Canadian Recession & Housing: What It Means For Your Mortgage
You've heard the news: Canada is officially in a "technical recession." And in the same week, the major banks announced record-breaking profits. If that sounds confusing, you're not alone. The word "recession" gets thrown around a lot, but its real impact on the housing market and your mortgage is often misunderstood.
Traditionally, a recession is supposed to do three things: drop house prices, lower interest rates, and put banks under pressure. Right now, in Canada, none of those things are happening in the way you might expect. This gap between what a recession is supposed to do and what's actually happening could cost you a lot of money if you make decisions based on outdated assumptions.
What You'll Learn
- What a technical recession actually means for Canada.
- Why Canadian home prices aren't crashing despite recession headlines.
- The real reason interest rates aren't dropping (hint: inflation).
- How Canadian banks are still making record profits during a "recession."
- Actionable steps you can take to save money on your mortgage, especially at renewal.
Understanding Canada's "Technical Recession"
Let's clarify what a recession is. It's simply two consecutive quarters where the economy, measured by Gross Domestic Product (GDP), shrinks instead of grows. GDP is the total value of everything a country produces and sells. When it goes backwards for two quarters, that's the textbook definition, and that's what Stats Canada observed recently.
The most recent quarter was barely below zero, and the one before that was slightly negative. So, technically, yes, we are in a "technical recession." However, here's the crucial detail often missed: in the same report, GDP per person actually increased because our population shrank at the same time the economy stayed flat. Early estimates for the next month even suggest the economy could be growing again by about 0.4%.
So, we have a recession label based on backward-looking data, even as underlying numbers suggest a potential rebound. This matters because every mortgage or real estate decision you make should be about where you're going, not where you've been.
Are House Prices Crashing? Not Exactly.
When people hear "recession," they often think "job losses" and "housing crash." Many are waiting on the sidelines for prices to plummet. But are house prices actually crashing in Canada?
The short answer is no. Nationally, home prices are down about 4% compared to a year ago, but this decline is actually slowing down month over month. The average price of a home across the country is still around $695,000. While 2022 to today might look like a significant drop, a true "crash" would mean a sustained 20% to 30% reduction in value. What we're seeing is more of a softening, a rough patch, not an ongoing crash.
If your plan is to wait for a continued market crash, you might be waiting for a long time. The market isn't necessarily going to bounce back tomorrow, but a prolonged, dramatic crash seems unlikely based on current data.
Why Interest Rates Aren't Dropping
Normally, a weakening economy prompts the Bank of Canada to cut rates to stimulate growth, making borrowing costs, including your mortgage, cheaper. This is what many people are counting on during a recession. However, it's not happening right now, and the reason is inflation.
The most recent inflation reading actually went up to about 2.8%. The main driver? Gas and oil prices, which are up close to 30% from a year ago. This puts the Bank of Canada in a tough spot. They can't cut rates because the headline inflation number still looks too high. But, if you strip out the volatile energy prices, core inflation has dropped to its lowest level since 2021, meaning they don't need to hike rates either.
Essentially, the Bank of Canada is stuck in a holding pattern and will likely remain there until the end of the year. They've held rates at 2.25% for four consecutive meetings, and most economists don't foresee immediate changes.
Fixed vs. Variable Rates: A Quick Note
It's important to remember that variable rates follow the Bank of Canada's overnight rate, while fixed rates follow what happens with bond yields, which move based on market expectations of inflation. A year ago, going variable was common advice, anticipating rate cuts. That advice isn't holding up as strongly now, and the factors influencing fixed versus variable decisions have shifted.
Banks Are Thriving: The "Spread" Explained
You'd think a recession would put significant pressure on banks, perhaps leading to insolvencies. Yet, Canadian banks are posting record profits. The six biggest banks collectively made $70 billion last year, a new record, with Royal Bank alone making $5.5 billion in the last quarter.
How is this possible during a recession? It largely comes down to something called the "spread," which is the difference between the interest rate you pay on your loan and the lower rate the banks pay for the money they lend you. This spread often widens during periods of market uncertainty, benefiting the banks.
One of the most profitable times for banks, especially regarding mortgages, is during renewal. CMHC data shows that three out of four people simply renew their mortgage with their existing bank without making any adjustments or shopping around. Banks know this. Even if you try to negotiate, they often price things in such a way that it still heavily benefits them.
The Cost of Breaking Your Mortgage
A significant cost for homeowners is breaking their mortgage early. Many large banks calculate this penalty based on the "posted rate," which is an inflated sticker price nobody actually pays for a new mortgage. This artificially high posted rate translates into thousands, or even tens of thousands, of dollars in penalties if you decide to sell, refinance, or restructure your mortgage mid-term.
While I have mortgages with big banks myself, it's crucial to understand this mechanism. Without this knowledge, you could easily end up paying $20,000, $30,000, or even $40,000 more than necessary.
Bottom Line: What You Can Control
The Canadian recession is real in a technical sense, but it's not translating into crashing prices or dropping rates, and banks are more profitable than ever. If you feel like everything is more expensive, you're not wrong.
The one thing you truly can control in this environment is your mortgage, especially at renewal or if you're considering a refinance. This means:
- Shopping Around: Don't just auto-renew with your existing bank. Use tools like our mortgage calculator to compare options.
- Understanding Mechanics: Learn how mortgage penalties, interest calculations, and different mortgage types (like offset loans) work.
- Considering Restructuring: Explore options to re-amortize, take out equity to pay off other debts, or even consider a different mortgage product that aligns better with your financial goals. Our refinance guide can help.
- Seeking Expert Advice: A qualified mortgage broker can help you navigate these complexities and find solutions tailored to your situation.
It's not about being angry at the banks; it's about understanding the current economic landscape and how it impacts your mortgage. By taking proactive steps, you can save significant money and structure your mortgage in a way that benefits you.
Frequently Asked Questions About Recessions and Mortgages
Will the recession cause Canadian house prices to crash?
While Canada is in a technical recession, a widespread housing market crash (20-30% sustained decline) is not currently expected. National home prices are down about 4% year-over-year, but this decline is slowing. Factors like population growth and limited supply are providing underlying support to the market, preventing a dramatic collapse.
When will the Bank of Canada cut interest rates?
The Bank of Canada is currently in a holding pattern due to conflicting economic signals. While the economy is technically in recession, inflation (driven by factors like oil prices) remains above the target range. This makes it difficult for the Bank to cut rates. Most economists do not anticipate rate changes in the immediate future, likely waiting until later in the year to see clearer trends in inflation and economic growth.
Should I wait for rates to drop before getting a mortgage or renewing?
Waiting for rates to drop significantly might be a gamble. While potential cuts are always a possibility, current economic conditions, particularly persistent inflation, mean dramatic drops aren't imminent. Your decision should be based on your current financial situation, risk tolerance, and long-term goals. Shopping around and understanding the differences between fixed and variable rates, as well as the terms of your mortgage, is crucial regardless of market predictions. Our First-Time Home Buyer Guide offers more insights.
How can I save money on my mortgage during a recession?
During a recession, focus on the aspects of your mortgage you can control. This includes actively shopping around for the best rates at renewal, understanding how different lenders calculate penalties (e.g., posted rate vs. contract rate), and exploring options like re-amortizing or restructuring your mortgage to better suit your cash flow. Consider using tools like our mortgage penalty calculator to understand potential costs.
Ready to take the next step? Use our free assessment tool to see where you stand.