Two key guide posts for the Canadian economy are pointing in the same direction.  Both the third quarter GDP numbers and November jobs figures suggest the Bank of Canada is unlikely to make any changes to its trendsetting interest rate in the coming days.

Canada’s economy shrank at an annualized rate of 1.1% through July, August and September.  That was a bigger decline than expected.  Market watchers had been looking for a modest 0.2% increase.  The Bank of Canada had forecast a 0.8% gain.  The country avoided falling into a technical recession though, because the Q2 reading was revised upwards to a 1.4% gain.  It had initially been posted as a 0.2% decline.  Nonetheless the economy has been on a slowing trend for several months.

The economy added more jobs than expected in November, but the unemployment rate went up.  There were nearly 25,000 jobs added, beating the forecast of 15,000.  However, that did not keep up with the country’s population growth.  Unemployment rose to 5.8%, from 5.7% in October, because there are more people looking for work.

These are the last two major economic data points before the Bank of Canada makes its December rate announcement this week.  When combined with the latest inflation numbers (up 3.1% y/y in October) the Bank appears to have all the reasons it needs to hold its policy rate at 5.0%.  That rate has not moved since July and the market focus has now shifted away from further increases and toward when there could be cuts.

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Like most other financial institutions, BMO said the bulk of its mortgage portfolio will be up for renewal in the coming three years, with the payment increases averaging up to 40%.

In its fourth-quarter earnings call, the bank said just 11% of its portfolio—or $16.2 billion worth—will renew in the next 12 months. The majority is then set to renew in 2025 ($27.6 billion) and 2026 ($55.8 billion).

Of its clients who have already renewed their mortgages, BMO said the average increase to their regular payments has been 21% for fixed-rate borrowers and 22% for those with variable-rate mortgages. Given that those are averages, some borrowers have seen smaller increases while others have seen their payments rise by more.

And as those who secured rock-bottom rates during the pandemic start to see their rates reset in the coming years, BMO says the payment increases will grow larger.

“We do see people having to face a 30% increase this year,” said Ernie Johannson, Head of BMO North American Personal and Business Banking. “That will get higher as we move into ’26 because—if you assume no rate decrease—there would be customers who would potentially be facing 35% or 40%, at that tail end.”

Despite the increases, BMO says borrowers have so far been able to handle the higher rates.

“We’ve seen an ability for consumers to adjust and be able to afford the increased payment,” Johannson added, noting that they were stress tested at a higher rate at origination and that many are also seeing an increase in income that is helping to offset the higher payments. “We feel pretty confident that there is an…ability to be able to handle that increase.”

Rate cuts could also lessen the payment shock for renewals taking place in 2026, added Chief Risk Officer Piyush Agrawal.

“A larger portion of our portfolio renews in 2026, by which time we expect interest rates will have moderated and customers will have had time to prepare,” he said.

Delinquency rate remains low, and clients still have payment buffers

BMO reported that its 90+ day mortgage delinquency rate remains low at just 0.14% of its portfolio, unchanged from the previous quarter and up from 0.11% a year ago.

Of its variable-rate mortgage portfolio, the bank said about 62%, or $29.8 billion worth, are currently negatively amortizing, meaning the monthly payments aren’t enough to cover the total interest cost, which is being added to the principal balance.

This is a situation unique to fixed-payment variable rate mortgage products, which are offered by BMO, CIBC and TD. While RBC also offers fixed-payment variable rate mortgages, it does not allow its mortgages to amortize negatively.

“We are proactively reaching out to customers, particularly our variable-rate customers,” said Agrawal. “We’ve had a positive customer response to the outreach, resulting in a reduction in mortgages in negative amortization from the prior quarter.”

Agrawal also said the bank’s analytical insights show clients are changing their behaviour and are “adjusting to the new reality” of higher interest rates. That includes a decline in credit card spending, particularly for discretionary items.

He also pointed to a still strong savings rate of 5%, with increased amounts going into investments. “So, there are buffer mechanisms,” he noted.

The bank has also seen the percentage of its mortgages with amortizations above 30 years ease back to 27%. That’s down from nearly a third of its portfolio in late 2022.

Remaining amortizations for BMO residential mortgages

BMO earnings highlights

Q4 net income (adjusted): $2.15 billion (+0.1% Y/Y)
Earnings per share (adjusted): $2.81

Conference Call

• BMO reported that its capital position continued to strengthen with a common equity ratio of 12.5%, up 20 basis points from the prior quarter.
• “Given our current outlook for higher for longer rates and the lagged impact from these interest rate increases, we expect impaired loss rates to trend somewhat higher from Q4 levels in the range of low-30 basis points, still below our long-term average and then improve as the rate start to come down and the economy begins to strengthen further,” said Chief Risk Officer Piyush Agrawal.
• “Given our strong risk management capabilities, the quality of our portfolio and prudent allowance coverage, we remain well-positioned to manage current and emerging risks,” Agrawal added.

Source: BMO Q4 conference call

Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.

This article was written for Canadian Mortgage Trends by:

There was growing talk of the “R-word” (recession) leading up to today’s GDP data release, given the third quarter could have marked the second straight month of negative growth.

Instead, markets received another R-word…revision.

While Statistics Canada revealed that real gross domestic product (GDP) fell 0.3% quarter-over-quarter in Q3, it also revised up its previous negative reading for Q2 to positive growth of 0.3%.

This avoided two straight quarters of declining GDP, which many consider the technical definition of a recession.

“Whatever label you slap on this economy, it’s basically not growing, despite the artificial sweetener of rapid population growth,” noted BMO Chief Economist Douglas Porter.

“But reinforcing the point that it doesn’t quite sink to the level of recession, the initial read on monthly GDP for October was a surprisingly perky +0.2%, confounding expectations that activity would shrink in Q4,” he added.

“It’s not a technical recession, but it’s not good either,” wrote TD’s James Orlando.

Economy is weak no matter how you slice it

On an annualized basis, GDP fell less than expected by 1.1% in Q3. That followed an upward revision in Q2 to +1.4% from -0.2% previously.

Housing investment was a positive contributor to growth in the quarter, rising +8% quarter-over-quarter following five straight quarterly declines.

“Still, the details of the Q3 data were soft—GDP would have declined a larger 3% in the quarter without a 7.3% jump in government spending,” noted RBC’s Nathan Janzen.

Meanwhile, international trade was a net negative for growth, with exports of goods and services down 5.1% from the previous quarter, led by a 25.4% drop in refined petroleum energy products.

Imports were also down by 0.6%, led by “declines in clothing, footwear and textile products, transportation services, and electronic and electrical equipment and parts.” Household spending was flat in the quarter, following a similar flat reading in Q2.

GDP figures reinforce a BoC rate hold, but too soon for cuts

Today’s results are expected to keep the Bank of Canada on the sidelines at its net monetary policy meeting next week, and into the new year.

Economists say continued weak growth in the coming quarters should help bring inflation back to (or near) the central bank’s target of 2%.

“Overall, today’s mixed report reinforces the point that the Bank is done hiking rates, but doesn’t really advance the cause for rate cuts, as the economy isn’t showing signs of further deterioration early in Q4,” said Porter.

Others believe continued weak growth will be enough to herald in the central bank’s first rate cuts as early as April of next year.

“We expect below trend economic growth to continue over the coming months, which will push inflation gradually closer to the 2% target,” noted Orlando. “This will give the BoC a few months before it starts to prepare markets for rate cuts, which we expect will start in April 2024.”

CIBC’s Andrew Grantham agreed, saying the “sluggish trend in economic activity and further decline in the job vacancy rate today keeps us on track for a first interest rate cut in Q2 next year.”

This article was written for Canadian Mortgage Trends by:

A key factor in determining whether an individual is likely to become a homeowner is whether or not their parents were property owners, a new study shows.

The adult children of homeowners were more than twice as likely to own a home compared to the children of non-owners, according to findings released by Statistics Canada last week.

The report found that children of non-homeowners had an overall homeownership rate of 8.1% vs. 17.4% for the offspring of owners. The correlation increased in families that owned multiple properties, rising to a homeownership rate of 22% for those whose parents owned two properties and 27.8% for those whose parents owned three or more.

The study, which focused on those born in the 1990s and compared ownership rates as of 2021, found the positive association between the homeownership rate of adult children and their parents was greatest among adult children with individual incomes of $80,000 or less.

“The income of adult children may be correlated to the income and wealth (including property ownership) of their parents, in part because of patterns of childhood socialization, existing social networks and the amounts invested in education, the report notes.

However, even when accounting for the adult children’s age, income and province of residence, parents’ property ownership is “strongly associated with an increased likelihood of homeownership for their adult children,” it added.

MBRCC unveils principles for mortgage product suitability

Mortgage brokers across the country are being asked to follow a set of six principles to ensure they are making suitable product recommendations to their clients.

In an ongoing effort to strengthen mortgage consumer protections, the Mortgage Broker Regulators’ Council of Canada (MBRCC) last week unveiled its final Mortgage Product Suitability Assessment Principles.

“Given high interest rates, elevated inflation and reduced mortgage affordability, many consumers are looking to the mortgage brokering sector for sound advice,” said MBRCC chair Antoinette Leung. “The Principles developed by MBRCC will support the industry’s provision of suitable recommendations to clients, enhancing the protection of Canadian consumers during a period of challenging financial conditions.”

The draft principles were first released over the summer, and the MBRCC since made two amendments following public feedback.

The mortgage product suitability assessment principles include:

1. Know your client
2. Know your product
3. Assess options and make suitable recommendations
4. Clearly communicate and explain rationale of the recommended option
5. Ensure adequate oversight and accountability
6. Document suitability assessment and oversight

More details on the above principles are available at the MBRCC website.

FSRA releases guidance for mortgage administrators

Effective today, mortgage administrators in Ontario must comply with new rules that govern financial reporting.

The new guidance was released by the Financial Services Regulatory Authority of Ontario (FSRA), which regulates and licences all mortgage brokers, agents, brokerages and administrators in the province.

“Mortgage administrators play the crucial role of handling people’s funds and investments, and we want to ensure that borrower and investor funds are protected,” Huston Loke, Executive Vice President, Market Conduct at FSRA, said in a release. “The guidance we are releasing today aims to reduce the risk of funds and investments being misplaced, stolen, or otherwise treated improperly.”

The guidance will help ensure:

• administrators file the required statements and auditor’s reports on time
• the auditor’s report is certified by a licensed public accountant
• the auditor’s Reasonable Assurance report on compliance with legislation is in a form approved by the CEO and addresses all the required areas of compliance

The full text of FSRA’s new guidance is available here.

Pineapple Financial completes IPO on New York Stock Exchange

Pineapple Financial made history recently by becoming the first Canadian mortgage brokers to launch an Initial Public Offer (IPO) on the New York Stock Exchange (NYSE).

Founded in 2016, Pineapple is a tech-focused brokerage with a network of over 650 partner brokers and agents across the country. It said it will use the capital raised from the IPO to fund research and development and expansion into new product offerings and tech infrastructure.

That includes expanding to every province in the country, adding insurance as a new product offering, and developing digital innovation to “increase productivity and efficiency” across all of its channels.

“The decision to go public was driven by our vision to expand market reach, accelerate growth initiatives, and capitalize on new opportunities,” Pineapple CEO and co-founder Shubha Dasgupta said in a release. “With this successful IPO, Pineapple achieved a milestone that reflects its market potential, growth trajectory, and our commitment to excellence.”

This article was written for Canadian Mortgage Trends by:

Canada’s banking regulator recently confirmed it will move ahead with new capital requirements for lenders and insurers with negatively amortizing mortgage portfolios.

Starting in early 2024, the Office of the Superintendent of Financial Institutions (OSFI) will require lenders to hold more capital for negative amortization mortgage balances with loan-to-values (LTVs) above 65%.

• What’s a negative amortization mortgage? Negative amortization can impact borrowers with fixed payment variable-rate mortgages in an environment when prime rate rises significantly, resulting in the borrower’s monthly payments not covering the full interest amount. This causes the mortgage to grow rather than shrink.

“We have updated several of our capital guidelines to promote prudent allocation of capital against risks that lenders and insurers take,” OSFI superintendent Peter Routledge said in a statement.

The changes were first announced by OSFI in July and were subject to a consultation period over the summer. They will primarily impact four of Canada’s big banks that currently offer fixed-payment variable rate mortgages: BMO, CIBC, RBC and TD.

For these banks, variable-rate mortgages comprise about a third of their overall portfolios (32%-39%), with roughly a quarter of those mortgages with extended amortizations beyond 30 years—or some $277 billion as of July, according to data from Fitch Ratings.

Scotiabank and National Bank of Canada, on the other hand, offer adjustable-rate mortgages where the borrower’s monthly payment fluctuates as prime rate changes. As a result, both banks have less than 1% of their variable-rate portfolios with amortizations above 30 years.

The new requirements will also impact Canada’s three mortgage insurers, which insure between 20% and 30% of all mortgages. Also effective in January, the maximum LTV ratio for individual mortgages in the Mortgage Insurer Capital Adequacy Test (MICAT) capital formula will increase from 100% to 105%. This adjustment aligns the MICAT capital formula with the maximum permitted LTV ratio for insured mortgages.

The new guidelines also set a limit of 40 years on the mortgage’s remaining amortization length for the purpose of calculating regulatory capital.

“Given the relatively low prevalence of negative equity mortgages, the overall impact for mortgage insurers is expected to be minimal, resulting in an immaterial decline in the capital ratio,” DBRS Morningstar noted in a report.

“Our expectation is that underwriting profitability will weaken somewhat but be manageable from a credit quality perspective given mortgage insurers’ strong capital buffers and conservative credit underwriting criteria,” the report added.

Impact on banks to be manageable, Fitch says

In its own report, Fitch said the Capital Adequacy Requirements (CAR) for the banks are likely to be “comfortably absorbed.”

The ratings agency said the changes should impact common equity tier 1 (CET1) ratios by only 7 to 22 basis points, “or less than 2% of the average 3Q23 13.5% CET1 capital for the four banks with exposure,” it said. “As of 3Q23, all banks had CET1 ratios comfortably above regulatory minimums.”

OSFI’s reasoning for cracking down on fixed payment variable-rate mortgages

OSFI has repeatedly voiced its concerns about fixed payment variable-rate mortgages, first singling them out in its Annual Risk Outlook for 2023-2024.

Most recently, during testimony before the Standing Senate Committee on Banking, Commerce and the Economy earlier this month, Routledge said increasing mortgage balances associated with negative amortization “increases their vulnerability, and increases the risk of default.”

“The variable rate product with fixed payments is a dangerous product in our view because it puts the homeowner in the position of an extended extended period—not always, but in this environment certainly—it can put the homeowner in the position of paying a flat rate of, say, $2,000 a month, and the interest on their mortgage is $3,000 a month,” Routledge said.

And while Routledge said OSFI’s role is not to “impose a judgment on product design,” he did say OSFI would “like less of that product.”

In response to stakeholder feedback on these new capital requirements that the implementation timeframe is “very tight,” OSFI responded by saying it was important to “address the risk in a timely manner.” As such, the new capital requirements will take effect in fiscal Q1.

This article was written for Canadian Mortgage Trends by:

The average asking rent in Canada has increased by about $175 over the past six months, and is now nearly 10% higher compared to a year ago.

As of October, the average rent price for all unit types reached $2,178, according to data from Rentals.ca‘s latest monthly data. That’s up 1.4% compared to September, but slower than the 1.8% monthly increase seen back in August thanks to seasonable factors.

One-bedroom rent prices were up a whopping 29% year-over-year in Red Deer, Alberta, while Halifax, NS (+20.6%) and Markham, ON (+20%) also saw outsized gains.

The national average rent for two-bedroom units has now surpassed $2,300 a month, up 1.7% from September and +11.7% compared to a year ago. The largest increases were seen in Oakville, ON (+23.5%) and Quebec City, QC (+17.6%).

High rents are contributing to inflation

Average rents in Canada are now up over 31% compared to the low of $1,662 reached in April 2021.

This steep rise means rent prices are now a leading contributor to the country’s headline inflation rate, which the Bank of Canada is desperately trying to bring back to its target rate of 2%.

As of September, rent inflation has shot up to 7.3%, according to data from Statistics Canada—the fastest pace since 1983. It’s now the second leading contributor to overall inflation, after mortgage interest cost, which is up 30.6%.

On a monthly basis, rent inflation from August to September was 0.8%. That means that of the headline CPI inflation reading of 3.8% in September, 0.8% came from rent inflation alone. Another 2.6% came from mortgage interest cost.

“It’s a big issue,” noted analyst Ben Rabidoux of Edge Realty Analytics. He pointed to the more than 700,000 non-permanent residents added to the population over the past 12 months—which includes international students and foreign workers—as a major contributing factor to the upward pressure on rent prices.

In response to housing affordability concerns, the federal government recently announced it plans to level out its targets for new permanent residents coming to Canada. The target for 2024 and 2025 will increase as planned to 485,000 and 500,00, respectively, and hold steady at 500,000 in 2026.

“These immigration levels will help set the pace of Canada’s economic and population growth while moderating its impact on critical systems such as infrastructure and housing,” Immigration Minister Marc Miller said.

Alberta leads the provinces in rent price growth

Rentals.ca reported that Alberta once again posted the fastest year-over-year increase in rent prices, which were up 16.4% in October to $1,686.

Rents were also up sharply in Nova Scotia (+13.6%) and Quebec (13.3%), thanks to both strong population growth and “large infusions of new rental supply priced at above-average market rents,” Rentals.ca noted.

The slowest annual increases were once again seen in Manitoba (+5.5%) and Saskatchewan (+4%).

Calgary and Montreal lead rent growth in Canada’s largest cities

Calgary continued to lead rent price growth in October, with an average year-over-year increase of 14.7% to reach $2,093. Montreal saw the second-fastest pace of growth at 10.8%, with an average price of $2,046.

Here’s a look at the year-over-year rent increases in some of the country’s key markets:

• • Calgary, AB: +14.7% ($2,093)
  • Regina, SK: +13.7% ($1,273)
  • Montreal, QC: +10.8% ($2,046)
  • Ottawa, ON: +10.6% ($2,197)
  • Halifax, NS: +9.5% ($2,017)
  • Winnipeg, MB: +7.4% ($1,521)
  • Vancouver, B.C.: +4.4% ($3,215)
  • Toronto, ON: -0.8% ($2,908)

This article was written for Canadian Mortgage Trends by:

An interesting new survey suggests a growing number of Canadians may be getting ready to move back into the housing market.

The newly launched survey by Dye and Durham indicates one in ten are looking to sell their primary residence and move into a new one within the next 12 months; double the number who made the move in the past year.

The number of respondents planning to expand their holdings is also up significantly with 8.0% saying they intend to buy an investment property or vacation home in the next year.  That is nearly double the 5.0% who did so in the past year.  First-time buying decisions are also getting stronger.  Eight percent of respondents expect to jump into the market, up from 4.0% who actually made a purchase in the last 12 months.

The sidelines of the housing market will still be crowded though.  The survey suggests 23% of Canadians will bide their time until interest rates come down.  Nearly a quarter (24%) say they are waiting for prices to ease.

A separate survey of people who have bought a home in the last 4 years (by a popular real estate marketplace) shows that the buying decisions of 93% of respondents were influenced by rising interest rates and competitive markets.  At the same time 43% said they wanted to buy before prices increased further.

Nearly a third (30%) of the respondents say their finances are tight right now, with 10% saying they are unable to meet basic needs.  Still, they do not regret their purchase with 45% saying they will still be happy even if there is another interest rate increase this year.

This article was written by First National’s marketing team.