Canadian job market poses greater risk than mortgage renewals, says RBC Debt Guru

In recent years, many feared that the looming “mortgage renewal cliff” would put a damper on the Canadian economy, especially after aggressive interest rate hikes from the Bank of Canada.

But according to an RBC report, it is the job market and the rising unemployment rate that should worry us more.

Concerns over mortgage renewals have not materialized as expected

Nathan Janzen, an economist at RBC, believes that while mortgage renewals will be a challenge for some and risk “braking” the economy, they are unlikely to cause a full-blown economic collapse.

“We emphasized almost a year ago that the 2025 mortgage renewal wave would be manageable,” Janzen explained, adding that two key conditions must be met for this to happen: rate cuts from the Bank of Canada and a stable rate. labor market.

“This first condition is clearly met, but we are more concerned about the second, as many labor market data continue to weaken,” he added. “Higher mortgage payments certainly hurt the total amount of income available in the economy to spend, but higher unemployment also has a negative effect. »

In September, the national unemployment rate was 6.5%, down slightly from 6.6% in August, which marked its highest level since 2017. It has gradually increased from a low of 5% in early 2023 .

Many of the country’s largest metropolitan areas saw more drastic increases, with unemployment rates of 8% or higher in Toronto (8%), Edmonton (8.6%) and Windsor (9.2%).

A 1% increase in unemployment generally reduces household disposable income by 0.5%. RBC predicts that Canada’s unemployment rate will gradually increase to 7% by the start of 2025. Oxford Economics, meanwhile, projects that the unemployment rate will peak at 7.3% by the end of 2024 or the beginning of 2025.

“This is a significant increase and more than a percentage point above pre-pandemic levels,” Janzen notes. “But we are monitoring a deterioration that could extend beyond that.”

He adds that job openings have fallen 25% compared to last year and if this trend continues, it could further worsen unemployment, pushing rates beyond current forecasts.

“The unemployment rate is now higher than pre-pandemic levels and the job vacancy rate is lower,” Janzen added. “Any further decline in hiring demand increases the risk of a further rise in the unemployment rate.

Mortgage renewal risk diminishes

The Bank of Canada’s recent rate cuts – 75 basis points (0.75%) so far, with more on the way – have provided much-needed relief, with many already benefiting from reduced payments or a increase in capital contributions.

Meanwhile, lenders cut fixed mortgage rates throughout the summer, driven by falling bond yields. Together, these changes give borrowers more flexibility as many approach their mortgage renewal.

“Yields on five-year government bonds, which determine five-year fixed mortgage rates, have fallen accordingly and yields on two-year Canadian government bonds, the main driver of changes in borrowing costs for mortgages of one to three years, are lower than the levels of two years ago,” notes Janzen.

Many one- to three-year mortgages are expected to be renewed at lower rates, while adjustable-rate mortgage holders are already seeing relief through reduced payments or increased principal contributions. However, repayments on four- and five-year fixed-rate mortgages are still expected to increase significantly as current rates remain higher than in previous years.

“These challenges, especially for some individual households, should not be ignored,” agrees Janzen. “But the increase will be smaller than it would have been without the BoC interest rate cuts, and will increase total mortgage payments in 2025 by about 0.1% of total household disposable income , according to our calculations.”

Additionally, Janzen says high home prices and large homeowners’ equity offer borrowers more flexibility, such as the ability to refinance with longer amortization periods to lower monthly payments if necessary.

Visited 2,613 times, 2,595 visit(s) today

employment figures labor market mortgage renewals Nathan Janzen rbc RBC reports renewals unemployment unemployment rates

Last modification: October 18, 2024