Central Banks Feeling The Pressure To Cut Rates

The Vancouver Life Real Estate Podcast

The Bank of Canada (BoC) has recently undergone a significant shift in its monetary policy focus. Over the past two years, the central bank aggressively hiked interest rates to combat soaring inflation. These efforts have largely paid off, as inflation has been brought under control. However, this success has come at a cost—economic growth has been throttled, leading to rising unemployment and a surge in business insolvencies. Recognizing the need to pivot, the BoC is now shifting its priorities from solely fighting inflation to supporting economic recovery. The forecast for interest rates is now tilted towards cuts, with expectations of a pronounced decrease over the next two years. Mortgage rates are also anticipated to decline in tandem, offering some relief to homeowners renewing their mortgages during this period.
As the BoC prepares to cut rates, it's essential to understand the implications for the mortgage market and the broader economy. The conversation has moved from concerns about inflation to worries about economic stability. Despite two years of rate hikes, the mortgage arrears rate has seen only a modest increase, from a low of 0.14% to 0.19% in May. Historically, arrears tend to rise after interest rate cuts begin, and this pattern is likely to repeat as the economy grapples with higher unemployment. However, even if arrears rates double, they would still be within long-term averages. The close correlation between unemployment and arrears suggests that as unemployment rises, so will arrears, though it may take a year or more before rate cuts start to reverse this trend.
The broader economic landscape is also undergoing shifts. Canada's population growth remains strong, driven largely by non-permanent residents, who account for the majority of the increase. In the second quarter of 2024, the country saw a record 1.2 million year-over-year population growth, slightly higher than the first quarter. However, there's growing debate about whether this level of immigration is sustainable, with some arguing that the current rate is too high. Immigration has now become a more pressing issue in Canada than even climate change, with half of Canadians believing that the country is accepting too many newcomers. The government has set a mandate to reduce the number of non-permanent residents, but achieving this goal may prove challenging.
In the mortgage market, originations are on the rise, surpassing levels seen from 2016 to 2019. Three and four-year fixed-rate mortgages remain the most popular choice among borrowers. Most mortgage renewals will take place in 2025 and 2026, at a time when the overnight rate is expected to be around 3%, a manageable level for those who took out mortgages when rates were near 0.25%. National housing inventory, while up from its 2021 low of 90,000, remains below long-term averages, with no signs of a dramatic increase in listings. Alberta and Saskatchewan are the only provinces where inventory is trending down, while others are seeing a gradual rise. As we move into the fall market, with rate cuts on the horizon and stable conditions, a balanced housing market is expected to continue for the remainder of 2024.
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