Economic Insights from Dr. Sherry Cooper
A second mortgage is a mortgage that is taken out against a property that already has a home loan (mortgage) on it. Generally people take out second mortgages to satisfy short-term cash or liquidity requirements, have an investment opportunity or to pay off higher-interest debts (such as credit cards and student loans) that a second mortgage might offer.
That is welcome news for homeowners with adjustable-rate mortgages whose rate has risen 425 basis points in less than a year.
Variable-rate mortgage holders with a fixed payment have largely hit their trigger points if they bought in the past couple of years. While their monthly payments have not risen, many are not covering the higher interest costs on their mortgages. Hence their principal outstanding is rising. Little is known about how the lenders will handle that when it comes time to renew.
Housing starts also plunged 13% month over month in January.
Bank earnings are under pressure with higher taxes and capital requirements, and the federal financial institution regulator is looking to tighten mortgage terms somehow. More will be known in mid-April when the comment period is over.
Other sectors of the economy remain relatively robust. Labour markets continue to be very tight as the unemployment rate is near record lows, and job vacancies—though down a bit—remain high. This has boosted consumer spending despite inflation.
We expect a soft landing in the Canadian economy this year—a mild contraction in Canada in 2023 Q2-Q3. This is one quarter later than the Bank of Canada projected in their most recent Monetary Policy Report.
The economy is resilient, and inflation is falling, but the central bank is unlikely to cut rates this year. When rates begin to fall in 2024, they will remain well above the pre-pandemic level of a mere 1.75% for the overnight policy rate. Inflation in the decade before the pandemic averaged less than 2%. Over the next decade, inflation is likely to be higher, especially as on-shoring and the reduction in globalization will be much less disinflationary.