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Real Estate

Jun 27, 2023

Inflation on mortgage rate interest costs hits a record high

Holly McKenzie-Sutter, BNN Bloomberg

We expect to see economic declines in the third and fourth quarter: Economist

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Overall inflation slowed in May to 3.4 per cent, but interest on Canadian mortgage costs rose a whopping 29.9 per cent – the highest increase on record for a third consecutive month as central bank interest rate hikes drive up housing costs.

Experts say the dynamic has set up a delicate tightrope for the Bank of Canada as its monetary policy aimed at bringing down consumer prices causes home prices to rise, and putting upward pressure on inflation as a result.

INTEREST RATE INFLUENCE

James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender, told BNNBloomberg.ca that the mortgage interest figure was “far from a surprise,” as it reflects more than a year of steep interest rate increases.

“We went from a historically low rate environment to the quickest rate increase we've seen for 30 years or perhaps ever,” Laird said in a telephone interview. “It makes sense that we are setting records.”

In May, the Bank of Canada’s benchmark interest rate was at 4.5 per cent, up from 0.25 per cent in January 2022. The central bank hiked rates again in June to 4.75 per cent, and many economists are predicting further tightening before the end of the year.

Laird said the tightening cycle was only at its beginning last year, so it makes sense that mortgage interest is reflecting a sharp year-over-year spike now.

“At this time last year, the majority of the rate hikes were still ahead of us,” Laird said in a telephone interview. “We definitely knew this was coming. I think the year-over-year number crystallized it well.”

WHO IS AFFECTED?

Variable-rate mortgage holders have been most affected by higher mortgage interest costs, Laird said. Figures from Ratehub.ca this month state that a homeowner with a variable rate mortgage would have seen a 62 per cent increase on their monthly payments since March 2022.

People with fixed-rate mortgages with recent renewals or renewals coming up soon may not have felt as big of an impact, Laird said, because their mortgage rates did not start at the lows seen during the pandemic.

More people will likely feel the effects of rate hikes in the coming years as their renewals come due, he added, meaning it will take until 2025 or 2026 for the full mortgage market in Canada to adjust to the higher interest rate environment.

BANK OF CANADA’S INFLATION BATTLE

The skyrocketing mortgage interest has posed a challenge for the Bank of Canada because its main tool used to fight inflation – interest rate increases – is actually driving it higher in the context of the housing market.

Last month, Statistics Canada credited higher mortgage interest and rent costs with partly driving the first increase in annual inflation since a year earlier.

Pedro Antunes, chief economist at the Conference Board of Canada, said housing is a “Catch-22 for the Bank of Canada.” He said the re-acceleration in housing prices may have prompted the central bank to hike rates again, but the resulting higher mortgage rates are driving up inflation in turn.

“What's calculated in inflation is home ownership costs, and part of what drives home ownership costs, of course, are mortgage rates. So as you increase interest rates, that has this negative impact in terms of driving at least that home ownership cost portion of the (consumer price index) up,” Antunes said in a television interview. “There's a bit of a balancing act there, for sure.”

Laird said the Bank of Canada is likely watching the phenomenon closely and looking at inflation sector-by-sector as it considers its next moves.

“They’re quite aware of the negative impacts that their rate policy has and mortgage holders are probably one of the first groups that they’re thinking about,” he said. “They’re hoping to be done (with interest rate increases) but they will act if they have to.”

WHAT’S NEXT?

Laird said he expects the year-over-year inflation on mortgage interest is nearing its peak.

He predicted the highest mortgage interest inflation figures would come either this month or next and then start to decrease as the baseline for mortgage rate costs moves up.