Canadians should worry about jobs, not mortgages: RBC

Stop worrying about mortgage renewals and start worrying about jobs.

That’s the advice of RBC Assistant Chief Economist Nathan Janzen. In a report issued October 16, he detailed why the concern about the former is less of an issue than the latter.

“The BoC’s 75 basis points of rate cuts so far (with much more to come) have already produced some rate relief for mortgage holders,” he argued. “Five-year government bond yields, which drive the five-year fixed mortgage rates, have correspondingly dropped and two-year Canadian government bond yields, the main driver of changes in borrowing costs in one to three-year mortgages are below levels from two years ago. A large chunk of one to three-year mortgages will likely renew at lower interest rates and variable rate mortgage holders are already seeing some relief—either from lower debt payments (for variable rate, variable payment mortgages) or lower interest costs and larger principal payments (for variable rate fixed payment mortgages).”

The economist detailed why he is more concerned about the possibility of labour market weakness.

“Higher mortgage payments certainly hurt the total amount of income available in the economy to spend, but higher unemployment does as well,” he wrote. “We anticipate a 1 percentage point rise in the unemployment rate typically lowers household disposable income in the economy by 0.5%. Our forecast calls for continued modest rises in Canada’s unemployment rate from its low of 5% in mid-2022 to 7% by early 2025. That’s a significant increase and more than a percentage point above pre-pandemic levels. But, we’re watching for deterioration that might extend beyond that.”

Janzen says the halcyon days of job availability has quickly closed.

“The total amount of job openings in the economy is 25% below where it was a year ago and if it weakens further, it will cause the unemployment rate to rise more than our base case expectations. Initially, there were more job vacancies than people looking for work, so the drop in openings didn’t have a material impact on the economy. But, that’s no longer the case. The unemployment rate is now above pre-pandemic levels, and the job vacancy rate is lower. Any further drop in hiring demand raises the risk of the unemployment rate rising more,” he added.