Canada’s big banks face lower mortgage growth in 2023 as housing sector remains slow

Canada’s big banks face lower mortgage growth in 2023 as housing sector remains slow

Canada’s largest banks face a year of slowing mortgage growth as high interest rates eliminate borrowers from the list of those eligible for loans from traditional lenders.

Real estate loans grew 8% in the year ended Oct. 31, 2022, breaking the double-digit growth trend in 2020 and 2021, when record low rates boosted homebuyers and bolstered bank profits.

As high inflation pushes interest rates up and continues to cool the Canadian housing market, analysts expect mortgage growth is expected to decline further this year.

“We expect mortgage growth to continue to decline to low single-digit year-over-year growth in 2023, reflecting lower home sales and prices due to rising rates. mortgages and low housing affordability,” said RBC Capital Market analyst Geoffrey. Kwan said in a note to customers.

Secured home loans in Canada make up the bulk of loans from the big six banks, accounting for 44% of total loans on average in the fourth quarter, according to research by investment bank Keefe, Bruyette & Woods (KBW). Mortgage portfolios have a higher weighting in some banks, ranging as high as 53% at Canadian Imperial Bank of Commerce and as low as 33% at Bank of Montreal.

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With interest rates more than doubling in a year, many Canadians no longer qualify for more expensive mortgages. Lenders are required to stress test borrowers to determine if they can sustain payments at higher interest rates. This pressure weighs on the purchase of a house.

Sales volume fell, with activity in the Toronto and Vancouver areas falling 45% and 55% respectively year-over-year in January. Economists generally expect the Bank of Canada to suspend rate cuts until the end of 2023 at the earliest, suggesting mortgage headwinds won’t ease until next year. , according to KBW analyst Mike Rizvanovic.

“For the Canadian banks under our coverage, we expect this to directly lead to a rapid deceleration in mortgage growth over the coming quarters, with balances potentially stable later in the year. [fiscal year] 2023,” Mr. Rizvanovic said in a note to clients.

Lending to house hunters could become even more difficult as Canada’s banking regulator proposes tougher rules that would make it harder for borrowers to get a mortgage. The Office of the Superintendent of Financial Institutions (OSFI) unveiled three proposals in January that would tighten underwriting rules for federally regulated banks, including strengthening mortgage stress testing for subprime loans and capping the share of borrowers at high leverage a bank can have on their mortgage. book.

Between higher rates and tougher approval requirements, the number of people eligible for mortgages with traditional lenders plummeted a year ago, according to Frances Hinojosa, mortgage broker and co-founder and chief executive of Tribe Financial Group. The pressure is pushing potential borrowers and those renewing their mortgages to subprime and private lenders with looser loan requirements.

With slower activity and fierce competition for a smaller pool of eligible mortgage applicants at the big six banks, brokers noticed that the big lenders were much faster in processing applications and responding to requests than the latter. years.

“When you submit a deal to a prime lender, the response time is so fast compared to what we’ve seen in the last two years,” Ms. Hinojosa said in an interview. “And that’s really indicative of the volumes they’re getting today.”

But as home buyers continue to face a housing shortage as Canada increases the number of newcomers entering the country, a milder year ahead could be a hit before activity hits. resume.

The Bank of Canada has signaled that it plans to pause further rate hikes, and Canada added 150,000 jobs in January, 10 times the number estimated by financial analysts. Households are also sitting on more savings than before the pandemic, and arrears — or mortgages with payments more than 90 days past due — have so far remained flat, suggesting the odds that loans turn sour are weak.

Meanwhile, banks have looked for ways to retain and attract customers while accommodating higher rates. As mortgages mature in an environment of inflation and higher interest rates, borrowers could face higher payments that some may not be able to afford. More and more customers are taking out mortgages with amortization periods of more than 30 years to help absorb higher payments.

According to CIBC, customers are also locking in fixed terms for shorter periods as they ride out high rates expected over the next few years.

“We are proactively communicating with customers prior to renewal to ensure they understand all of their options, as this is a different pricing environment and it is important for owners to consider their overall financial situation,” said Peter Lee, Executive Vice President of CIBC Banking Centres. said in an email.

“In the current rate environment, we are seeing increased interest in 2- and 3-year fixed-term mortgages, giving customers certainty of short-term fixed interest costs and a chance to assess their options in the not-too-distant future.”

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