Canadian Real Estate’s Nearly 40-Year Tailwind From Lower Rates Is Reversing: BMO

Canadian real estate has had an easy climb over the past 30+ years, but that might be coming to an end. That was the take from BMO Capital Markets in a new research note. Recent mortgage borrowers will have to renew at much higher rates in the future. The estimated renewal increase will be the largest since the 1980s. The bank warns a decades-long tailwind that boosted home prices has now reversed. Buckle up.  

Bank of Canada Warns Recent Borrowers At Low Rates Will Pay More At Renewal

The Bank of Canada (BoC) Financial System Review warns mortgage rates are a financial risk. They argue households have only been able to manage their debt due to low rates. As mortgages renew at higher rates, the cost of debt servicing will rise. This is especially problematic for those who borrowed at artificially low rates recently. Despite being prepared with a stress test, concerns are widespread.  

The BoC estimates mortgage rates will hit 4.5% in 2025/2026. At this level, they warn these borrowers will see payments increase between 24% and 45%, assuming all else is equal. That’s a big increase, but before we start weeping for these borrowers let’s give it a little context.

Remember, these borrowers took out debt at stimulus rates, below reasonable capital costs. Low rates were stimulus to incentivize borrowing to raise demand and inflation. The capital was basically on sale, as borrowers repaid less than inflation in many cases. They were stress tested for higher rates and should be capable of paying them. This isn’t a melt-down scenario but one where the risk is diverting capital from the economy.

Higher servicing costs divert capital from other areas. “[higher interest rates at renewal] will weigh on disposable income and increase vulnerability for more stretched households,” warns BMO  

After all, paying more interest on debt is a similar impact to higher inflation. More cash is diverted from discretionary spending and funneled into smaller areas. The big difference here is no one needed to borrow, they received a discount to do it. Inflation on the other hand, has no opt out.

Canada’s Decades-Long Tailwind Boosting Real Estate Is Over

The overnight rate is still below January 2020,  but higher renewals are here. “Note that, already today, those coming off fixed-rate mortgages from five years ago will be doing so with comparable rates already a good 2 ppts higher than origination,” says Kavcic. 

As the above chart shows, an increase for mortgage renewals like this hasn’t been seen since the 80s. After a downtrend of nearly 40 years boosting prices higher, rates fell to nearly zero.

“Of course, there are ways to counter [increased renewals],” explains Kavic. Fixed-rate borrowers switching to variable rates or extended amortizations would help. However, that’s not the primary takeaway from the circumstances. 

“The bigger point is that a decades-long tailwind of lower rates on renewal has reversed, at least for the duration of this cycle,” he warns. 



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  • C.Rose 2 years ago

    The unwinding of the bubble begins. It is going to be very painful for some.

    • Bob 2 years ago

      We haven’t seen anything yet. Wait till recession kicks in and the lay offs come. Although, my guess is the BOC will chicken out and intervene.

    • Fraser 2 years ago

      good, lollllllllllllllllllllll

  • Average Man 2 years ago

    My usual schadenfreude aside, this is good in the big picture. People are going to get burned short-to-medium term, and the people who just wanted a house to live in and felt like it was now or never, I legitimately feel for them. That sucks. But in the long term, this is going to help Canada build a healthier economy and society.

  • M 2 years ago

    What about oil prices don’t they drive up the cost thus inflation. Is such rapid increase necessary, despite 3 increases gas and diesel have gone up that’s not reduced. High rates will only impact housing market and also employment in that sector construction to sales rampant rate increase is not solution.

    • Erik 2 years ago

      This isn’t a rate increase, it’s eliminating the discount. All Canadian dollar holders are subsidizing debt creation so a couple of dummies can feel like genius investors.

  • question guy 2 years ago

    How does the BoC estimate mortgages will be at the 4.5% range in 3 years? They are already there! If this estimate is true it would mean the rates would be on their way DOWN to get to 4.5%

    Am I right?

    • Yoroshiku 2 years ago

      Seems like the BOC will probably slash interest rates as soon as possible (once inflation is more or less under control) to try and reinflate the housing prices.

      • Whiskey Foxtrot 2 years ago

        BAHAHAHA. What’s incredible about the bubble is how everyone things society will always reorient to support it. The BoC won’t say it but high inflation is a GOOD problem. They need to COOL the economy it’s doing so well.

  • dave frazer 2 years ago

    5 yr Mortgage rates are already over 6% at some banks and look like they might go to the 8-10% range perhaps more. Houses will almost stop being sellable as few will want to sell at the massive discount needed to move them. Many will sit empty for months as the owners need to move elsewhere or are taken back by banks who will just keep them empty till the market returns. They will not sell them at any price, as it will further depress the market. This will also put pressure on the rental stock apart from the 400,000 immigrants expected. Rents are going to rise significantly 20- 30% rises in the next year or two for anyone looking for a place to rent.. Renovictions will be much more common and financilly beneficial, as the difference between goverment mandated rent rises and market rates becomes massive. The poorer section of society will be suffering in massive numbers. A lot of the middle class will be going bankrupt.
    Nothing the govenment can do will affect this. They will try bring in lots of help and try new policies, perhaps reduce interest rates if the internatioal market will let them, but in the end they will have to just wait out the crash that going to happen.

  • Niko 2 years ago

    Folks to be fair, every one has to take their turn. Now is the turn for some buyers (money in hands) to get their hands on some good deals as home prices go drastically down and they will. This is basic economics folks as they wait for those foreclosures or people giving up on their houses and now have to sell because they can’t afford it anymore. Who would think one day that a basic townhouse will cost around 1.2 million while the owners can barely make the payment with the low interest rate (stimulus rate). Companies are already laying off and Recession is coming. You might be the lucky ones that might say, I have the money etc but most of us don’t. So good luck to most of us. Just like Covid is now on an individual basis, so is your mortgage payment or your disposable income and THEY all want a piece of it!

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