Another increase in the Bank of Canada’s key rate is expected on Wednesday. The dominant scenario is for a total of 100 additional basis points by the end of 2022. Enough to at least double the correction in real estate prices already underway.
The central bank’s key interest rate has so far risen quite rapidly since March by 300 basis points, or from 0.25% to 3.25%. Analysts expect an additional increase of 50, or even probably 75 points on Wednesday, and another of at least 25 points at the December 7 monetary committee meeting. Already well underway in the restrictive zone, it would then reach 4.25%, far from its so-called neutral rate of 3%. For Desjardins Group economists, it should stay there next year to begin its descent in the fourth quarter. At the National Bank, they are instead putting forward a scenario of a 4% cap and then seeing the Bank of Canada begin to throw some ballast in the second half of next year.
Whatever target is reached, and with the lagged effect of monetary tightening, the ongoing correction in residential real estate prices is far from over. The Teranet-National Bank home price index, released last week, posted a second 2% decline in September, matching that of August, for a fifth straight monthly contraction. The index is down 7% from its peak in May. By way of comparison, during the financial crisis of 2008, prices had accumulated a decline of 6.2% over the same period. And 9.2% in total over eight months. Given the Bank of Canada’s rather aggressive monetary tightening, this time National is forecasting a record cumulative decline of 15% across Canada by the end of 2023. A correction obviously more felt in the markets that have experienced the most strong overheating during the pandemic.
Oxford Economics went further in its latest forecast, citing a 30% peak-to-trough correction also across Canada, combining the effects of rapidly rising rates and slowing job growth.
Variable rate mortgage
The increase in interest rates is not without having rather significant repercussions for holders of variable-rate mortgages and for those who will have to renew theirs in the coming months. Statistics Canada indicated, on September 12, that among the new residential mortgage loans contracted in the second quarter, 51.1% were at variable rates, and that these represented 32.5% of the total mortgage debt, an increase compared to the 29.8% from the previous quarter. Simply by way of an order of magnitude, we note that each 25 basis point increase in the mortgage rate adds to the payment a little more than $6 per month for every $50,000 of mortgage.
All of this takes place, however, in a context of households already shaken by inflation that persists in remaining at levels not seen for some forty years. On the grocery bill alone, Statistics Canada measured an 11.4% surge in prices for food purchased from stores in September, the steepest year-over-year rise since the 11.9% surge. of August 1981. And while gas prices continued to decelerate (month-over-month) for a third month in a row, year-over-year motorists had to deal with prices gasoline showing an increase of 13.2% compared to September 2021.
The cost of money is therefore added to the inflationary framework. A recent poll conducted by Ipsos on behalf of insolvency firm MNP indicates that six in ten Canadians say they are concerned about the impact of rising interest rates on their financial situation, an all-time high since the index was created. in 2017. And compared to landlords, renters are more concerned about the impact of rising rates on their financial health, at 34% among renters versus 29% among landlords. MNP adds that while households with incomes below $40,000 are more likely to suffer the consequences, sensitivity is high even in higher income brackets.
The percentage of respondents who say they are worried about their ability to repay their debts goes from 60% for income below $40,000 to 52% for the income bracket above $100,000. The percentage of those who say that an increase in interest rates would cause them financial problems rose from 59% to 44% respectively. The gap remains the same when asked if they fear that an increase in interest rates will force them to file for bankruptcy, with the percentage dropping from 44% to 29% respectively.
In the wake, the latest data from the Office of the Superintendent of Bankruptcy indicates that the total number of insolvency cases in Canada (including bankruptcies and proposals) increased by 13.7% in August 2022 compared to the previous month. The number of bankruptcies increased by 10.7% and the number of proposals increased by 14.8%.
Compared to August 2021, the total number of insolvency cases filed was up 27.6%. Consumer insolvency filings increased by 26.7% and business insolvency filings by 66.1%.
We will have to see what the Bank of Canada does on Wednesday.