Read the September 2023 Canada interest rate forecast.

During the last interest rate announcement the Bank of Canada kept rates steady at 5.00%. With rate hikes paused for the time being and core inflation trending lower, it’s looking like the housing market isn’t likely to see large price decreases any time soon. Let’s take a look at the latest in the mortgage world going into October.

Here’s how the mortgage market is doing going into October:

For the month of October, we anticipate fixed rates will increase, the variable rate could also increase, should the Bank of Canada increase it’s key lending rate on October 25th. National sales activity edged down in August by 4.1% month over month, remaining on trend with July and June’s declining sales activity. The number of new supply has inversely steadily increased, Canada’s inventory edged up by a further 0.8% month over month in August. Sales activity has officially tapered off and inventory is now on a steady incline, thus the sales-to-new listings ratio eased to 56.2% in August, which is in line with its long-term average, in comparison, this ratio peaked at 67.4% in April. “The demand is obviously still there, and it will be back, but as the housing affordability crisis re-emerges as a top policy issue, for now, the slowdown on the buyer side should help keep a lid on prices.” said Shaun Cathcart, CREA’s Senior Economist.

The Aggregate Composite MLS Home Price Index climbed by a further 0.4% on a month-over-month basis in August, lower than July’s 1.1% increase, we’re now heading towards the expected drop in home prices as both higher interest rates and increased inventory apply downward pressure on pricing across Canada. The actual (not seasonally adjusted) national average home price was $650,140 in July, up 2.1% years over year.

The Bank of Canada holds rates steady in September

October 25th will mark the 7th meeting of The Bank of Canada this year, where they’ll publish their Interest rate announcement and Monetary Policy Report, with only one final meeting set for 2023 thereafter. There has been an increase of 75 basis points to the Bank of Canada’s overnight lending rate in 2023, a notable but small increase in comparison to 2022’s 400 basis point run. The Central Bank believes there’s now evidence pointing to slowing demand and increased probability of a recession, lead by slower consumption growth and a decline in housing activity, while still maintaining their hawkish and precautionary stance. Markets and Senior Economists largely believe there are no more rate hikes in the pipeline for Canadians, however with inflation slated to continue to rise in the short term, positive forecasted GDP and wage growth proving more sticky, the Bank of Canada might have one more rate hike in store before holding their key rate until mid 2024.

Canada’s economy is struggling

Canada’s economy contracted during the second quarter, according to Statistics Canada, with both services-producing industries (-0.2%) and goods-producing industries (-0.4%) posting declines in June. The economy contracted at an annualized rate of 0.2 per cent, pushing the agency to revise their annual pace of growth to 2.6%, down from 3.1%. It appears that Canada’s economy is not as resilient as expected by analysts and the Bank of Canada, which is welcome news to the Central Bank, whose been on a quest to slow consumer spending through their tightened monetary policy to tame inflation. Statistics Canada also said its early estimate suggested real GDP was essentially unchanged for the month of July.

Inflation ticks upwards in August

August’s consumer price index, the measure for year over year inflation, came in at +3.2%, when excluding mortgage interest cost, +4.0% actual, following a 3.3% year over year increase in July. August’s increase was no surprise and came mainly as a result of higher gasoline prices and mortgage interest cost, with early estimates confirming we will see the CPI continue to tick further upwards to 5% as we near the end of the year. Canadians continued to battle elevated shelter costs (+6%) and mortgage interest costs (+30.9%) in August and beyond, notably, mortgage interest rates continues to apply the highest upward pressure on the CPI since December of 2022. The Central Bank sees tightening household discretionary spending as their most viable tool to halt consumer spending on goods and services and attain their 2% inflation target.

Canadians shopping for a new home or renewing their mortgage in August experienced a staggering 30.9% increase in mortgage costs, the largest increase on record. We expect the CPI to continue to hold near the 3% mark in September, of course, when not accounting for mortgage interest cost.

Job vacancies and Unemployment Rates

Canada’s employment rose by 40,000 jobs in August, following a contraction of 6,400 jobs in July. While the Job market added more than double what was expected by Senior Economists, Statistics Canada’s report highlights that the increase in employment was outpaced by a burst in population growth (+103,000). Canada’s continued increase in newcomers has been the biggest prop up to our job market, this has essentially stalled the unemployment rate, which remained unchanged in August at 5.5%, following three consecutive increases.

Job vacancies continued to decline, by 55,500 in the second quarter, marking an entire year of decline. This quarter, there were 1.4 unemployed persons for every job vacancy in Canada, an increase (0.1%) from the previous quarter and a further increase (0.3%) from the second quarter of 2022, a further sign indicating the labour market tightness has eased, which could reduce upward pressure on wage growth.

Canada’s population growth is driving demand

The Bank of Canada continues to warn that strong population growth is supporting aggregate consumption and employment growth, according to their July Monetary Policy Report, “Strong population growth from immigration is adding both demand and supply to the economy: newcomers are helping to ease the shortage of workers while also boosting consumer spending and adding to demand for housing.” Ottawa plans to accept 465,000 permanent residents into the country in 2023, with the immigration target growing to 500,000 in 2025. Many of those arriving in Canada’s major markets are searching for shelter amidst the home unaffordability crisis, driving up rental cost (+6.5%) in August. Provinces rely heavily on Canadian investors to supply rental apartments in the form of investment homes, however, as higher interest rates and mortgage costs have worked to deter existing and would be landlords, the supply of rentals has steadily declined which has driven up rents across the country.

Recommended reading: How does population affect the housing market?

Bond yields inch higher

Bond yields are back on the rise. The month of September saw Canada’s 5-year bond yield hover below the 4% ceiling until the Bank of Canada rate announcement and inflation report convinced speculators that the Central Bank hawkish commentary is not in line with their monetary policy and removing their foot off the gas pedal pre-maturely will cause inflation to run rampant. Bond yields have increased more than a 120-basis point increase since May, primarily due to stronger than anticipated job reports, inflation back on the rise, mortgage cost index continuing to rise and GDP growth having convinced markets the central bank should continue to hike their rate or hold higher interest rates for longer.

If you’re looking to buy a home in Canada:

Our current best 5-year fixed rates is 5.54% and 5-year variable rate of 5.95%.

For first-time home buyers, there are some great opportunities outside of core markets, sellers are coming to terms with tapering price growth as higher interest rates bar many from entering the market, however, inventory is still low, so we’re not at a balanced market quite yet.

For homeowners who are coming up for renewal, continue to monitor our rate forecasts, it would be wise to see what rates Perch may be able to offer above and beyond your existing Lender, as they’re typically less aggressive on their rate offerings.

For homeowners who would like to see the benefit of switching lenders and breaking their mortgage early, Perch automatically calculates the net benefit once you input your existing property and mortgage details in your Perch portfolio.