Gerard’s Take: Interest Costs in 2024

Why is this? Many Canadians feel like we are in a recession with reduced spending power over the last two years and higher cost of mortgage renewals. In some cases, mortgage costs on renewals are going up by 200 – 300%. With current house prices being high and average income that has not kept pace, many people cannot afford to even enter the market.

What to expect from Interest Rates and Inflation in the coming months and into 2025:

• In the city of Toronto Active Real Estate Listings are at their highest since 2008 during the financial crisis; therefore, homes are not selling.
• With inflation at 2.5% y/y in July and some softness in the Canadian economy, most economists believe we will see interest rates decrease on September 4th.
• I will give this decline a probability of about 80%
• I am sure it is no surprise to our readers that although headlines point to inflation coming down, prices are still high.
• This is the case for services and shelter costs with significant contributors being gasoline, renovations and monthly rent. High fuel prices are often a forerunner to higher food prices in the fall
• We believe rate decreases will continue into the fall with a 4% Bank Rate in sight, the rate currently being 4.75%. This means three more cuts of .25% each, including July 24th.
• If rates continue this downward path, we could see prime rate at 6% to 6.20% by Christmas (this is an approximate savings of $352, from the peak of 7.20%, on a $600,000.00 mortgage and the best news I have for readers.)
• In Canada with gas prices remaining high it is hard to see inflation coming down too much more; however, much of the decrease in inflation is coming from slower and reduced spending by Canadians.
• The easing of inflation is a sign that consumers are becoming increasingly cautious with discretionary spending and Canada’s economy is expected to show further signs of weakening when Canada releases its Gross Domestic Product (GDP) report for the second quarter of 2024 on August 30th
• We believe that we could see rates decrease 2 to 3 times before rates decrease in the USA. I am not overly worried about the Canadian Dollar, as the CAD is close to USD 0.70, with a lot of negativities built in from Canada’s low productivity (recall: Gerard was a currency and interest rate specialist for 25 years at Scotia Capital)
• Jerome Powell, Chair of the Federal Reserve in the USA has signaled that they are open to rate decreases in September and the months ahead.
• For those with Mortgage Renewals, 3 years fixed is our focused recommendation due to the price advantage over variable and ensuing uncertainty.

First Time Home Buyers and Gifted Down Payments

A recent survey by Royal LePage conducted by Hill & Knowlton revealed that 84% of Canadian adults in Generation Z and younger millennials—aged 18 to 38 and born between 1986 and 2006—still consider homeownership a good investment.

Skyrocketing home prices and steep mortgage qualification hurdles have seen a growing number of first-time home buyers rely on gifted down payments from parents or grandparents to fund their first purchase. This has been a trend for the last 5 or six years according to a new report by CIBC. Although the number of families using wealth transfer has remained flat since 2021 when CIBC published their first report, the amount of the gift is rising sharply with the average amount of a gifted down payment for a first-time home buyer sitting at $115,000 — an increase of 73% since 2019.

The overall share of first-time buyers relying on assistance from family members now sits at 31%. A study by Ratehub shows that 11 out of 13 housing markets in Canada remain unaffordable. Although real estate sales are down, prices remain high in most markets as incomes have not increased to keep pace with the housing price increase. In addition, 31% of people between ages 25 and 29 live with at least one of their parents, up from just 17% 30 years ago, according to a 2024 study by the Vanier Institute of the Family.

House Rich and Cash Poor

There is another segment of the population that is remaining in their homes longer. In the mid-70s, a person lived to an average age of 72 — and now that age has increased to 84 due to modern medicine and wellness effects. That means that Canadians are living in their homes at least 12 years longer and in many cases, more than 90% of Canadians wish to age in place well into their 90s. As the expression goes, Younger Canadians can’t get into the housing market, and older Canadians don’t know how to get out. By themselves, these trends have contributed to a housing shortage.

There is a predicament for older Canadians as they near retirement: being house-rich and cash-poor and needing to depend on just OAS and CPP as approximately only 44%. The remainder will have to rely on savings (of which a full 49% have saved nothing at all.)

There is a duality to homeownership, in which it represents both a home and an investment.

To extract this investment there are several choices:

1. Sell their home and rent or lease it back from an investor.
2. Use a reverse mortgage. Many options enable a homeowner to receive a lump sum of monthly payments or a combination of both. In this scenario, a 70-year-old person would have use of about 35% of the value of their home.
3. HELOC (Home Equity Line of Credit)
4. Add a second mortgage
5. Refinance
6. Sell and downsize into a smaller owned home
7. Sell and move into a different rental home

However, the sad reality is that many of these homeowners live a poor existence and, in many cases, sacrifice their health and well-being in their golden years.

Relocation or Interprovincial Migration

Mortgage portability is becoming popular. Almost 3 in 10 Canadians are considering leaving their province to escape high housing costs, another reason mortgage portability is important. Some of the popular provinces are Nova Scotia, New Brunswick, Newfoundland, Saskatchewan and, to a lesser degree, Alberta. In these jurisdictions, housing costs are not the only consideration. Having lived in many of these provinces myself, some of the other considerations worth researching are: Health Care, Provincial Taxes, fresh produce and fruit and the aging population placing pressure on senior residents.