5 minute read
BE AT THE TOP OF YOUR GAME
BY CARLA GILES, CHIEF EXECUTIVE OFFICER, CMBA-BC AND MBIBC; CO-EXECUTIVE DIRECTOR CMBA
This past January, the mortgage community breathed a sigh of relief with the news that the Bank of Canada is holding its policy rate at 4.5 per cent while it assesses the impact of the cumulative rate increases on inflation.
The second half of 2022 was not kind to the mortgage sector. While the year started with an overheated housing market, fueled by low interest rates and investor confidence, it gradually shifted to one of uncertainty as inflation shot to 8.1 per cent by June.
To curb inflation, the Bank of Canada halted quantitative easing in March and rapidly raised interest rates in just 10 months. The Bank’s reasoning behind rapid adjustments to the policy rate was grounded on the need to cool the economy and keep inflation expectations anchored.
Prospective homebuyers delayed their entry into the market, waiting to see what would happen with mortgage rates and hoping prices would come down with the housing market cooling. At the same time, sellers adopted a similar posture, waiting to see when and if the market settled before listing their properties. By the end of 2022, housing sales dropped significantly to just below the 10-year average.
In addition, the rapid rise in interest rates impacted housing affordability more significantly than the rest of the economy, making homeownership more expensive for Canadians. On a year-over-year basis, the mortgage interest cost index rose to 18 per cent in December, as per Statistics Canada. Homeowners holding variable-rate mortgages felt the immediate impact of each rate hike. They saw their principal payments reduced or saw increases in their monthly payments. A recent survey conducted by Habitat for Humanity Canada on attitudes of Canadians on homeownership and the housing affordability crisis revealed that 40 per cent of those surveyed are concerned about paying rent or mortgage over the next year.
The Bank’s response to rising inflation has been criticized for ignoring the early warning signs in 2021 and failing to act quickly to control inflation. Back then, the Bank believed that inflation was transitory and would be resolved independently. Throughout that year, the Bank indicated it would keep interest rates low until at least 2023. The mortgage community operated under this belief, offering mortgage options to clients that in most cases did not consider a rapid rise in interest rates.
As for 2023, the Bank expects Consumer Price Index inflation to be around 3 per cent in mid-2023 and back to the 2 per cent target in 2024. There are signs that restrictive monetary policy is slowing activity, especially in household spending.
However, this time, the industry is treading with caution as inflation may prove to be sticky and not fall as quickly as expected by the Bank. The labour market remains tight, with an unemployment rate of 5 per cent in December, just above the record low of 4.9 per cent in June, according to the latest data released by Statistics Canada.
What seems to be clear is that we are still in a period of unknowns and that a shift in mindset is needed. Housing market participants need to get used to interest rates remaining higher than what we experienced in 2021 and early 2022. Higher net migration will almost certainly continue to put upward pressure on housing demand against an already limited housing supply. As well, the rental market may not be an option for many Canadians – as demand has outpaced supply and rent costs have gone up across Canada at an unprecedented pace in the last year.
Within this economic landscape lies a massive opportunity for the mortgage broker channel to grow as homebuyers’ affordability has taken a hit. It has become more difficult for potential borrowers to get qualified for loans. According to CMHC’s Residential Mortgage Industry report, there was a decline in the ratio of mortgage loans to applications in the second quarter of 2022.
Mortgage brokers are best positioned to assist homebuyers entering the market and mortgage holders needing help when it comes time to refinance their mortgage. They can provide options that are best suited to their specific circumstances and needs.
It is essential to recognize that this level of service requires more effort from mortgage brokers, who are already pressured to be at the top of their game. They need to be abreast of changing regulations and market trends. For example, as per data released by CMHC, the market share of newly extended mortgages by mortgage investment entities (MIEs) is increasing, signaling a trend where borrowers find it harder to qualify with a conventional lender.
This is also the time for brokers to broaden their knowledge and remain confident about the future through increased opportunities for education and networking. They must learn about new products and financing options available through different lenders. They may also want to revisit their client management and engagement tools and practices, as the digitalization of processes can help tailor messages to various segments and support lead generation. Those best equipped to understand their clients’ needs and offer products most suitable for their unique situation will be positioned to be the most successful.