The looming wave of mortgage renewals in Canada, totaling nearly $1 trillion by 2026, presents a concerning macroeconomic challenge for the Bank of Canada. As these renewals lead to a substantial increase in average monthly mortgage payments, they are poised to trigger a significant demand shock, exerting pressure on the housing market and the broader economy. To prevent this slowdown from escalating into a crisis, the central bank may need to take aggressive easing measures, positioning Government of Canada bonds for a strong performance in 2024.
It is widely reported that approximately two-thirds of the Canadian mortgage market will undergo renewals between 2024 and 2026. Given that most fixed-rate and fixed-payment variable-rate mortgages had locked in low interest rates before or during the early stages of the 2022/23 rate hike cycle, these renewals will transition mortgage holders to considerably higher average interest rates.
The forthcoming “mortgage renewal cliff” in Canada is a well-known phenomenon, but the full extent of its macroeconomic implications has not been thoroughly examined. By combining data from the Bank of Canada’s recent Financial Stability Review with information from the Canada Mortgage and Housing Corp. (CMHC) regarding average mortgage balances, it has been confirmed that approximately two-thirds of mortgages, by value, will renew by 2026, with the majority occurring in 2024 and 2025. Analyzing the increase in average monthly mortgage payments since the beginning of the rate hike cycle, it is estimated that these payments will rise by 15% by the end of 2024, 30% by the end of 2025, and 45% by the end of 2026.
The true concern lies in the aggregate impact of these rising individual payments on the overall economy. As households allocate more of their monthly income to mortgage payments, there will be less available for discretionary spending, such as consumer goods, dining out, and vacations. Based on the share of households with mortgages, this reduction in per-capita discretionary income translates into a substantial 20% decrease in effective aggregate national disposable income by the close of 2026, significantly affecting overall demand.
It’s important to note that this calculation represents an upper limit of the impact on demand, as many households may be unable to absorb such a steep increase in mortgage costs. Some households may choose to restructure their mortgage payments, using excess savings to reduce principal and manage monthly payments. Others may opt to downsize, leading to an increase in housing supply and demand for lower-priced units, which could further pressure house prices.
Lastly, a smaller segment of mortgage holders may have no alternative but to default on their mortgage obligations. Banks have already bolstered their loan-loss provisions in anticipation of growing delinquencies, and as mortgage renewals progress, there is a historical lag of two years between policy rates and mortgage defaults. This suggests a steady rise in defaults beginning in early 2024, even though delinquency rates remain at record lows for now.