The Great Moderation

Steve Saretsky -

Another week, another bump higher in borrowing costs. The Canada 5 year bond yield ripped again, climbing above 3.3%, the highest reading since March 2008. Last time rates were this high bad things happened. As has been the theme of this newsletter for the past month or so, I continue to believe this is a terrible set-up for housing. Highly levered housing markets such as Vancouver & Toronto are not designed for a doubling of mortgage rates in a short span of four months.

Rest assured, Bank of Canada Governor Tiff Macklem sure doesn’t feel that way, “The economy can handle, indeed needs – higher interest rates. Moderation in housing would be healthy.” This was the message from the governor in a press conference last week. Remember, housing volume has been chopped in half across quite a few markets, not exactly a moderation.

Payment shocks are going to hit Canadians hard this year, not only at the pump and the grocery store, but on their rate renewals. The average Canadian renewing their mortgage this year will see about a 200bps increase in their mortgage rate. I can assure you, most homeowners are not actively watching the rates market, nor do they know who the hell Tiff Macklem is. They may soon find out.

It’s not all doom and gloom though. While Canadians are carrying a lot of debt as a whole, only 35% of households actually carry a mortgage and all major bank will auto renew your mortgage, so long as your current on your payments. However, some Canadians will be in for a payment shock when their new rate comes in the mail. You can always refinance and extend the amortization to lower the payment, however that will require you to re qualify, which might be difficult considering the increasingly stringent mortgage stress test. If you’re poised to lock in a 5 year fixed rate mortgage you will soon be stress tested at 7%.

As the always insightful Rob McLister recently commented, “as the government’s minimum mortgage stress test rate climbs into 7-8% nosebleed territory, mortgage growth will be more than halved. That’ll provoke medieval duels for mortgage business come fall. But on a positive note, mortgage turnaround times are about to get even faster.”

Here’s a few brain busters for you. Residential mortgage credit growth has been running at decade highs. On a year-over-year basis, mortgage credit growth as a percentage of GDP is running at a whopping 7.5%, that’s up from the previous sugar rush of 6% leading up to the great financial crisis of 2008.

If McLister is right and mortgage growth gets cut in half there will be a lot of hungry mortgage brokers, and probably Realtors too. A lot of the big banks doubled their mortgage personnel over the past year.

Mortgage brokers and Realtors won’t be the only casualty. New housing construction is also in the eye of the storm. The industry has cancelled 4600 units of housing in the past three weeks because of construction costs increases and interest rates, per Jeff Thomas, Group Head Development Kingsett Capital.

The moderation has begun.

Three Things I’m Watching:

1. Residential mortgage credit growth as a percentage of GDP is at an all-time high. (Source: Acorn Macro)  59babcc8-49ae-b6bc-e189-c8f203a72307-6617313

2. About one third of Canadian households have a mortgage. (Source: Bank of Canada)

3. Canadians have been extracting cash from their homes during the pandemic. (Source: Bank of Canada)

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The Saretsky Report. December 2022