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Newfoundland and Labrador

Housing, mortgage sectors brace for more pain as Bank of Canada tees up another big rate hike

The Bank of Canada’s fight against inflation has weighed on Canada’s property markets and mortgage providers, and with another outsized rate hike expected on October 26, the pain is likely not over, analysts say.

The bank has already raised the key interest rate by three percentage points to 3.25 percent over the course of the year. This aggressive tightening campaign has raised borrowing costs and sucked the steam out of the country’s hottest housing markets as more potential home buyers sit on the sidelines.

Existing home prices in Canada fell to $640,479 in September from a peak of $816,720 in February, according to data from the Canadian Real Estate Association.

However, September saw the first month-on-month decline in Canada’s new home price index since January 2020.

Although Bank of Montreal chief economist Douglas Porter conceded the 0.1 percent drop wasn’t a big move, he said the index is still a barometer measuring home price inflation by “replacement cost”.

“This is at least one area where the aggressive (Bank of Canada) tightening campaign is having a direct impact on headline inflation, and more are to come,” Porter warned in an Oct. 25 note.

Among homeowners, v

Adjustable rate mortgage holders are likely to feel the crisis first, said Royce Mendes, managing director and head of macro strategy at Desjardins. Mendes and macro strategy contributor Tiago Figueiredo added that they expect the Bank of Canada to hike rates by 75 basis points this week and another 25 basis point hike in December, and are reluctant to forecast anything higher than that .

If the widely-anticipated 75 basis-point hike comes in the pipeline on Oct. 26, taking the policy rate to 4 percent, economists at Desjardins believe homeowners who took out an adjustable-rate mortgage between May 2020 and July 2022 will do so could be forced to increase their payments.

“Admittedly, adjustable rate mortgages account for only about a third of total outstanding mortgages, and we’re talking about a portion of that,” Mendes and Figueiredo said in an Oct. 21 note. “But banks are already sending letters to customers whose adjustable rate mortgage owes more interest than their fixed monthly payment obligation. And that’s just the tip of the iceberg.”

This impact is also affecting the broader mortgage market, with stocks of the country’s largest mortgage providers coming under pressure this year. National Bank of Canada analyst Jaeme Gloyn noted that shares in Home Capital Group are down 38 percent this year, Equitable Bank is down 32 percent, Timbercreek Financial Corp. by 22 percent and First National Financial Corp. by 16 percent.

Gloyn expects rising interest rates to keep these mortgage stocks low for the rest of the year. Risks in the real estate market also remain elevated, Gloyn warned, noting that the median price of a low-rise home in the greater Toronto area is down 7 percent year-on-year since the first week of October.

“Overall, we believe Mortgage Land’s relative underperformance will continue in the near term, at least until uncertainty surrounding these risks abates,” Gloyn said in a note Oct. 24, adding that the bank cut price targets across the board .

“What could change our view? … We are keeping a close eye on the employment outlook and the positioning of central banks. We believe that more widespread job losses will push mortgage stocks lower, possibly to crisis lows that would offer investors a more attractive entry point. A dovish turn from the Federal Reserve and/or the Bank of Canada could also result in a change in our current softer view.”

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