Intelligent Investment

Lenders Enter 2023 on Cautious Note

Canada Monthly Mortgage Commentary

November 29, 2022 2 Minute Read

Economists at the major Canadian banks are nearly unanimous that the Bank of Canada will raise interest rates by another 50 bps in December. A similar increase is also expected by the Federal Reserve next month. If realized, these would bring policy interest rates at year-end to 4.25% in Canada and 4.50% in the U.S. After the escalating pace of interest rate hikes throughout most of 2022, both central banks are now openly considering slowing the pace of interest rate increases, but not pausing.

Last month, the Bank of Canada had already slightly eased their monetary policy adjustments with a smaller-than-expected interest rate increase. Additional statements by the central bank revealed that they could be “reverting to more normal 25-basis point steps”, however, that final decision will depend greatly on the upcoming economic data releases preceding their December meeting. Meanwhile, the Federal Reserve also plans to formally discuss slowing their pace over their next couple of meetings.

Inflation remains stubbornly high and weakens the case for slowing interest rate hikes. Even after 350 bps of interest rate increases so far this year, inflation in Canada continues to hold at elevated levels and has now broadened. Over 85% of the prices in the Consumer Price Index are rising above the 2% target and nearly 60% are increasing by over 5% year-over-year.

According to CBRE’s 2022 Canadian Real Estate Lenders’ Report, amid this environment of escalating cost of debt, real estate lenders have become a bit more cautious but will continue to provide liquidity in the market in 2023. While 66% of lenders plan to deploy an additional 10% of net new lending capital next year, this pace of growth reflects a moderation in lender intentions relative to the 53% that sought to grow by 20% to 30% last year. The report also found that real estate debt spreads have risen over the course of the year and most lenders expect these spreads to widen further in 2023.

In terms of lender preferences, sentiment has shifted significantly on the office asset class with over half of lenders intending to lower exposure to the sector. Class B assets, in particular, are seeing the highest level of concern among lenders as office tenants across Canada are taking advantage of this period and relocating to best-in-class buildings. Overall, the market is expected to remain liquid, albeit with more selective and higher cost of capital over the next 12 months.

Economic Highlights:

  • The Canadian economy grew at an annualized rate of 2.9% in Q3 2022, down from the 3.2% increase in Q2 2022.
  • Employment rose by 108,000 jobs in October 2022 with the unemployment rate holding flat at 5.2%.
  • Inflation held steady at 6.9% in October 2022 with higher gas and mortgage interest costs offset by moderating food prices.


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