Mortgage renewal cliff no longer biggest risk to economy

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The mortgage renewal cliff has loomed like a dark cloud over Canada’s economy ever since its central bank began aggressively hiking interest rates back in 2022.

The fear was that homeowners who took out mortgages at the rock-bottom bargains of the pandemic would struggle to make payments once they were forced to renew at higher rates.

But now an economist says that risk is fading and a new one is taking its place.

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Borrowers are already getting relief from 75 basis points of interest-rate cuts by the Bank of Canada, with the expectation of more to come as early as next week.

Two-year government bond yields, which drive mortgage terms of one to three years, have now dropped lower than two years ago, meaning not everybody is going renew at higher rates in 2025, said Nathan Janzen, assistant chief economist of the Royal Bank of Canada.

Five-year fixed mortgage rates remain above previous levels, but the increase in payments will be smaller because of the Bank of Canada cuts.

RBC estimates total mortgage payments in 2025 will increase by only 0.1 per cent of total disposable income.

Homeowners also have other supports to help them cope with renewals. Home prices have remained high, and this “significant equity” gives them more options to refinance at a longer amortization, making monthly payments more manageable.

But while the risks of the mortgage cliff fade, another risk to the economy — unemployment — is gathering steam as labour market data weakens, said Janzen.

Unemployment in this country has risen from a low of 5 per cent in 2022 to 6.5 per cent in the latest reading, and RBC expects it will continue to rise to 7 per cent by early 2025 — more than a percentage point above pre-pandemic levels. A 1 percentage point rise in the unemployment rate typically lowers household disposable income by 0.5 per cent, the bank calculates.

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There is also reason to worry that it may rise even higher than that, said Janzen.

Job openings are 25 per cent lower than a year ago, and if these weaken further unemployment could surmount RBC’s base case.

“The unemployment rate is now above pre-pandemic levels, and the job vacancy rate is lower. Any further drop in hiring demand raises the risk of the unemployment rate rising more,” he said.

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Toronto’s condo land may now be one of the toughest residential real estate markets in Canada, says BMO Capital Markets. The flood of condos coming up for sale has pushed the overall sales-to-new-listings ratio in the city to its lowest level since the 2009 recession. Condo prices are down 7.5 per cent from last year, the weakest performance in 23 years and the worst of the major segments and locations that BMO tracks.

“What gives?,” says Robert Kavcic, senior economist at BMO.

“Toronto condos were a hotbed of investor activity, and investors have disappeared.”

• The parliamentary budget officer will post a new report entitled “Economic and Fiscal Outlook — October 2024”
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• Earnings: BlackBerry Ltd, Costco Wholesale Corp., Accenture PLC

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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