RISING RATES, INFLATION AND A POSSIBLE RECESSION, BUT REAL ESTATE REMAINS STRONG

T​he BoC has raised the policy rate on Wednesday June 7th to 4.75% a 0.25 increase since January. This is the highest it’s been since 2001. The prime rate is now 6.95%, which would increase payments for those with variable rates.

In April, inflation increased to 4.4% from 4.3% in March, which was the first increase since last June when inflation was as high as 8.1%. Since then, inflation has been on an overall downward trend. Goods and services price inflation remain elevated, reflecting a strong demand and a tight labour market.

On May 31st Canada’s economy grew by 3.1% in Q1 2023, which beat the federal agency’s forecast of 2.5%. The unemployment rate is at a low 5% and in April Canada added 41,000 new jobs (mostly part-time).

D​espite the growing economy and the increase in demand, BoC still believes inflation to decrease to 3% this summer due to the lowered energy costs. Gas prices are lower than last year with Ontario’s average from today at 156.9/L compared to last year at 211.1/L

However, with three-month measures of core inflation running in the 3.5-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could remain materially above the 2% target for 2024.

More Debt and Missed Payments

To address these concerns and reach the 2% target, future rate hikes are highly possible. This would add to the fire of Canada’s growing debt and missed payments. Equifax reports a 4.1% increase in consumer debt at a substantial $2.37 trillion from the same period the previous year. Credit card balances have increased by 14.5% compared to Q1 2022. Credit card spending has also increased. On average, consumers spend 21.5% more on their credit cards compared to pre-pandemic spending.

I​n Q1 2023, 175,000 consumers have missed at least one payment on a non-mortgage product an 18.8% increase from Q1 2022. The latest data reveals an increasing number of mortgage holders missing payments on non-mortgage products, reflecting a 15.7% increase from Q1 2022. This is almost double the rate observed in the previous quarter (8.9 per cent from Q4 ‘21 to Q4 ’22). Consumers holding variable rate products are feeling the pressure of higher payments, however, overall mortgage delinquency rates remain lower than pre-pandemic levels.

According to Ben Rabidoux of Edge Realty Analytics, it’s important to remember that mortgage delinquencies are a type of indicator that looks backward rather than providing real-time information. They give us insights into what was happening in the past year rather than reflecting the current situation.

“When a borrower loses their job, they typically have savings that can get them by for six months to a year, or get a mortgage refinance. On top of that, mortgages aren’t considered delinquent until they are at least 90 days overdue.”

Based on a report from the IMF (International Monetary Fund) warns Canada at being at the highest risk of mortgage default. Along with Australia, Luxemborg, Sweden, Norway and Netherlands.