Welcome to Mortgage Rundown, a quick take on Canada’s home financing landscape from mortgage strategist Robert McLister.
Canada’s economy will get ugly in 2023. Runaway inflation always has an unhappy ending.
That’s the bad news.
The good news is that ugly doesn’t last. Our central bank will likely be forced to reverse course and cut rates within 12 to 18 months, if history and market expectations are a guide.
Now, if only market outlooks were that easy.
The truth is, neither I, nor economists, nor the Bank of Canada can foresee the unforeseeable. Wildcards in the mortgage market are guaranteed in any year, let alone a year where potential for another inflation scare, COVID resurgence, energy price spikes and nuclear cold war loom overhead.
That said, here’s what yours truly feels can be predicted for 2023′s mortgage market with some degree of confidence.
McLister: This week’s lowest fixed and variable mortgage rates in Canada
1) Variable mortgages will make a comeback
A record number of mortgage shoppers were choosing variable rates in the months surrounding this year’s first rate hike. That’s thanks partly to poor advice, alluring rates, initially low variable-rate payments, a central bank that led people into thinking rates would stay low until 2023, and a variable-rate bias in the government’s mortgage stress test.
Now, with rates going orbital, the share of new mortgages that are variable has been cut in half. If forward rates in the bond market are correct, however, the Bank of Canada will signal rate cuts by year-end 2023. Once that happens, floating rates should start to regain appeal as people aim to ride borrowing costs down.
2) Home prices will bottom
According to Nanos, more Canadians expect home prices to fall than rise in 2023. They may be right because the full brunt of rate hikes has yet to be felt. As high interest rates weigh on affordability and unemployment, and mortgage defaults climb, the national average home price could take another leg down.
Most likely, however, the majority of those who need to sell for financial reasons will have done so by the end of 2023. That, plus record immigration, rising wages, chronic housing undersupply, rising rents and talk of rate cuts should put a bottom in the national average home price before year-end.
3) Demand for non-federally regulated lending will soar
Thanks to an oppressively difficult mortgage stress test, falling home values and overleveraged consumers, a record percentage of mortgage applicants could be declined for mainstream mortgages in 2023. That’ll leave only private lenders, mortgage investment corporations and other non-federally regulated subprime lenders as options for many people. The rate premium that these lenders of last resort will charge in 2023 will make people’s eyes water, but borrowers will nonetheless pay the piper to avoid defaulting on debt and losing their homes.
4) More bifurcated mortgage competition
As mortgage default risk climbs in 2023, lenders will continue favouring liquid government-backed mortgage securitization. Online mortgage discounters such as QuestMortgage, Nesto, Ratehub, Butler Mortgage, Neo, Pine and True North will leverage such funding to continue their cutthroat competition, accelerating the race to the bottom on insured mortgage rates.
Meanwhile, our six mega banks – which have a near stranglehold on uninsured mortgage rates owing to their dominant funding cost advantage – will happily maintain fatter profit margins on uninsured mortgages.
Worse yet, Royal Bank of Canada’s RY-T takeover of HSBC Canada will likely be approved by the feds. That would only weaken uninsured mortgage competition as HSBC is Canada’s most competitive uninsured lender.
The net effect is that the difference between insured and uninsured rates will widen even further in 2023.
5) Regulatory credit tightening
Canada’s banking regulator plans to review federal mortgage underwriting guidelines in early 2023. That typically leads to new mortgage restrictions.
Moreover, on Feb. 1, Basel III banking rules will significantly increase lender capital requirements on mortgages where, according to the Office of the Superintendent of Financial Institutions, “over 50 per cent of the income used to qualify for the mortgage comes from [rental] income generated by the property.”
Capital requirements for privately insured mortgages – meaning mortgages not insured by the Canada Mortgage and Housing Corp. – will also be increasing. It remains to be seen how much of that cost increase will be passed through to consumers. Like so many other regulatory changes that affect funding costs, mortgagors will pay more without even realizing it.
Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
