Housing Market In Canada Precarious
With the housing market situation in Canada seemingly more precarious, the Bank of Canada should be wary, says Picton Mahoney Asset Management in its ‘Q4 2022 Investment Review and Outlook.’ Compared with the U.S., the Canadian economy already appears to be weaker, it says. Unemployment jumped to 5.4 per cent in August, the third straight month of falling employment levels. Employment declines were driven by setbacks in the educational services and construction sectors. The Canadian dollar’s weakening in the third quarter suggests that investors are pessimistic about Canada’s economic outlook and that higher rates will likely have more of a negative impact than in the U.S. Such concerns would be well-founded. However, housing weakness is a big concern, given the lack of consumer deleveraging following the global financial crisis. And Canada doesn’t have the cushion of locked-in 30-year mortgages, as in the U.S., which to a certain extent help insulate mortgage markets from interest rate spikes. Canada’s reliance on seemingly low floating-rate mortgages to buy expensive real estate could prove a problem when prices fall and floating-rate mortgage rates spike. According to the Bank of Canada, as of July 2022, variable rate mortgages represented 21 per cent of insured residential mortgage balances outstanding and 39 per cent of uninsured mortgages. Since the uninsured market is more than double the size of the insured market, this means that variable-rate mortgages account for about one-third of the total residential mortgage balances outstanding.