Intelligent Investment

Lenders Sentiment Improves As Interest Rate Hikes Appear To Plateau

Canada Monthly Mortgage Commentary

November 30, 2023 2 Minute Read

Bond yields have fallen over the last few weeks as the latest economic indicators strengthen the case for the end of interest rate hikes. Inflation in Canada has resumed its downward trend, with both headline and core measures easing over the last two months. The overall economy also contracted by an annualized rate of 1.1% in Q3 2023, but Canada avoids a technical recession thanks to Q2 2023 GDP growth being revised upwards to 1.4% from the previous 0.2% decline. Overall, these indicators depict a Canadian economy that is slowing as intended by the Bank of Canada and that no further interest rate increases should be necessary from the central bank. In the U.S., a similar narrative is playing out and no more interest rate increases are expected from the Federal Reserve.

Financial markets responded accordingly and bond yields have adjusted to the current outlook. Both the Canada and U.S. 10-year bond yields dropped nearly 70 bps from their recent peaks set last month to 3.6% and 4.3%, respectively. Lower bond yields will translate to lower costs of real estate debt as well as easing pressure on cap rates, which will eventually help unlock increased investment activity.

Canadian lenders are also signaling optimism in real estate as interest rate hikes appear to plateau. The amount of debt capital available to facilitate Canadian real estate transactions is expected to grow modestly in 2024. According to CBRE’s 2023 Canadian Real Estate Lenders’ Report, lenders plan to add 16% of net new capital into the real estate market in the coming year, and 79% of lenders say they plan to expand their outstanding real estate loan books in 2024.

Toronto, Vancouver, Montreal, and Ottawa are the markets generating the strongest lender appetite. In terms of asset classes, Purpose-Built Rental (Conventional), Purpose-Built Rental (CMHC-Insured) and Industrial were cited as the most favourable property types for lenders and with the most available financing. While overall conditions remain challenging in the real estate sector, the general tone in the market appears to have improved slightly heading into 2024.

Economic Highlights:

  • Headline inflation slowed to 3.1% in October 2023 and all three Bank of Canada core measures also declined month-over-month.
  • Real GDP declined at an annualized rate of 1.1% in Q3 2023 and advanced estimates call for 0.2% growth in October 2023.
  • Employment rose by 17,500 jobs in October 2023 and the unemployment rate rose slightly to 5.7%.



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