2023 MORTGAGE AND REAL ESTATE OUT LOOK WITH PATTIE LOVETT-REID

BY CHRIS FREIMOND

To find out what the future holds, Canadian Mortgage Broker asked financial commentator Pattie Lovett-Reid to share her outlook for real estate and mortgages over the next year.

Lovett-Reid was previously a senior vice president at TD. She is also a Certified Financial Planner, best-selling author and former chief financial commentator at CTV. She became a household name through her time as a regular guest on BNN Bloomberg and as host of the Pattie Lovett-Reid Show on CTV.

Lovett-Reid is currently chief financial commentator at Home Equity Bank, provider of a range of reverse mortgage solutions including the flagship CHIP Reverse Mortgage™ product for Canadians aged 55 and older.

CMB: What are currently the primary economic issues impacting the housing sector and mortgages?

Pattie L-R: For the average Canadian on the street, higher interest rates sure are an issue, but I’m not sure affordability is front and centre. I think it’s more about lack of supply out there, which means there is still pent-up demand.

We are seeing many first-time home buyers – and many home buyers in general – amass more of a down payment than we’ve seen in a long time. But they can’t deploy it. They can’t find the right house at the right price.

We don’t know for sure that it’s the last increase. It takes time for these interest rate hikes – eight of them in a row – to work their way through the system. It appears to be working, but we don’t know with absolute certainty yet, nor does the Bank of Canada. Was the recent increase an insurance policy? A bit of one. Some would suggest that the Bank was a little too slow in starting to raise interest rates then was in catch-up mode.

So, the fear of missing out has been overtaken to some extent by the joy of missing. Many buyers are now saying maybe it’s better to wait and see if more supply comes onto the market in the spring selling season, and maybe prices will continue to move a little lower.

CMB: What is causing the lack of supply?

Pattie L-R: There’s pent-up demand driven in part by immigration. We have one of the fastest growing populations – if not the fastest growing – in the G7 nations. We simply don’t have the supply. Also, I think many Canadians are opting to stay in their homes longer, so they are not putting them up for sale, adding to the shortage. Many are instead turning to CHIP Reverse Mortgages, which were once probably the most disliked product on the market because in many cases they were misunderstood.

But you can’t eat a brick in retirement. The economic slowdown is prompting many homeowners to use the equity in their homes to create a little financial wiggle room and allowing them to stay in their home longer.

The supply crunch is also exacerbated by millennials who have been living under their parents’ roof, but neither they nor their parents want it to go on forever, so they are looking for homes of their own.

CMB: Other than homeowners who want to stay in their homes longer, to what extent is the supply shortage caused by those who don’t want to sell when prices are falling and are waiting for prices to recover?

Pattie L-R: I think there may be some of that, but I also think people need to look in absolute numbers. What actually is your principle gain on this residence? What did you buy in at?

For many Canadians, a house is their largest asset, but it’s also their most emotional asset. Regardless of whether the market is up or down, they need to do a reality check before putting their house up for sale: Why are you selling? Do you need to sell? Are you pricing yourself out of this market?

And even those who tell me that they want to downsize, I often think, are you really downsizing in terms of just dollars? If so, where are you going to go and what are the lifestyle considerations?

The shortage has also in part been induced by the Bank of Canada with interest rate hikes to slow down the one thing that propped up the economy, which was the housing market during the pandemic. The Bank is now trying to reverse course so that we can beat down inflation and put more money in the pockets of Canadians and allow the economy to continue growing.

Financial Commentator Pattie Lovett-Reid

So I do think we’re at an inflection point, a bit of a reset, and households are assessing what that means for them.

CMB: It seems counterintuitive that there is still such pent-up demand in spite of rising interest rates. Why is that?

Pattie L-R: I think what’s happened is that people who went through the qualifying process for mortgage loans and had their deposit ready, pulled back when the market was stronger and refused to get into a bidding war. They still have their deposit and still dream of owning a home and will continue to look for it.

CMB: Do we need to change the requirements of qualifying for a mortgage?

Pattie L-R: I think our banks have been very prudent. If you look at our delinquencies right now, people may not be happy with high inflation and interest rates going higher, but our delinquencies are still very low.

The housing market has proven to be very resilient. We could see prices drop further in the spring and not get the usual uptick that we’ve seen before, but I think it’s going to be temporary. The dream of home ownership is still there for a lot of people who missed it on the last round.

CMB: It has been suggested that the latest Bank of Canada interest rate increase may be the last for a while. How do you think that’s going to affect the real estate market and the mortgage industry in particular?

Pattie L-R: We don’t know for sure that it’s the last increase. It takes time for these interest rate hikes – eight of them in a row – to work their way through the system. It appears to be working, but we don’t know with absolute certainty yet, nor does the Bank of Canada. Was the recent increase an insurance policy? A bit of one. Some would suggest that the Bank was a little too slow in starting to raise interest rates then was in catch-up mode.

And when I look at what the market is pricing in 2023 to 2024, if the economy lapses into this slowdown, which is expected by just about every economist on Bay Street, the Bank may be in a position or even forced to cut rates by as much as 200 basis points.

As far as mortgages go, there are many savvy people out there saying that if you find your dream home and it’s in the right location and you have the deposit and can afford the payments and you believe rates will be coming down, then variable products may be suitable for you.

Whether to opt for fixed or variable rate products is a personal choice. I know people who have had variable rates during the time that rates have been rising. They have altered their lifestyle, are still making their payments and are comfortable with where they are at. But I know others with fixed rates who say they would not sleep at night if they were stuck with a variable rate product.

There’s the right product out there for the right person, and everyone has their own view on the economy. However, the job market is the wild card. Do you have a job? Will you be able to maintain your job through this?

And yes, jobs have been very strong, which is why some are saying this is going

to be a mild recession because we still have a labour shortage, but we don’t have a labour shortage in every sector, technology and financial services for example.

If you have a job, you don’t worry about a recession. If you find the right home and you can afford it and you have the down payment, you don’t worry about making your mortgage payment. It’s the minute you don’t have a job that you start to worry.

CMB: Other than interest rates and employment security, are there any other significant factors that you think will influence home buyer or home seller decisions in the next year or two?

Pattie L-R: I think the employment landscape will play a role. During COVID-19 when people could work from home, many moved out of urban centres to more rural locations. They believed they would never have to return to the office.

Initially, employers were happy to see that happen, but many are now realizing that 100 per cent remote is not working for them and they are calling employees back into the office. It still has to be played out, so we don’t know how it will impact the housing market or how much flexibility employers are prepared to allow.

CMB: What advice would you give to help mortgage brokers navigate the current market conditions, particularly with interest rates having risen yet again?

Pattie L-R: The mortgage brokers I know do a fabulous job at this already. I think it’s about putting it into perspective. Drilling down on what a client may need versus what they think they want or would like to see. What may appear attractive in mortgage terms and conditions for one person is not attractive for the next. They need to ask their clients how long they expect to stay in this

location and look at their life as a whole.

It’s about taking that hand-holding step further and it becomes more of a partnership based on: “I’m going to get the best deal for you,” which doesn’t always mean it’s the best rate, but rather the best package.

CMB: With the real estate market having changed to the extent that it has, do you see any new types of mortgage products coming onto the market to deal with the new circumstances?

Pattie L-R: I am not an expert on all of the mortgage products available and, at least from my perspective, if I don’t fully understand them, does the end consumer?

Maybe there are opportunities for changes such as moving away from the conventional five-year and three-year fixed mortgages. Maybe we could have a longer amortization period and different pay down methods, more tailored to the individual consumer.

I appreciate that a bank’s funding commitment is a business decision, but they may need to look at new products to maintain or grow market share as the lending landscape alters.

CMB: Finally, what is your outlook for the housing market as a whole?

Pattie L-R: There’s a lot of talk about prices maybe being down 25 per cent over the next year. There’s no doubt that prices have come down. But the housing market has proven very resilient, and it is a far cry from where you see a pullback from a bubble that has burst. We have demand here in Canada, and it is a sector that has served us well through the pandemic.

In my opinion, as we enter into an economic slowdown and even as we come out of it, it will be a sector that continues to serve this country well.