As always, there’s no shortage of speculation surrounding the Bank of Canada’s (BoC) impending interest rate decision, which is slated for next week.
In fact, the guesswork started ahead of June’s decision, when a number of economists predicted that July will bring a rate increase, given sticky inflation, robust consumer spending, and the charged-up real estate market.
Since that time, however, inflation has come down in a meaningful way, falling to 3.4%, the lowest level in nearly two years, according to Statistics Canada’s latest Consumer Price Index reading. (And mind you, that reading would be lower if not for mortgage costs, which saw the largest leap on record in May, at nearly 30%.)
As well, major Canadian real estate markets lost some steam in June -- buyers “promptly retreated” in Toronto, Hamilton, Ottawa, and Vancouver, according to a new report from RBC -- which is a clear signal that the Bank's monetary policy is doing what it’s meant to. Confronted with continued rate pain, consumers are starting to shy away from big purchases.
Still, a rate hike is very much on the table. But, as we know from last month’s rate surprise, nothing’s for certain.
Nikola Gradojevic, Professor of Finance at the University of Guelph, calls the outcome of the next rate meeting a "coin toss."
“The Bank of Canada has already shown its readiness to flex its policy muscle in June. Another hike in an already sensitive economic environment for consumers may be too much to bear,” he continues. “I am leaning more towards the bank holding the policy rate in July, given that the inflation rate fell in May, while the total number of consumer and business insolvencies in May increased by 30.1% and 59.1%, respectively, relative to May 2022.”
However, Gradojevic cautions, “There are indications that the GDP numbers for May could come out stronger than expected at 0.4%.” As well, June saw a surge in job gains, with 60,000 jobs added to the Canadian market, which does bode pretty firmly for a hike.
With BoC Governor Tiff Macklem himself hinting at a 25-basis-point increase at the July 12th meeting, there will likely be some degree of fallout in the real estate market.
“Higher interest rates typically translate into higher mortgage rates and this discourages future mortgage applicants and lowers demand for housing,” says Gradojevic. “However, strong GDP growth and low unemployment could partially offset this effect. At its core, the real estate market is determined by interactions between demand and supply, and it appears that the demand in Canada is still high, while the supply is low. To conclude, potential implications on the housing market may not be significant.”
Many Mortgage Borrowers In For A “Pinch”
Victor Tran, mortgage and real estate expert with RATESDOTCA, anticipates that the BoC will opt for a quarter-percent increase on Wednesday.
“Of course, it’s not guaranteed,” he adds. “There's also a possibility that it could be a little bit more of an increase, as high as even 0.5% just to get a little closer to what the US Fed rate is."
For variable-rate mortgage holders or anyone with a home equity line of credit, whether it’s secured or unsecured, a hike of any kind is bad news.
“They will definitely feel the pinch of higher payments. For every $100,000 borrowed, every quarter percent increase equals to about an extra $15 per month,” says Tran. “Fixed rate borrowers will not be impacted -- however, people that are coming up for a mortgage renewal will likely renew into higher rates. I mean, the fixed rates have been on the rise for the past month now, and there was another fixed rate hike [yesterday]. Rates haven't been this high in over 16 years.”
Given the impending rate realities, Tran urges borrowers to shop around before settling on a lender.
“Up until about maybe as last year, the rate difference between, let's say Scotia, RBC, BMO, wasn't a whole lot. We're talking about 0.1%, 0.2%," he says. "But I find now there's a much larger difference -- as much as a quarter percent or even half a percent difference. That can be quite significant in terms of interest savings."
As well, says Tran, Canadians should start shopping around well before it’s time to renew.
“Most people wait last minute. If they have a mortgage renewal coming up on October 1, they won't start shopping around until like a month or two prior to the renewal date -- but rates could be a lot higher by then,” he says. “Lenders will allow you to start shopping around and to lock in a rate as early as four months prior to the maturity date of a mortgage. If you know that you're almost at that four-month window of when your renewal date is, you might as well just start shopping around and lock in a rate. If rates go down, that's great, you can just apply for the lower rate."
Looking ahead, Tran cautions that there could be an uptick in mortgage delinquencies and defaults amongst Canadians -- which is something that’s been observed to some degree already, but “not nearly as much as expected.”
“[Lenders] are offering relief plans or deferring payments, extending amortization to keep the payments a little bit lower -- they're basically just kicking the can down the road," he says. “If lenders stop helping these customers out, then yeah, we're gonna start seeing a huge increase in mortgage delinquencies and mortgage defaults. And sure, we may see many forced sales in the market and an increase in real estate inventory. But again, it really comes down to the lenders."
The next interest rate decision is slated for July 12, 2023. A monetary policy report is also scheduled for release at that time.