BC Housing and Mortgage Insights Newsletter June 21, 2024

This week ~ The Bank of Canada's ongoing concerns, implications of rate cuts on the housing market, and the shift to higher interest rates. Additional highlights include Canada's steady bank capital levels, household debt stability, and the latest trends in real estate and mortgage renewals.
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The Bank of Canada's growing list of worries

The Bank of Canada has been trying to balance slowing the economy enough to control inflation without triggering a recession. Recent data shows their strategy is working, with inflation easing and economic growth resuming. However, the central bank remains cautious about several risks, including mortgage renewals, population growth, and global uncertainties. These factors could still impact the economic recovery, influencing the bank's decisions on future rate cuts.

Bank of Canada officials worry that rate cuts may overheat the housing market

The Bank of Canada cut the benchmark rate from 5.00% to 4.75% in June, but its top decision-makers expressed concerns about overheating the housing market. They believe inflation is progressing toward the 2% target, but further cuts depend on future data. Risks include increased housing demand, mortgage renewal impacts, and consumer spending shifts. A modest recession could lower the rate to 2.25% by 2026, but strong labor markets or quick housing rebounds might delay or reverse easing. The next rate decision is set for July 24.

Borrowers must adapt to ‘new normal’ of higher rates, says Macklem

Interest rates may be easing globally, but they won't return to pandemic levels, warns Bank of Canada Governor Tiff Macklem. Speaking in Montreal, Macklem emphasized the need for borrowers to adjust to this "new normal." He also acknowledged policy errors during the pandemic and stressed the importance of maintaining public trust. As rates stabilize, Canadians should prepare for a different financial landscape.

Meanwhile, Canadian household net worth rose in Q1, driven by gains in equity and real estate markets. National Bank plans to acquire Canadian Western Bank in a $5 billion deal, expanding its reach in Western Canada.

Canada holds bank capital levels steady, says household debt risk is stable

Canada's financial regulator has kept capital requirements for the largest banks unchanged, signaling confidence in their ability to handle economic challenges. The Office of the Superintendent of Financial Institutions (OSFI) maintained the domestic stability buffer at 3.5%, following increases in December 2022 and June 2023. This buffer ensures banks can absorb losses during downturns. Despite concerns about future mortgage renewals, commercial real estate, and geopolitical conflicts, OSFI believes near-term risks are low. While financial stress is rising due to higher interest rates, the Bank of Canada's recent rate cut offers some relief.

Would-be homebuyers are still staying on the sidelines in Canada. Here's why

New data from the Canadian Real Estate Association (CREA) reveals a 5.9% drop in home sales in May compared to last year. Higher interest rates are expected to limit sales volumes and pressure housing prices. Economist David Macdonald notes that many Canadians haven't yet renewed their mortgages at higher rates, which continues to suppress market activity. While housing starts rose by 10% in May, high rates are impacting new construction, especially for single-family homes. Despite potential future rate cuts, significant price increases are unlikely as borrowing costs remain high.