Economists on how the central bank is viewing the outlook for the sector
The Bank of Canada is maintaining a degree of silence at the beginning of 2024 about the mortgage market outlook for the year – but it will prove a key consideration for the central bank as it maps the interest rate path ahead, according to leading economists.
The central bank made no reference in its opening rate decision of the year to the upcoming surge of mortgage renewals slated to take place at significantly higher interest rates from 2024 onwards.
Still, the Bank’s governor Tiff Macklem was candid in November about the impact of that coming trend on its thinking, telling a Senate committee he was keeping a close eye on the prospect of further pain and squeezed budgets for Canadian homeowners.
“One of the important reasons why we held our policy rate of 5% [in November] is that we know that those renewals are coming – so we know that there’s more to come from what we’ve already done,” Macklem said.
Following the Bank’s decision to keep rates steady once again last week, Canadian Imperial Bank of Commerce (CIBC) World Markets deputy chief economist Benjamin Tal (pictured top) told Canadian Mortgage Professional that the mortgage market would be a strong factor in its deliberations on when to eventually dial down rates.
The prominence of mortgage interest costs in the current inflation outlook is especially noteworthy, with the surging cost of servicing a mortgage contributing to 28.6% of consumer price index (CPI) growth in December.
“Although they will not admit it, I think it’s a major factor impacting their psyche,” Tal said of the coming renewal wave.
“I think the fact that the mortgage interest payment is the number-one factor leading to overshooting by the Bank when it comes to inflation is something that enters their psyche – and I think that this is a factor impacting [their January decision].”
The Bank of Canada has left its policy rate unchanged in its first announcement of the year.
— Canadian Mortgage Professional Magazine (@CMPmagazine) January 24, 2024
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Mortgage costs, rent continue to pile upward pressure on inflation
Sal Guatieri (pictured below), senior economist and director at Bank of Montreal (BMO) Capital Markets, highlighted that prevalence of repaying mortgages at higher interest rates in the current inflation figures, a factor that will continue to play a big role in Canada’s inflation landscape looking ahead.
“Those payments will continue to increase for several more years because more and more Canadian households – roughly half – still need to refinance their mortgage over the next two to three years, at almost certainly higher rates than when they initiated that mortgage,” he told CMP.
“So that will be a source of ongoing upward pressure on inflation and will slow the decline of inflation back to the target. The Bank has been very clear about that.”
Another big current contributor to inflation is rent, whose costs spiked by 7.7% on a year-over-year basis in December. Strong population growth and a chronic lack of housing supply and rental units mean that trend shows no sign of slowing – and labour cost growth is also putting upside pressure on inflation, Guatieri noted.
Those are some of the key factors that mean the central bank is unlikely to countenance rate cuts, he said, until other measures of inflation begin to trend more consistently downwards.
Rates could eventually decline by 100 basis points by the end of the year, according to Guatieri. “That will provide some relief to those who were renewing their mortgage,” he said. “But again – the issue is that because mortgage rates were at basically record lows during part of the pandemic, many households will be refinancing at higher rates.”
Manulife Investment Management recently highlighted the upcoming spate of mortgage renewals as one of the top factors that will shape Canada’s economic outlook in 2024, noting that the refinancing schedule is likely to negatively affect growth, reduce discretionary spending, and put pressure on borrowers.
That said, while payment shock and a housing slowdown is “on the horizon” as a result of that trend, there appears little prospect of a crash, the company’s report noted, with the Bank of Canada confident homeowners can absorb the impact of those higher payments.
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