A realtor's for sale sign stands outside a house that had been sold in Toronto on May 20.CHRIS HELGREN/Reuters
Everywhere you look in the mortgage business, records were broken in 2021. Be it record-low mortgage rates, record average mortgage amounts, record mortgage volumes, record-low mortgage arrears, a record percentage of overleveraged borrowers, record amounts of home equity or the mortgage industry’s record share of GDP, you could go on and on.
Next year’s mortgage market will also be action-packed, but for very different reasons – many of them not so pleasant, depending on your perspective. On that topic, here are four mortgage predictions for 2022.
Rate inflation
This one doesn’t take much of a crystal ball. All you need to do is gaze at Canada’s three-decade highs in core inflation, a Bank of Canada that’s signalling rate hikes in the “middle quarters” of 2022 and a bond market that’s pricing in four or more rate hikes in the next 12 months. Clearly, rate risk will be a thing next year, once every other headline is no longer Omicron-related. That’s when we’ll see what we always see when the central bank hikes rates: scared borrowers rushing to lock into escalating five-year fixed rates. As usual, these late lockers will likely overpay for those fixed rates. Indeed, the best time to go fixed is before bond yields run up in anticipation of central bank rate hikes.
New lending restraints
Home sales, home prices and mortgage volumes broke records in 2021 as feverish buyers fought over record-low housing availability. We ended the year with the worst housing affordability since the early 1990s, according to Royal Bank of Canada. To shoehorn themselves into a home, a record percentage of Canadians overborrowed – according to policymakers’ favoured “loan-to-income” metric – and investors became the fastest-growing buyer segment. The result was runaway home prices and what the Bank of Canada called a “deteriorating quality” of new mortgages. To shore up bank underwriting and harden the financial system foundation, expect regulators to tighten credit. Potential policy changes might include increasing the minimum down payment for investors from 20 per cent to 25 to 35 per cent, reducing the maximum ratio of debt to income, restricting borrowed down payments for non-owner-occupied homes and/or making it harder to get a mortgage on other properties when you have a big unused home equity line of credit.
Rising inventories and slowing mortgage growth
The main reason people have big mortgages is big purchase prices. The reasons for big purchase prices include
- record-low mortgage rates
- record-low housing inventory
- more investor buying (investors account for a quarter of Ontario home sales, Edge Analytics estimates)
- pandemic shifts in buyer preferences
- blind bidding
- surging materials prices
- the inability of single-family home construction to keep up, and so on.
Most or all these catalysts should reverse in 2022, helping housing inventories move closer to, perhaps above, their long-term average. That should slow or even reverse price increases by the second half of the year, particularly if regulators restrict the mortgage market further. And that’s despite record immigration and shortsighted, demand-inducing housing policies such as the federal government’s proposed First-Time Home Buyer Incentive loans.
Pushback against mortgage rate sites
In the past decade, rate comparison websites have transformed mortgage shopping by adding much-needed transparency – which you simply don’t get at a typical bank. But things are changing for the worse. Sites such as market leader Ratehub are no longer comparing third-party mortgage brokers. That’s a problem because these brokers often have Canada’s lowest mortgage rates. Rate-site owners want to ban deep discounters despite the fact such brokers are “reputable” and “continue to offer fantastic service and advice to their customers” (Ratehub’s words).
Why, then, are they shutting out these competitive brokers? It seems the site owners want to direct more leads to their in-house mortgage brokers, which is more profitable. But consumers aren’t stupid. In 2022, I think we’ll see mortgage shoppers push back on websites that don’t show the best deals from competing discount brokers. That could spawn new entrants into the rate comparison space and drive mortgage shoppers toward sites that are fully transparent.
Robert McLister is an interest rate analyst, mortgage planner and contributing writer for The Globe and Mail. You can follow him on Twitter at @RobMcLister.
