage news update for the week of September 29, 2023

Memo 1: Soft July GDP supports October rate hold

The latest snapshot of Canada’s economic growth was released this morning, bolstering rationale that the Bank of Canada will continue to hold rates over the coming month.

The gross domestic product measure was “essentially unchanged” in July, reports Statistics Canada, coming in below an expected 0.1% increase. That follows the -0.2% dip recorded in June; meanwhile, preliminary forecasts are pointing to a scant 0.1% uptick in August. 

According to StatCan, the greatest declines were seen in the manufacturing sector, as well as oil and gas, which are still bearing the effects of the summer wildfires. Improvements were centred in the finance sector, while real estate and renting inched up by 0.1%, as rising mortgage costs took a bite out of purchasing power.

“Interest rate hikes in both June and July may have deterred some buyers in the month. Despite increasing activity in the majority of markets in July, declines in the Greater Toronto Area along with the Fraser Valley more than offset those increases,” states StatCan’s report.

Overall – assuming the stagnancy continues through September – the Canadian economy is on trend to grow 0.2% in Q2, lower than the 0.4% initially forecasted by the central bank, and well below the 2.6% increase seen in Q1.

Today’s report will be a crucial consideration for the Bank of Canada as it makes its pending rate decision on October 25th; softer economic growth is a key indicator that the series of 10 rate hikes implemented thus far are indeed having their intended impact in slowing inflation – badly needed reassurance following August’s hotter-than-expected headline number of 4%. Analysts are now largely calling for a rate hold as a result of today’s reading.

“While some disruptions have compromised the ‘cleanliness’ of recent GDP data, the bigger picture is that Canada is really struggling to grow right now,” writes Robert Kavcic, Senior Economist and Director of Economics at BMO.

“Real GDP is little changed over the past six months, which looks even weaker when considering that the population is exploding at a 3% per-year run rate. The Bank of Canada still has their eyes on stubborn core inflation and firm wage growth, but struggling growth argues for them to remain on hold and lean on the tightening that has already been put in place.”

Memo 2: Nearly half of Canadians don’t think they’ll ever afford homeownership

As interest rates have steadily marched upward, borrower sentiment – and their ability to keep up with their mortgage payments – has plunged. That’s according to the latest findings compiled by Mortgage Professionals Canada (MPC), as part of their Semi-Annual State of the Housing Market report.

The report, which is based on an online survey of 1,949 respondents between June 26 and July 12, 2023, states that a full 48% of non-homeowners in Canada think they’ll never be able to buy a home – an increase of 15% since the survey was last conducted six months ago. This is a direct reflection of the impact of rising rates, which MPC says have tripled between mid-2022 and 2023, and “a clear indication of Canadians’ housing related stress in this high interest rate environment.”

“Canadians are facing a housing affordability crisis with little sign of easing in sight,” said Lauren van den Berg, President and CEO of MPC. “We hear this every day from our members right across the country, and that is why we continue to advocate for policies that break down the barriers to homeownership.”

Also read: Home affordability declined in August, despite lower home prices

The survey also picked up on a potential increase in distressed selling, as the percentage of homeowners who are considering listing their home because they can’t afford their rising mortgage rate has grown by more than three-fold.

Borrowers who are coming up for renewal remain a top concern – one in five existing mortgage holders (19%) expect to renegotiate their financing over the next year, with that number to surge to two-thirds (65%) within the next three years. According to the survey, 69% of respondents are anxious about renewing in a higher interest rate environment. 

Also read: Renewing your mortgage in 2023: What are your options?

MPC – the national organization that represents thousands of mortgage professionals – has taken the stance that the Bank of Canada will keep its interest rate at 5% until at least mid-2024 (resulting in average mortgage rates of 6.1%), before returning to a more neutral level by early 2027. This “higher for longer” approach will continue to depress the housing market throughout 2024.

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Memo 3: Banking regulator has extra-long mortgages on the radar

As mortgage rates have soared, variable-rate borrowers have been increasingly squeezed by rising monthly payments. For those who are on a fixed payment schedule, however, their payments haven’t increased – rather, more of it is earmarked for interest costs, with less paying off their principal mortgage debt. Eventually, the borrower hits what’s called their trigger rate – the point at which their payment no longer covers their principal at all, and becomes interest-serving only.

That’s led to a bit of creativity from lenders in efforts to pull these borrowers out of negative amortization, the most common being a temporary extension of their amortization period; stretching out this timeframe beyond the typical 25 or 30 years effectively eases payment strain on these borrowers in the short term. These “extra-long” mortgages over 35 years have become more common over the Bank of Canada’s hiking cycle, accounting for between 24 - 30% of all mortgages on the big bank’s books (representing $250 billion in mortgages), according to quarterly regulatory filings.

However, OSFI – Canada’s banking regulator – is less than pleased about the growing prevalence of this practice, and is actively exploring ways to curb it. According to comments made by OSIF superintendent Peter Routledge, the regulator will roll out draft guidelines in October to restrict the amortization extension.

“I think both banks — financial institutions — and borrowers would be better off if the prevalence of this product was less, and we’re consulting and will have something out in October to discuss how we might address that, and put in place a little more regulatory oversight to make this product a little less prevalent,” he stated to reporters in Toronto on September 26.

OSFI’s stance appears to be counter to that of the Financial Consumer Agency of Canada (FCAC), which released guidelines back in July that spelled out “expectations” for how lenders would support borrowers considered “at risk” due to rising rates. This includes variable-rate borrowers on fixed payments who "have seen a materially larger portion (or all) of their payments allocated towards the increased interest costs or who may be facing negative amortization."

According to the FCAC, lenders should implement policies with “consideration for all available mortgage relief measures that may be appropriate for consumers at risk, such as waiving prepayment penalties, waiving internal fees and costs, not charging interest on interest, and extending amortization.” However, the agency does specify that in cases where an amortization is stretched, it should be done so for the shortest period possible, and that the borrower should be able to withstand it being restored to its original period.

The industry is sure to be keeping a keen eye on what OSFI will roll out in the coming month, and what options will remain for borrowers squeezed by today’s rising rate environment.

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