The Latest in Mortgage News: CMHC sees chance of a recession if BoC policy rate hits 3.5%


July 18, 2022 Facebook Twitter LinkedIn Google+ Mortgage News Canada



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As the Bank of Canada continues to hike interest rates, the country’s housing agency sees the chance of a recession growing the higher rates go.

The Canada Mortgage and Housing Corporation (CMHC) put out a report this week suggesting the likelihood of a two-quarter recession should the Bank of Canada take its overnight target rate to 3.5%, which CMHC considered a “high interest rate scenario.”

The Bank’s key policy rate currently sits at 2.50% (as of July 13).

“In this scenario, the Bank of Canada hikes more aggressively and increases its policy interest rate to 3.5% in early 2023 before gradually converging back to the neutral rate of 2.5%,” wrote CMHC’s chief economist Bob Dugan.

He added that, in this scenario, GDP would grow by 3.4% in 2022 and 0.7% in 2023, with economic growth hitting a bottom in Q4 2022 and Q1 2023.

“These two quarters register marginal negative growth, signifying a mild recession in the high interest rate scenario,” he added.

In CMHC’s “moderate” scenario, the Bank of Canada only takes interest rates to 2.5% by early 2023, maintaining that level until the end of 2025.

In terms of the impact on mortgage rates, Dugan said the high interest rate scenario would result in conventional 5-year fixed mortgage rates reaching 5.7% by the end of 2022, and would decline in 2023 to “correspond to policy interest rate normalization and an economic recovery.”

CMHC also sees higher borrowing costs contributing to a further slowdown of the housing market in 2022 and 2023. “In the high interest rate scenario, the national average price remains elevated, but is set to decline by 5% by mid-2023 compared to its level in early 2022,” Dugan noted. “In the same forecast period, the moderate interest rate scenario sees a 3% decline.”

Filogix contract with Newton Velocity ends

A long-term agreement between deal management system Filogix and DLC Group’s wholly owned subsidiary Newton Velocity came to an end this week.

Filogix reportedly informed the lender and mortgage broker community of the expired contract with Newton on July 1. This was initially to result in brokers who use Velocity having their access cut to Filogix FxLink, or its “lender pipes,” as of July 11.

“This effective date change had the unexpected potential for considerable frustration for lenders and brokers as they manage all in-progress mortgage transactions,” Newton President and CEO Geoff Willis said in an emailed statement.

However, Filogix agreed to a contract extension to October 30, allowing brokers and their selected lenders to complete all “in-progress” transactions based on the longest rate hold period of 120 days.

“This resulting good news demonstrates how the right outcome for all involved can be achieved if we communicate our respective interests, keep all the impacted parties in mind and be open to changing positions if it includes doing what is right for all involved,” Willis added.

Reverse mortgage market in Canada has strong growth potential: DBRS

The reverse mortgage market in Canada has grown substantially in recent years as seniors increasingly use the products to access their home equity during retirement.

DBRS estimates Canada’s reverse mortgage market is a little less than $6 billion as of the first quarter of 2022, with a penetration rate of the country’s six million senior households at just 0.5%.

“The penetration in this market in Canada still lags behind those in some other developed economies, including the United Kingdom and Australia,” DBRS noted in a report released Monday.

“Nevertheless, given Canada’s aging demographics and rapidly rising real estate values, we view the growth potential in this niche market as strong.”

HomeEquity Bank currently holds more than 90% of reverse mortgage debt in Canada with a loan book of $5.4 billion as of Q1, while the next largest provider, EQ Bank, currently has a portfolio of roughly $304 million.

“In our view, barriers to entry are not restrictive enough to prevent increased competition in this product market,” DBRS noted. While HEB’s Number 1 position “remains largely unchallenged,” it said EQ Bank is “also committed to expanding its market share through a combination of lower rates, different product features, and a partnership with Coast Capital Savings Federal Credit Union…”



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