The Bank of Canada has stated that merely adjusting the nation's distinctive mortgage system won't resolve the impending housing affordability crisis, even as over four million Canadians face higher mortgage renewals.
What does this mean?
Canada's mortgage model, which features variable rates or fixed rates that reset every few years, has traditionally supported financial stability and maintained low default rates compared to other economies. This starkly contrasts with the US, where homeowners often benefit from 30-year fixed-rate loans. Despite the Bank of Canada's efforts to stimulate growth by reducing its key interest rate four times to 3.75% following inflation stabilization, mortgage renewals are still set to happen at higher rates. This discrepancy arises because long-term bond yields haven't decreased in tandem with these rate cuts. Consequently, increasing mortgage payments pose a threat, potentially constricting household spending and market liquidity. The Bank of Canada suggests that enhancing housing affordability requires balancing supply and demand rather than altering mortgage structures.
As mortgage costs climb, Canadian households might reduce their spending, potentially leading to lower consumer activity and tighter financial conditions. This could impact market sectors reliant on consumer confidence and spending, highlighting the need for careful economic planning.
The bigger picture: Steady rates, shifting landscapes.
While stable, Canada's approach faces hurdles amid a housing crisis worsened by limited supply. Shifting to longer mortgage terms would demand significant policy changes, yet the current system has prevented unsustainable borrowing. Improving affordability means boosting housing supply to meet demand without disrupting the financial framework.