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Wouldn’t it be great if we were able to know what the top risks and trends would be in Canada’s mortgage market today and in the next 12 months? From rising inflation and falling consumer confidence to changing real estate preferences, Canada’s mortgage market could be impacted on multiple fronts. And, as always, the course of the pandemic remains the wildcard in any economic planning and forecasting. We will look at some forces that would be impacting the mortgage market.

Inflation: With the latest reading from July at 3.7% (according to data released by Statistics Canada), well above the Bank of Canada’s target of 2%, inflation is running hot right now.

Despite the Bank’s insistence that inflation pressures should prove ‘transitory’ and dissipate as supply chains ease up, the experts believe an ‘inflation scare is coming’.

Businesses are seeing a lot of price pressure and that is going to translate into higher inflation. If that comes to pass and inflation remains high, markets would likely see a rise in the 5-year bond yield, which is the leading indicator for the 5-year fixed mortgage rates.

Housing affordability a key election issue: All of the major political parties have promised to make housing more affordable as part of their election platforms. The most common age to purchase a home is now between 28 and 37, and with millennials now outnumbering boomers, housing affordability is an increasingly important election issue.

Housing now represents the overwhelming majority of the Canadian economy, accounting for two-thirds of GDP since the bottom of last year’s recession, and over 50% over the past four years. Most policies will probably be focused on incentivising new housing supply.

Potential reversal of the ‘flight to the suburbs’: Over the course of the pandemic, there’s been a flight of homebuyers out of the cities looking for single-detached homes with more space and privacy.

The latest housing reports are showing declines in the detached market. This suggests that we’re starting to see the early signs that this migration out from the big cities and into the suburbs is starting to reverse.

If the fourth ‘delta’ wave of the pandemic proves significant, it could matter a lot for the economy and housing.

End to government income support measures: Now more than a year and a half into the pandemic, there are still 1.7 million Canadians on wage subsidy programs, which are scheduled to expire on October 23rd.

This is a huge number (during the financial crisis of 2008, there were 800,000 on Employment Insurance), that means that we have twice as many people still on government support compared to the height of the financial crisis.

At the same time, the share of businesses reporting a shortage of workers is at a record high. While the situation isn’t a huge deal at the moment, we don’t know how this is going to play out.

Potential new regulations on the way: Mortgage debt has been growing at a record pace over the past year and if that continues the experts suspects that new mortgage regulations could come down the pipeline later this year or in early 2022.

The regulators have been dropping hints and often emulate policies that have already been tested in other markets such as in New Zealand. They face similar housing challenges, such as supply constraints and high demand. The government there just announced a tightening of underwriting practices for secondary properties, which now require a higher down payment.

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