Weak GDP growth has been a critical factor influencing the Bank of Canada's decision to cut rates recently, with further cuts likely in 2024. In Q1 2023, GDP growth fell short of expectations at 1.7% compared to the forecasted 2.3%. Additionally, Q4 2022 GDP was revised down to flat, indicating zero growth for the latter half of 2023. On a per capita basis, GDP declined by 2.6% year-over-year, marking the steepest drop since the Global Financial Crisis. Employment rates have also plummeted, reaching lows not seen since the GFC and the 2016 Oil Crash, prompting markets to anticipate more rate cuts, with significant probabilities of cuts in July and September.
While a 0.25% rate cut does little to improve affordability directly, it does positively affect market sentiment. The Real Estate Outlook index, reflecting confidence in the housing market, is higher than it was between 2015 and 2020, despite national home sales volumes hitting a 20-year low. Affordability has improved slightly, with the typical home payment decreasing by 10%, from $3,550 to $3,200 monthly. This improvement, coupled with a rise in housing inventory and a surge in building permits, especially in the multi-family segment, provides some hope for better affordability in the future.
Mortgage delinquency in Ontario has topped $1 billion, although this figure is somewhat misleading as it includes total mortgage amounts rather than just missed payments. Ontario, however, has the lowest delinquency rate in the country at 0.13%. Nationwide, consumer debt has risen to $2.5 trillion, with the average Canadian holding $21,276 in non-mortgage debt. Historical trends suggest that delinquency rates will increase following rate cuts, indicating that arrears rates will likely rise in the coming months.
Housing affordability continues to decline, exacerbated by high home prices and significant down payments. Insured mortgages, which were 55% of bank-held mortgage balances in 2015, have decreased to 27% by mid-2023. Raising the limits for insured mortgages could increase demand and push prices even higher, underlining the necessity of constructing more homes to address affordability issues.
Canada's infrastructure has struggled to keep pace with population growth, with a notable decline in hospitals and hospital beds per capita since 1995. The number of hospitals per million people has fallen from 31 in 1995 to 18.5 in 2021, and hospital beds per 1,000 people have decreased from 7 in 1976 to 2.5 in 2021.
The Canadian economy is either in or near a recession, with unemployment rising from 4.8% to 6.2%. Core inflation remains low, suggesting that the Bank of Canada might need to lower rates further to stimulate the economy.
Investor behaviour in the real estate market has shifted, with many offloading condos, particularly in Toronto, due to a surge in completions and negative cash flow. The condo market is expected to see price drops as more units are completed in 2025 and 2026. Improved affordability and lower rates could eventually make investment properties appealing again, but not until they approach positive cash flow.
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