Last year, one factor drove the real estate market more than any other: rising mortgage rates.

In March 2022, the Bank of Canada began a series of interest rate hikes in an effort to pump the brakes on inflation.¹ And while some market sectors have been slow to respond, the housing market has reacted accordingly.

Both demand and home prices have softened, as the primary challenge for buyers has shifted from availability to affordability. And although this higher-mortgage rate environment has been a painful adjustment for many Canadians, it should ultimately lead to a more stable and sustainable real estate market.

So what can we expect in 2023? Will mortgage rates continue to climb? Could home prices come crashing down? While no one can forecast the future with certainty, here’s what several industry experts predict will happen to the Canadian housing market in the coming year.

MORTGAGE RATES WILL EVENTUALLY STOP CLIMBING

Over the course of 2022, we saw the benchmark rate rise at a record pace—a whopping 400 basis points in just nine months. Fortunately, there are signs that the central bank’s series of rate hikes may be coming to an end.²

After last month’s half-point rate increase, Bank of Canada officials struck a noncommittal tone about future rate hikes, prompting economists to speculate that the central bank may pause hiking rates by early spring, if not sooner.³

According to Stephen Brown, a senior economist at Capital Economics, the central bank is likely to hike rates at least one more time before it shifts gears. “We would not rule out a final 25 basis point interest rate hike in January,” said Brown in a client note. “But the Bank is very close to the end of its tightening cycle.”³

What impact will this have on mortgage rates? Variable mortgage rates could finally stabilize. However, buyers hoping for a big drop later in the year may be disappointed. Although some market analysts are betting on lower rates, CIBC economist Benjamin Tal thinks that’s unlikely as long as inflation remains a factor. “I think that the Bank of Canada is determined to make sure that they will not touch interest rates in terms of cutting them before inflation is totally dead,” said Tal in an interview with Canadian Mortgage Professional.⁴

Fixed mortgage rates, on the other hand, could continue to trend lower as bond yields crumble.⁵ James Laird, co-CEO of Ratehub.ca, predicts that Bank of Canada’s benchmark rate will hold steady through 2023, but fixed mortgage rates may tick down because of bonds. “Bond yields will decrease throughout the year, allowing fixed rates to follow suit,” said Laird in an interview with Canadian Mortgage Professional.⁶ However, those rate decreases may be fairly muted as long as banks’ borrowing costs stay higher overall. 

It’s also possible that rates on both variable and fixed-rate mortgages will climb instead. Bank of Canada Governor Tiff Macklem has made clear that the central bank is prepared to keep hiking rates aggressively if inflation fails to dissipate. “If high inflation sticks, much higher interest rates will be required to restore price stability,” said Macklem in a recent speech to business leaders.⁷

What does it mean for you?  While no one can predict the future of mortgage rates with certainty, an end to interest rate hikes could bring some much-needed relief for borrowers. If you have plans to buy a home or renew your mortgage in the coming year, you’ll want to weigh your options carefully when deciding between a variable or fixed rate. Reach out for a referral to a mortgage professional who can help. 

BUYERS WILL RETURN TO THE MARKET

The pace of home sales fell steeply last year as higher mortgage rates priced would-be buyers out of the market. However, some industry experts predict that the Canadian housing market is poised to turn a corner.

Although many buyers and sellers are currently in a stalemate over housing prices, market dynamics may shift this spring as more homes go up for sale.

“Zooming in on demand and supply conditions, the drop in unit sales has been the steepest on record, but the pace of the decline is starting to slow,” write CIBC economists, Benjamin Tal and Katherine Judge, in a recent forecast.⁸ Douglas Porter, chief economist at BMO Capital Markets, projects that existing home sales will fall through the first half of 2023 and then reverse course and begin to rise in Q3.⁹

Victor Tran, mortgage expert at Ratesdotca, also speculates that a stabilization in mortgage rates will bring home buyers back out. He told the Financial Post in a December interview: “We may be seeing the bottom of the housing market trough before buyers begin to enter the market in spring of 2023.”¹⁰

Buyers’ purchasing power will still be constrained by higher mortgage rates, though, as well as by a stringent mortgage stress test for uninsured mortgages and a hefty monthly payment for insured ones. So a buyer’s ability to participate in the market will depend, in part, on a seller’s willingness to negotiate. 

What does it mean for you?  If you’re a buyer who has been waiting for conditions to normalize, now may be an ideal time to start your home search. As more buyers begin to enter the market, you’ll face steeper competition and reduced negotiating power.

And if you’ve delayed selling your home, this could be the year to make a move. Reach out to schedule a free consultation and home value assessment.

HOME PRICES WILL STABILIZE LATER THIS YEAR

Canadian home prices have fallen roughly 10% from their peak, and analysts expect they could fall further before moderating in the second half of this year.¹¹

A Reuters poll of industry experts found a wide range of predictions. But on average, the analysts surveyed project that home prices could fall another 7.5% or so. However, the majority report that the risk of a market crash is low.¹¹

A nationwide housing shortage is expected to prop up prices even as sales volume falls. According to Robert Kavcic, senior economist at BMO Capital Markets, “We have a unique situation where demand has cracked and buyers can’t qualify for, or afford, early-year prices. But, outside some areas, there’s not a bounty of listings to choose from, and sellers are still able to say ‘no thanks.’”¹¹

Economists at CIBC speculate that home prices will hit a floor in the coming months: “A lower 5-year rate and pent-up demand amplified by demographics will work to establish a bottom in prices by the spring of 2023,” write Benjamin Tal and Katherine Judge.⁸

RBC Assistant Chief Economist Robert Hogue offers a similar projection: “We expect prices will keep falling until a bottom [this] spring. Our forecast calls for the national benchmark price to drop 14% from (quarterly) peak to trough.”¹²

What does it mean for you?  It can feel scary to buy a home when there’s uncertainty in the market. However, real estate is a long-term investment that has been shown to appreciate over time. And keep in mind that the best bargains are often found in a slower market, like the one we’re experiencing right now. Contact us to discuss your goals and budget. We can help you make an informed decision about the right time to buy.

And if you’re planning to sell this year, you’ll want to chart your path carefully to maximize your profits. Contact us for recommendations and to find out your home’s market value. 

RENT PRICES WILL CONTINUE TO CLIMB

While home prices have fallen, rent prices have surged—rising around 12% year-over-year, according to data from Rentals.ca.¹³

The average monthly cost to rent a home in Canada is now higher than ever and some analysts are growing increasingly concerned that renters won’t be able to keep up with the higher payments. “We’re getting close to a point where rents are just simply becoming unaffordable for renters,” said Urbanation president, Shaun Hildebrand, to CBC News.¹⁴

But that’s not stopping landlords from collecting higher rents. In 2023, affordability challenges for would-be buyers, inflationary pressures, and an overall lack of housing are expected to continue driving up rent prices in much of the country.

“Interest rates are actually working to elevate rent inflation because many people are not buying, so they are renting more,” CIBC Economist Benjamin Tal told CBC News.¹³

And according to Tal, the higher rates have also disincentivized builders and developers from investing in rental properties. That, in turn, has exacerbated the undersupply of available units.¹³

It’s possible rent prices could ease if Canada’s economy deteriorates, says Urbanation’s Hildebrand. “But over the medium and longer term with aggressive immigration targets and rental construction that’s been stalling recently due to high costs, it’s pretty clear that rents are going to continue to rise higher.”¹⁴

What does it mean for you?  Rent prices are expected to keep climbing. But you can lock in a set mortgage payment and build long-term wealth by putting that money toward a home purchase instead. Reach out for a free consultation to discuss your options.

WE’RE HERE TO GUIDE YOU

While national real estate forecasts can provide a “big picture” outlook, real estate is local. And as local market experts, we can guide you through the ins and outs of our market and the issues most likely to impact sales and drive home values in your particular neighbourhood.

If you’re considering buying or selling a home in 2023, contact us now to schedule a free consultation. We’ll work with you to develop an action plan to meet your real estate goals this year.

The above references an opinion and is for informational purposes only.  It is not intended to be financial, legal, or tax advice. Consult the appropriate professionals for advice regarding your individual needs.

Sources:

1. CP24 News –
   https://www.cp24.com/news/the-bank-of-canada-has-raised-rates-again-here-s-a-timeline-of-how-we-got-here-1.6125268#
2. Reuters –
   https://www.reuters.com/markets/bank-canada-set-hike-rates-may-signal-it-is-near-end-tightening-cycle-2022-12-07/
3. CBC –
   https://www.cbc.ca/news/business/bank-of-canada-1.6677004
4. Canadian Mortgage Professional – https://www.mpamag.com/ca/mortgage-industry/market-updates/bank-of-canada-could-be-done-on-hikes-for-now-cibcs-tal/430005
5. Reuters – https://www.reuters.com/business/finance/bank-canadas-inflation-fight-made-harder-bond-yields-fall-2022-12-15/
6. Canadian Mortgage Professional – https://www.mpamag.com/ca/news/general/whats-the-bank-of-canada-rate-likely-to-be-in-2023/430755
7. Global News –
   https://globalnews.ca/news/9341825/bank-of-canada-tiff-macklem-speech-dec-12/
8. CIBC Capital Markets –
   https://economics.cibccm.com/cds?id=6f402711-69b3-46a5-afc8-91ede34fe1fd&flag=E
9. BMO Capital Markets –
   https://economics.bmo.com/media/filer_public/04/01/040155ce-0cb2-49ac-b63e-def8e66d4c05/outlookcanada.pdf
10. Financial Post –
    https://financialpost.com/real-estate/mortgage-rates-soar-higher-interest-rate-increase
11. Financial Post –
    https://financialpost.com/real-estate/canada-house-prices-to-tumble
12. RBC Special Housing Reports –
    https://thoughtleadership.rbc.com/quiet-fall-housing-market-across-canada/
13. CBC News –
    https://www.cbc.ca/news/business/rent-inflation-november-1.6650777
14. CBC News –
    https://www.cbc.ca/news/canada/toronto/rental-costs-canada-1.6685602

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Interest rates have risen rapidly this year, triggered by the Bank of Canada’s efforts to curb inflation. And the July MNP Consumer Debt Index found that 59% of Canadians “are already feeling the effects of interest rate increases.”1

Why has the impact been so widespread? In part, due to the rising popularity of variable rate mortgages. According to the Canada Mortgage and Housing Corporation, in the latter half of last year, the majority of mortgage borrowers opted for a variable over a fixed interest rate.2

Variable mortgages are typically pegged to the lender’s prime rate, which means they are immediately affected by rising interest rates. Homeowners with fixed mortgages aren’t impacted as quickly because their interest rate is locked in, but they will face higher rates, as well, when their mortgages are up for renewal. And many homebuyers are finding it increasingly difficult to afford or even qualify for a mortgage at today’s elevated rates.

Fortunately, there are steps you can take to strengthen your position if you have plans to buy a home or renew an existing mortgage. Try these eight strategies to help secure the best available rate:

1. Raise your credit score.

Borrowers with higher credit scores are viewed as “less risky” to lenders, so they are offered lower interest rates. A “good” credit score typically starts at 660 and can move up into the 800s.3 If you don’t know your score, you can access it online from Canada’s two primary credit bureaus, Equifax and Transunion.4

Then, if your credit score is low, you can take steps to improve it, including:5

● Correct any errors on your credit reports, which can bring down your score. You can request free copies of your reports through the Equifax and Transunion websites.
● Pay down revolving debt. This includes credit card balances and home equity lines of credit.
● Avoid closing old credit card accounts in good standing. It could lower your score by shortening your credit history and shrinking your total available credit.
● Make all future payments on time. Payment history is a primary factor in determining your credit score, so make it a priority.
● Limit your credit applications to avoid having your score dinged by too many inquiries. If you’re shopping around for a car loan or mortgage, minimize the impact by limiting your applications to a two-week period.

Over time, you should start to see your credit score climb — which will help you qualify for a lower mortgage rate.

2. Keep steady employment.

If you are preparing to purchase a home, it might not be the best time to make a major career change. Unfortunately, frequent job moves or gaps in your résumé could hurt your borrower eligibility.

When you apply for a new mortgage, lenders will typically review your employment and income history and look for evidence that you’ve been financially stable for at least two years.6 If you’ve earned a steady paycheck, you could qualify for a better interest rate. A stable employment history gives lenders more confidence in your ability to repay the loan.

That doesn’t mean a job change will automatically disqualify you from purchasing a home. But certain moves, like switching from corporate employment to freelance or self-employment status, could force you to delay your purchase, since lenders will want to see proof of steady, long-term earnings.6

3. Lower your debt service ratios.

Even with a high credit score and a great job, lenders will be concerned if your debt payments are consuming too much of your income. That’s where your debt service ratios will come into play.

There are two types of debt service ratios:7

1. Gross debt service (GDS) — What percentage of your gross monthly income will go towards covering housing expenses (mortgage, property taxes, utilities, and 50% of condo maintenance fees)?
2. Total debt service (TDS) — What percentage of your gross monthly income will go towards covering ALL debt obligations (housing expenses, credit cards, student loans, and other debt)?

What’s considered a good debt service ratio? Lenders typically want to see a GDS ratio that’s no higher than 32% and a TDS ratio that’s 40% or less.7

Low debt service ratios will also help you pass a mortgage stress test, which is required by all Canadian banks and some other types of lenders. The stress test is designed to help ensure you can continue to afford your mortgage payments even if interest rates rise. You can use the government of Canada’s Mortgage Qualifier Tool to calculate how much you can afford to borrow.

If your debt service ratios are too high, or you can’t pass a mortgage stress test, you may need to consider purchasing a less expensive home, increasing your down payment, or paying down your existing debt. A bump in your monthly income will also help.

4. Increase your down payment.

Minimum down payment requirements vary by loan size and property type. But, in some cases, you can qualify for a lower mortgage rate if you make a larger down payment.

Why do lenders care about your down payment size? Because borrowers with significant equity in their homes are less likely to default on their mortgages. That’s why you will be required to purchase mortgage default insurance if you put down less than 20%.8

It’s important to note that some lenders offer discount rates for borrowers who put down less than 20% – because the required default insurance protects them from any potential loss. However, the cost of CMHC or private mortgage default insurance will typically exceed any interest savings. You’ll also have to pay interest on that insurance if you add it to your mortgage.9 The bottom line: you’ll save money in borrowing costs if you can afford a larger down payment.

Fortunately, there are a couple of government-initiated resources designed to help eligible first-time home buyers with a down payment, including:9

● Home Buyers’ Plan (HBP) – Buyers may withdraw up to $35,000 (tax-free) from their Registered Retirement Savings Plan(RRSP). The money must be used to build or purchase a qualifying home and repaid to the RRSP within 15 years.
● First-Time Home Buyer Incentive – Buyers can take advantage of a shared-equity mortgage with the Government of Canada. Essentially, the Government will put 5% or 10% towards your down payment, interest-free, in exchange for a limited equity share of your property. The repayment is due in 25 years or when you sell your home.

We’d be happy to discuss these and other programs, tax rebates, and incentives that might help you increase your down payment.

5. Weigh interest rate options.

All mortgages are not created equal, and some may be a better fit than others, depending on your priorities and risk tolerance. For starters, there are several interest rate options to choose from:10

● Fixed — You’re guaranteed to keep the same interest rate for the entire length of the loan. Many buyers prefer a fixed rate because it offers them predictability and stability. However, you’ll pay a premium for it, as these mortgages typically have a higher interest rate to start. And if rates fall, you’ll be locked into that higher rate.
● Variable — Your interest rate will rise or fall along with your lender’s prime rate. You can choose either an adjustable or a fixed monthly payment. However, if you opt for a fixed payment, the amount that goes towards principal and interest each month will fluctuate depending on the current rate. Variable-rate mortgages typically offer lower interest rates to start but run the risk of increasing.
● Hybrid – Can’t decide between a fixed or variable rate? Hybrid mortgages attempt to address that dilemma. A portion of the mortgage will have a fixed rate and the remainder will have a variable rate. The fixed gives you some protection if rates go up, while the variable offers some benefit if rates fall.

What’s the best choice if you’re looking for the lowest mortgage rate? The answer is…it depends. If mortgage rates don’t rise much higher, or drop back down in a couple of years, you could win by opting for a variable rate. However, if they continue to climb, you may be better off with a fixed rate.

Keep in mind that the spread between variable and fixed rates has narrowed as rates rise.11 However, it’s still easier to meet the stress-test requirements for a variable mortgage, since the threshold is lower.12 So, your choice may be limited by your ability to qualify.

6. Compare loan terms.

A mortgage term is the length of time your mortgage agreement is in effect. At the end of the term, a mortgage holder will need to either pay off their mortgage or renew for another term.

There are three major types of mortgage terms:13

● Shorter-term – These can range from 6 months to 5 years, and they are the most popular type in Canada. Borrowers can choose between a fixed or variable interest rate.
● Longer-term – These are longer than 5 years but generally no more than 10 years in length. Longer-term mortgages are more likely to feature fixed-interest rates and hefty prepayment penalties.
● Convertible – Offers the option to extend a shorter-term mortgage to a longer-term mortgage, typically at a different interest rate.

Which loan term offers the lowest rate? A shorter-term mortgage will typically feature a lower interest rate than a longer-term mortgage. However, the rate on a 1-year or a 3-year mortgage could be higher or lower than a 5-year mortgage depending on the current economic climate and whether it’s fixed or variable.

Many lenders offer especially attractive rates for 5-year mortgages due to their popularity.14 But to find the best rate, you’ll need to compare your options at the time of purchase or renewal.

7. Get quotes from multiple lenders.

When shopping for a mortgage, be sure to solicit quotes from several different lenders and lender types to compare the interest rates and fees. Depending upon your situation, you could find that one institution offers a better deal for the type of loan and term length you want.

Ideally, you should begin this process before you start looking for a home. If you get preapproved for a mortgage, in most cases, you can lock in the mortgage rate for 90 to 120 days. This is especially important when interest rates are rising.15

Some borrowers choose to work with a mortgage broker. Like an insurance broker, they can help you gather quotes and find the best rate. They’re paid a commission by the lender, so it won’t cost you anything out of pocket to use a broker. However, make sure you find out which lenders they work with and contact more than one so you can compare their recommendations.16

Don’t forget that we can be a valuable resource in finding a lender, especially if you are new to the home buying process. After a consultation, we can discuss your financing needs and connect you with loan officers or brokers best suited for your situation.

8. Ask for a discount.

When shopping for a mortgage, don’t be afraid to negotiate. In Canada, it’s commonplace for lenders to discount their advertised interest rates, which are called posted rates. And in many cases, all you have to do is ask. Of course, the strength of your application will come into play here – so don’t neglect strategies 1 through 4 above.17

Keep in mind that interest rates aren’t the only thing on the table. You can negotiate other contract terms, as well, like prepayment options and rebates. And if you get a great offer from one lender, you can leverage it by asking your preferred institution to match or beat it.17

Getting Started

Unfortunately, the rock-bottom mortgage rates we saw during the height of the pandemic are behind us. However, today’s 5-year fixed rates still fall beneath the historical average — and are well below the all-time peak of 20.75% in 1981.18

And although higher mortgage rates have made it more expensive to finance a home purchase, they have also ushered in a more balanced market. Consequently, today’s buyers are finding more homes to choose from, a better value for their investment, and sellers who are willing to negotiate.

If you have questions or would like more information about buying or selling a home, reach out to schedule a free consultation. We’d love to help you weigh your options, navigate this shifting market, and reach your real estate goals!

Sources:

1. MNP Consumer Debt Index –
https://mnpdebt.ca/en/resources/mnp-consumer-debt-index
2. Global News –

Variable mortgages have surged in popularity. Are they still the cheaper choice?

3. Loans Canada –

Minimum Credit Score Required For Mortgage Approval in 2022

4. Government of Canada –
https://www.canada.ca/en/financial-consumer-agency/services/credit-reports-score/order-credit-report.html
5. Government of Canada – https://www.canada.ca/en/financial-consumer-agency/services/credit-reports-score/improve-credit-score.html
6. RATESDOTCA –
https://rates.ca/resources/how-long-at-job-before-applying-mortgage
7. NerdWallet –

What Are Debt Service Ratios?

8. Royal Bank of Canada –
https://www.rbcroyalbank.com/mortgages/mortgage-default-insurance.html
9. Government of Canada – https://www.canada.ca/en/financial-consumer-agency/services/mortgages/down-payment.html#toc2
10. Government of Canada –
https://www.canada.ca/en/financial-consumer-agency/services/mortgages/choose-mortgage.html
11. Canada Mortgage Professional –
https://www.mpamag.com/ca/mortgage-industry/industry-trends/what-do-falling-bond-yields-mean-for-fixed-rates/416463
12. The Globe and Mail –
https://www.theglobeandmail.com/business/article-the-best-mortgage-strategies-for-a-rising-interest-rate-environment/
13. Government of Canada –
https://www.canada.ca/en/financial-consumer-agency/services/mortgages/mortgage-terms-amortization.html
14. WOWA.ca –
https://wowa.ca/mortgage-rates
15. NerdWallet –

What to Know About Mortgage Pre-Approval

16. Government of Canada -https://www.canada.ca/en/financial-consumer-agency/services/mortgages/preapproval-qualify-mortgage.html
17. NerdWallet –

8 Expert Tips for Negotiating Your Mortgage

18. RateHub.ca –
https://www.ratehub.ca/5-year-fixed-mortgage-rate-history