For the past couple of years, many feared that the looming “mortgage renewal cliff” would throw a wrench into Canada’s economy, especially after the Bank of Canada’s aggressive interest rate hikes.
But according to a report from RBC, it’s the job market and a rising unemployment rate we should be more worried about.
Concerns over mortgage renewals haven’t materialized as expected
RBC economist Nathan Janzen suggests that while mortgage renewals will be a challenge for some and are likely to “act as a brake” on the economy, they’re not expected to cause a full-blown economic meltdown.
“We made the point as far back as almost a year ago that 2025’s mortgage renewal wave would be manageable,” Janzen explained, adding that two key conditions need to be met for this to happen: rate cuts from the Bank of Canada and a stable job market.
“That first condition has clearly been met, but we are more concerned about the second as a slew of labour market data continues to weaken,” he added. “Higher mortgage payments certainly hurt the total amount of income available in the economy to spend, but higher unemployment does as well.”
As of September, the national unemployment rate was 6.5%, a slight drop from 6.6% in August, which marked its highest point since 2017. It’s been gradually climbing from a low of 5% in early 2023.
Many of the country’s largest metro areas have seen more drastic increases, with unemployment rates at 8% or more in Toronto (8%), Edmonton (8.6%) and Windsor (9.2%).
A 1% rise in unemployment typically reduces household disposable income by 0.5%. RBC predicts Canada’s unemployment rate will increase gradually to 7% by early 2025. Oxford Economics, meanwhile, sees the unemployment rate peaking at 7.3% by late 2024 or early 2025.
“That’s a significant increase and more than a percentage point above pre-pandemic levels,” Janzen notes. “But, we’re watching for deterioration that might extend beyond that.”
He adds that job openings have dropped by 25% compared to last year, and if this trend continues, it could further exacerbate unemployment, pushing rates beyond current forecasts.
“The unemployment rate is now above pre-pandemic levels, and the job vacancy rate is lower,” Janzen added. “Any further drop in hiring demand raises the risk of the unemployment rate rising more.
Mortgage renewal risk is easing
The Bank of Canada’s recent rate cuts—75 basis points (0.75%) so far, and more on the way—have brought much-needed relief, with many already benefiting from reduced payments or more principal contributions.
Meanwhile, lenders have been cutting fixed mortgage rates throughout the summer, driven by falling bond yields. Together, these shifts are giving borrowers more breathing room as many approach their mortgage renewals .
“Five-year government bond yields, which drive the 5-year fixed mortgage rates, have correspondingly dropped and 2-year Canadian government bond yields, the main driver of changes in borrowing costs in one to 3-year mortgages, are below levels from two years ago,” Janzen notes.
Many one to three-year mortgages are set to renew at lower rates, while variable-rate mortgage holders are already seeing relief through reduced payments or increased principal contributions. However, payments for four and five-year fixed-rate mortgages are still expected to rise significantly as current rates remain higher than in previous years,
“Those challenges, particularly for some individual households, shouldn’t be dismissed,” Janzen acknowledges. “But, the increase will be smaller than it would have been without BoC interest rate cuts, and will increase total mortgage payments in 2025 by about 0.1% of total household disposable income, by our count.”
Additionally, Janzen says high home prices and significant homeowner equity provide borrowers with more flexibility, such as the option to refinance with longer amortization periods to lower monthly payments if necessary.
Visited 30 times, 12 visit(s) today
employment figures job market mortgage renewals Nathan Janzen rbc RBC reports renewals unemployment unemployment rate
Last modified: October 17, 2024