Higher interest rates to keep growth subdued for rest of year

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Canada’s biggest banks are warning that mortgage growth is slowing and is expected to stay subdued for the rest of the year, as higher interest rates bite deeper into the economy.

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Total mortgage volume growth was in the single-digits at most of the Big Six banks in quarter ended April 30, down from double-digit levels last year.

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On top of a slowdown in housing markets, which has dented home values, the banks are also contending with a wave of mortgage renewals that will raise housing costs and strain indebted borrowers.

The Royal Bank of Canada was one of the banks warning that the days of unrelenting mortgage volume growth are ebbing.

“Mortgages grew seven per cent from last year, down from eight per cent growth year over year last quarter,” RBC chief executive Dave Mckay said in a May 25 conference call. “Origination activity is expected to continue moderating towards 2019 levels as limited supply and increased demand from immigration is muted by concerns around affordability. We expect annual mortgage growth to slow to the mid-single digits.”

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The total size of RBC’s mortgage book grew 6.5 per cent in the second quarter over the same period last year. That’s down from 11 per cent year-over-year growth reported in the second quarter last year.

The Canadian Imperial Bank of Commerce and the Bank of Montreal shared their own warnings that mortgage growth was softening amid a slowdown in home sales.

The Bank of Nova Scotia, meanwhile, eked out a three per cent gain in its residential mortgage book since last year, but posted a decline of $2 billion — or one per cent — over the previous quarter, according to average assets recorded in company filings.

Scotiabank has been deliberately moving away from the mortgage business and slowing portfolio growth to focus on growing consumer bank deposits so that it doesn’t lean as heavily on wholesale funding from large investors. During the first quarter conference call on Feb. 28, Scotiabank chief executive Scott Thomson made the case that boosting deposits reduces funding costs and deepens client relationships.

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The Bank of Nova Scotia has been moving away from the mortgage business.
The Bank of Nova Scotia has been moving away from the mortgage business. Photo by Peter J. Thompson/Financial Post

Even so, it’s not every day that a big Canadian bank has a dip in overall mortgage portfolio growth, said mortgage analyst and strategist Rob McLister. He added it would be rare to see it happen across all of the banks.

“People don’t realize it, but negative mortgage growth on a system-wide basis is incredibly rare,” McLister said. “And the only time in modern records on a year-over-year basis that has happened was August 1982.”

McLister said that was the year after Canada’s prime rate reached an all-time high of 22.75 per cent, which put much more pressure on borrowers than the current 6.7 per cent level. Given that 1981’s mortgage downturn was the worst plunge since the Great Depression, he doesn’t expect to see negative mortgage portfolio growth across all of the major banks any time soon.

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He also expects that the banks will be able to navigate renewal at higher interest rates and the expected uptick in mortgage arrears because high immigration has been able to set a floor under how far home prices could drop in major cities, giving homeowners equity to lean on.

Negative mortgage growth on a system-wide basis is incredibly rare

Rob McLister

The wave of renewals has been flagged by the Bank of Canada as a concern in its financial system review on May 18. The central bank estimated that mortgage costs would rise by a median of 20 per cent between 2023 and 2026 as borrowers renewed their mortgages. Some variable-rate borrowers with fixed payments could see a bump of up to 40 per cent in order to keep up with their original amortization schedules, assuming they renew in 2025 or 2026.

Scotiabank’s chief risk officer Phil Thomas said the bank’s mortgage book was still holding up and noted that only about 2,000 customers of their 950,000 mortgage customer base ran a greater “tail risk” of defaulting on their loans. Thomas added that the bank was looking to leverage machine learning to identify consumers before they go delinquent through their financial behaviour.

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Executives across the banks said they would be wary of how rising rates are hitting their clients and would work with them to manage their mortgage payments if problems arise.

McLister said the strength of the banking system, policymaker interventions and the fact that wages are still climbing gives him confidence that a wave of defaults or collapse in mortgage volumes isn’t coming.

“Based on all the data I’ve seen, I don’t really have significant reason to worry at this point,” McLister said. “Now, we don’t know what’s happening with recession, we don’t know how bad it’s going to be. But things are working in banking system’s favour.”

• Email: shughes@postmedia.com | Twitter:

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