Economists confident in December rate cut amid inflation growth

 Canada’s inflation rate saw a modest rise in October, but economists say it’s unlikely to derail the Bank of Canada’s anticipated rate cut next month.

The Consumer Price Index (CPI) increased by 2% on an annual basis, up from 1.6% in September, according to Statistics Canada’s latest report. Despite the decrease, inflation remained within the central bank’s target range.

October’s inflation data isn’t expected to stop the Bank of Canada from cutting interest rates next month, although it may influence how deep the cut will be, economists said.

Tiffany Wilding, managing director and economist at PIMCO, told BNN Bloomberg that the inflation uptick doesn’t derail the case for rate normalization.

“The outlook remains intact for the Bank of Canada to continue to reduce interest rates and bring policy back into more normal territory,” Wilding said. “I do think today’s report probably reduces the likelihood that they cut another 50 basis points.”

Wilding highlighted Canada’s relative economic stability

“We also had a pretty decent retail sales report, so the Canadian economy is by no means crashing, but nevertheless, we are in a period now where the Bank of Canada should continue to normalize policy,” she added.

Core inflation metrics, which the central bank closely monitors, surprised slightly on the upside but stayed within the acceptable range of 1-3%, according to RBC economist Abbey Xu. These figures, combined with another labour market report due before the Bank of Canada’s December 11 meeting, will likely shape the final rate decision.

“Our base-case assumes an additional 50-basis-point cut to the overnight rate by the Bank of Canada in December,” Xu said.

Tu Nguyen, an economist at RSM Canada, said the economy’s current state of excess supply provides room for the Bank of Canada to act without major inflationary risks.

“The acceleration in Canada’s consumer price index in October will not deter a December rate cut by the Bank of Canada, though the precise size of the cut is up for debate,” Nguyen said, adding that she expects inflation to hover near target levels in the coming months.

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Canada gears up for a busy 2025 housing market

The tide may well be about to turn in Canada’s housing and mortgage markets, with interest rate cuts spurring improved buyer sentiment and a recent jump in home resales.

Homebuyer caution continued to linger at the end of the summer despite two rate cuts by the Bank of Canada in June and July – but local real estate board data from October indicates prospective borrowers are increasingly ready to step off the sidelines.

What’s more, the prospect of further central bank rate cuts in 2025, not to mention impending new mortgage rule changes aimed at easing the path to homeownership, are raising hopes of a much busier 12 months ahead for the mortgage market.

A pickup in activity has already been seen in recent months – and that could potentially mean things gather pace earlier next year than usual, according to a top lending executive.

Grant Armstrong (pictured top), head, mortgage originations at Community Trust, told Canadian Mortgage Professional the new rules, which include an expanded rollout of 30-year amortizations and a higher insured mortgage cap, could have a significant impact on activity across the board.

“I think what you’ll see in 2025 is an early spring market,” he said. “I think you’ll see Canadians excited to get out there and look for financing. And the new regulations that have come out about the increased mortgage insurance, the new refinance products, the 30-year ams, will stimulate borrowers – and even if those borrowers apply and then don’t qualify to a prime lender, they’re not going to walk away from the home.

“They’re going to look for different ways to come up with different equity positions. They’re going to look at shared equity programs. And I think we’ll see that downstream impact on the alt lending industry.”

Removal of stress test for switching lenders welcomed

What’s more, the elimination of the stress test on uninsured mortgage switches at renewal is another measure that will provide welcome relief and a new slate of options to many borrowers, according to Armstrong.

The exact detail of that change has yet to be revealed – but it’s one that’s been broadly welcomed within the alternative lending space. “We’re looking at that to see how we can help borrowers at renewal, either looking to stay with Community Trust or looking to transfer to Community Trust,” Armstrong said.

“We’re looking at how this will help borrowers who are looking to graduate on their path from alt to prime, just really creating some new competitive landscape for borrowers. So we’re excited – but we’re going to probably take it a little bit slower and learn about how it’s going to impact the marketplace and see how it comes out.”

What other trends are set to play out in the 2025 mortgage market?

A growing trend in borrower types also shows no sign of fading in 2025: namely, the increasing prominence of multigenerational living arrangements.

The cost of housing has seen plenty of borrowers tap into equity for additional dwelling units (ADUs) in their property, either to house family members or for extra rental income. “Whether it be shared accommodation or a basement apartment, I think those types of clientele have really changed,” Armstrong said.

“The bulk of business is still single-family homes, single-family units, parents and children, but you’re starting to see more multigenerational as well.”

A bumpy ride for interest rates over the past two years saw the Bank of Canada embark on a series of rate hikes in 2022 and 2023 before finally starting to cut this year, with fixed rates also seeing unpredictable movement amid plenty of global economic turbulence.

With rates likely on a slow but steady downward trend next year, that could also play into a more stable outlook for home prices in 2025. “What we’ve seen in the market is consistent property valuation changes,” Armstrong said. “I do think 2025 will bring less volatility in values. I think you’ll see more stable property values.

“House pricing will probably return to its old normality of two, three, four, or five points up. Some markets will go up, some will go down, but I think you’ll see a more stable rise than what we’ve seen in Canada… moving into 2025 and 2026.”

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Toronto's mortgage arrears may hit 12-year high, CMHC reports

Mortgage arrears in Toronto could climb to levels not seen in over a decade, Canada Mortgage and Housing Corporation (CMHC) has warned.

Rising interest rates, cooling housing markets, and increasing non-mortgage credit delinquencies are putting homeowners under significant financial strain. Vancouver faces similar risks, with arrears potentially reaching 2015 levels.

While Canadian homeowners have shown resilience amid rising mortgage costs, the next six to 12 months could present a breaking point for many. Mortgage arrears, although still historically low, are beginning to rise and are expected to accelerate over the next year, particularly in Toronto and Vancouver.

Warning signs

CMHC’s analysis showed that resilience will be tested as economic uncertainty persists and high interest rates affect those renewing their mortgages.

In Toronto, where there are more homes for sale than buyers, struggling homeowners are finding it harder to sell their properties to avoid financial trouble. CMHC identified the sales-to-new-listings ratio, a measure of market activity, as a crucial predictor. When this ratio declines, arrears tend to follow within 6 to 12 months.

Rising delinquencies in non-mortgage credit products, such as credit cards and auto loans, are also early warning signs of future mortgage arrears. Initially, homeowners prioritize mortgage payments, but financial strain often leads to trouble across all debts within six to 12 months.

The report expects Calgary, Saskatoon, and Halifax to maintain low arrears rates, close to post-pandemic levels. Winnipeg also showed stability, though recent declines in credit scores and increases in non-mortgage delinquencies could signal emerging risks.

Meanwhile, Toronto and Vancouver are in a more precarious position.

Toronto could see arrears rates soar to 2012 levels, driven by a sluggish housing market and growing non-mortgage credit delinquencies. Vancouver’s arrears may rise to a point not seen since 2015, as high inventory levels and slowing sales limit homeowners’ ability to exit the market.

Montreal, Ottawa, and Edmonton presented a more uncertain outlook. Mortgage arrears are expected to stay within post-COVID ranges, but sharp increases in non-mortgage credit delinquencies across these cities warrant further monitoring, CMHC said.

Mortgage renewal shock

The "mortgage renewal shock" is a looming challenge for over a million Canadian homeowners whose mortgages will renew at higher rates in 2025. Combined with inflation-driven reductions in disposable income and rising unemployment, this could push more households into arrears.

RBC recently pointed to the softening labour market as a greater threat to the economy than mortgage renewals, adding another layer of concern. Rising unemployment could further limit homeowners’ ability to manage increasing costs.

CMHC called on financial institutions to support struggling homeowners through alternative payment arrangements and other tailored measures. The new Canadian Mortgage Charter offers additional guidelines for lenders to address financial distress.

"Complacency is not an option," CMHC said.

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Interest rates to remain key factor in 2025 mortgage market, says executive

Impending mortgage regulatory changes, availability of inventory, and the trajectory of home prices are all set to play a major role in determining how Canada’s housing and mortgage markets perform in 2025. But the main factor in that performance is set to be an unsurprising one: the direction of interest rates and borrowing costs.

Expansion of access to 30-year amortizations and a higher insured mortgage cap are scheduled to take effect on December 15, measures widely viewed as a positive step in improving the affordability picture for Canadians. Still, interest rates will remain the top consideration for borrowers as they weigh up making a move next year, according to Drew Donaldson (pictured top), mortgage broker and principal at Toronto-based Donaldson Capital.

Buyer confidence could return as a result of those mortgage rule adjustments. “Whenever there’s a rule change or regulatory change that’s positive, it brings back good news to the market,” Donaldson told Canadian Mortgage Professional. “But I really think it’s a story about interest rates. If interest rates continue to go down, you’re going to see a very strong 2025.

“If interest rates stay where they’re at, I think 2025 will be fine – but it won’t be anything robust like 2020 or 2021. If interest rates were to go up, which is not what we’re predicting, I think you’d see a slowing market.”

Market confidence on the way up as rates tick lower

The positive news for mortgage brokers and borrowers alike is that the prospect of rates climbing significantly next year remains, for now, a distant one. The Bank of Canada has already trimmed its benchmark rate several times this year, with further cuts expected to arrive in 2025, while five-year Government of Canada bond yields – which lead fixed mortgage rates – have seen a significant decline throughout much of 2024 despite a recent uptick.

Those trends have already had an impact, according to Donaldson, with the refinance market beginning to stir back to life and prospective buyers increasingly ready to take the plunge into the market. “People are now starting to believe that not only have rates come down so they’re more manageable, but that they’re going to continue to go down in the future,” he said, “and that just brings back confidence for everybody.

“People are licking their chops right now. We’ve found that people are extremely price sensitive. So I think the last few years have been tough on people economically and they’re trying to save every bit of money they can when you refinance them or buy a new property – and they want a really competitive interest rate. But at the end of the day, it’s all positive news, and I think 2025 might even be better.”

What else could impact the Canadian mortgage market in 2025?

One wild card for 2025: the return of Donald Trump to the US presidency, with the impact of his new administration’s policy proposals on both Canada-US relations and the wider North American economy remaining to be seen.

The bond market has shown some concern about Trump’s economic approach and its potential to spur inflation, while others point to deregulation and streamlining of government costs as potential boons for the economy.

New tariffs, meanwhile, could also weigh down on the Canadian economy, although Donaldson described his conversations with clients as “bullish” on economic prospects for the years ahead. “I’ve had clients starting to say to me, ‘I kind of want to get into [the market] now, because I think if interest rates keep going down, next year there might be bidding wars and things like that,’” he said.

“I’m cautiously optimistic. I think the worst is behind us. The last two to three years have been a challenging market in Canada, and I also think the condo market is still struggling – but that’s going to work itself out. It’s all about interest rates. And I think in 2025, 2026, people will be pleasantly surprised on the real estate market in general.”

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Canada's mortgage renewal wall: A 'headwind' but not a crisis

Bank of Montreal (BMO) senior economist Robert Kavcic anticipates that Canada’s so-called "mortgage renewal wall" over the next two years will act as a “modest headwind” rather than a major disruption for most Canadian homeowners.

More than four million mortgages are set to renew during this period, many at higher interest rates than those originally locked in, especially the 1.2 million renewals expected in 2025. Still, Kavcic believes a range of factors will help homeowners manage the transition, even as higher rates curb discretionary spending.

Kavcic explained that many homeowners who locked in low rates in 2021 or 2022 were stress-tested at higher levels, typically around 5.25%, meaning they proved their ability to pay higher rates if necessary.

"When somebody walked into the bank in 2021 and took out a mortgage at 1.5%, they were stress tested in most cases at around 5.25%," he said. "So they would have already proven an ability to handle mortgage rates that are probably going to be higher than we actually see at renewal anyway, the way rates are going right now."

Interest rates, which peaked around 6% to 7%, have now dropped back to around 4% and may decrease further by 2025. This downward trend is expected to ease pressure on homeowners, though renewed mortgages will still be costlier than before.

In addition, banks are expected to work with clients to extend amortizations, helping to reduce monthly payment increases.

Kavcic also pointed out that many Canadians are now earning more than when they initially secured their mortgage rates, which could help offset the financial impact of higher payments.

While he estimated that higher renewal rates could push up monthly payments by 20% to 50%, he said most Canadians will adjust by cutting discretionary spending, such as dining out or vacations, rather than facing serious financial hardship.

For younger, lower-income families, the increase will likely be more challenging. Wealthier households, however, may barely feel the effect of higher mortgage costs. The overall effect will be a period of softer spending, which could slightly slow the Canadian economy in the short term.

"Discretionary spending will be held back a bit, and that’s where that headwind would come from," Kavcic said. "But there’s probably going to be less of that through 2026. By the time we get to 2027, 2028, and beyond, that’s when this whole renewal wave plays itself out."

Investors in the housing market, particularly those who purchased properties in 2021 or early 2022 with plans to flip or rent, may face greater challenges. The current environment could see some investors offloading properties as the math behind their purchases no longer holds.

"Maybe the arithmetic made sense when they were borrowing at 1.5% but [it] turns out on closing you’re actually borrowing at 4%, so it doesn't work anymore," Kavcic added. "Those are the ones that will probably take a loss and have to flip some of that onto the resale market."

CMP

We hope you are finding our Blog informative and enjoyable to read while keeping you up to date with the ever changing real estate market. 

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