Canadian Mortgage Rates To Surge, Demand Will Be Slowest In Recent History: Moody’s

Canadian mortgage rates are expected to surge higher and grind demand to a halt over the next few years. That’s the take Moody’s Analytics shared with credit analysts and institutions last week. The credit rating giant sees soaring bond yields pushing mortgage rates to a decade high. Low rates over the past two years also produced record sales, pulling forward demand. Combined, those issues are forecast to produce the slowest demand in recent history.

Canadian Mortgage Rates Forecast Forecast To Hit 2009-Levels

Canadian mortgage rates are forecast to surge to the highest level in over a decade. Moody’s has forecast 5 year fixed rate mortgages will reach 4.25% by the end of this year. This would be similar to costs briefly seen in 2019. Mortgage rates are then seen climbing to 5.5% around the end of 2024. Canadians last saw mortgage rates at this level in 2009, during the Great Recession.

Canadian Mortgage Rates Forecast To Peak At 5.5%

Expressed as % per annum. 

Source: Bank of Canada, Statistics Canada, Moody’s Analytics. 

The forecast conservatively assumes the spreads shrink as rates rise, producing fewer mortgages. In the above chart, you can see spreads falling during tightening cycles (when rates rise). This is due to increased liquidity, as demand for credit falls faster than the supply of credit.

When lenders compete, their margins shrink. Conversely, the spread rises during easing, since rate cuts happen during elevated risk. If mortgage demand doesn’t taper as expected, mortgage rates can climb higher. That said, they’re also forecasting mortgage originations will fall fast.

Canadian Mortgage Originations Expected To Fall Sharply

Low interest rates and quantitative ease are used to stimulate demand. It does this largely by pulling forward demand with increased incentive and leverage. “Clearly consumers were attracted by these low interest rates and really ramped up their borrowing. However, that pulls forward a lot of demand,” said Brendan LaCerda, an associate director and senior economist at Moody’s Analytics. 

“As these interest rates rise, that growth rate of mortgage debt is really going to diminish,” he adds. Demand that’s been pulled forward creates a demand gap. The longer low rates are used to stimulate excess demand, the larger the gap. “Consumer appetite for debt will diminish — quite significantly.”

Moody’s sees residential mortgage borrowing grinding to a halt in the coming months. They’re forecasting annual growth falls to 4% by mid-year. It would be an incredibly fast drop from today’s double-digit levels. The forecast rate was last seen during the peak of the 2018-2019 tightening cycle.

Consumers’ Debt Appetite Diminishes

The annual percent change of Canadian household mortgage credit and Moody’s forecast growth rate.

Source: Statistics Canada, Moody’s Analytics.

This time the tightening cycle needs to go much further to tackle inflation’s 30-year high. By the end of 2022, annual growth is forecast to fall to 4%, and continue to under 2% by 2025. If correct, it would be the slowest mortgage credit growth since the early 80s. Coincidentally, that’s when the last inflation crisis occurred. 

“Originations are going to be much slower through this tightening cycle than anything we’ve seen in recent history,” said LaCerda. “Households are carrying a lot of debt already. There’s not a lot of appetite to take much more on.”

7 Comments

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  • Martin Berk 4 months ago

    It seems like the only solution may be for the government to institute some form of mortgage debt forgiveness. It could be a tax break, or outright debt cancellation. Nobody can afford Interest rates at 5.5%. It’s usury plain and simple.

    • MG Masterson 4 months ago

      That would be wholly unfair if a debt forgiveness was handed over. You take the chances as grown boys n’ girls when you get a mortgage. Tough beans!

  • robert christian 4 months ago

    Well, in fairness, every one has been saying interest rates are going to go up for almost 20 years now. Since then, many have paid off their loans and mortgages.
    While I don’t “doubt” that mortgage rates will go up this time around, if they are to go up as many times as this and other pundits describe, exactly how is this country going to pay the interest on the new debt? If the gov’t is paying .5% now and the deficit is 54B, what’s the deficit going to be when government bonds are 3% or more?
    My answer in short – interest rates won’t go up by more than 1 – 1.5% over the next 3 years. I have the last 20 years data to prove it.

  • Randall Farquar 4 months ago

    This website never fails to deliver. Better Dwelling – you’d assume upbeat, inspirational and supportive of the home ownership. HELL, NO!! Doomsday, apocalypse is more like it.

    This article is brutal. Self serving, hand picked stats and quotes to further their Deep Impact outcome. WOW.

    Don’t get me wrong, tough times are ahead but the incongruence between this sites name choice, motive and presentation of a story is on the spectrum.

    • Trader Jim 4 months ago

      LOL. In a bubble the view is so distorted that those inside think everyone on the outside can’t see clearly.

      You know how investors can tell it’s a bubble? Because you just read a piece where the subject is a report written by one of 3 big credit agencies, and the only one to do a real estate analysis, and you think it’s “hand picked.”

      Either the Grade 4 level they promote as a feature to help you understand a complicated issue is too high of a grade for you, or you should take the short bus back home.

  • nomobaloney 4 months ago

    Your opening statement is such a paradox. In deed no experience and no research might be just the kind of background you want when trying to do things completely differently.

    • Trader Jim 4 months ago

      Higher mortgage rates and reduced credit capacity aren’t a paradox, it’s literally how it works.

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