Mortgage Trends to Watch Heading into 2023

On Friday, October 14, the Canadian Real Estate Association (CREA) released its national housing statistics for the month of September. Below, CREA’s Senior Economist Shaun Cathcart provides an update on the current state of housing markets in Canada and explains what the data means for members:

Home sales recorded over Canadian MLS® Systems fell by 3.9% between August and September 2022, marking a slight re-acceleration in the sales slowdown that began with the Bank of Canada’s first rate hike back in March.

Why is that? Well for one thing, up until recently, higher borrowing costs had been disproportionally affecting the fixed-rate space, with home buyers still able to qualify more easily if they went with a variable rate mortgage—and they did.

The Bank of Canada’s recent rate hike in early September slammed that door closed, so it wasn’t a big surprise to see some additional softness on the sales side.

The Bank of Canada is not done yet.

Odds were for a 50 basis point hike in late October. Bets are now for a 75 basis point hike at that meeting. The “terminal rate” as it’s called, meaning where they’re expected to stop, has gone from 3.5% (they’re at 3.25% now) on the overnight rate back in the spring to closer to 4.5% now.

Not only have many seen mortgage payments rise dramatically as the Bank of Canada has raised rates, it has gone so far that we’re now hearing stories about people with closed variable rate mortgages hitting what are called “trigger rates”. In this scenario, the principal repayment component has effectively fallen to zero, with amortizations rising, and still payments are going up.

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Additionally, those with fixed rate mortgages are not safe for the next five years. Those come up for renewal every day. People paying attention are rightfully worried. People who have not been paying attention could be in for some serious sticker shock.

While these mortgage trends warrant our close attention going forward, long-term I remain very bullish on housing. Canada’s population added more than 700,000 people in the latest annual figures from Statistics Canada. More than 500,000 people turn 30 every year. These people need to live somewhere.

As such, with rapidly rising rates, the “too much” housing demand story is likely to move into the rental market for a time.

And so, in that sense, this is a continuation of the same story—those who got into the market early are unlikely to be affected by rapidly rising rates and are also unlikely to see the value of their properties decline all that much from the peak.

Meanwhile, those that bought recently at elevated prices, and those in the rental market, may be in for a tougher ride over the next few years.

This story is already well underway. What happens next depends on what inflation does going forward.

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As our Director and Senior Economist, Housing Data and Market Analysis, Shaun Cathcart provides housing market intelligence to Boards, Associations, members, and real estate industry stakeholders. He spends much of his time analyzing and writing about Canadian housing trends. In his downtime, you can find him on his bike, on the volleyball court, and enjoying time with his family.

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