The headlines are painting a cruel summer, but are we really heading for certain financial doom?

Over halfway through 2023, and I think we can all agree that we’d hoped to see a clearer light at the end of the tunnel by now. But after a 10th rate increase by the Bank of Canada and some very misleading inflation numbers, it’s safe to say that our path is anything but straightforward from here.

Everywhere you turn this summer, there is a discussion about the worst case - are we headed straight for a certain doom where Canadians will be forced to leave their keys and walk away, leaving our broken economy to pick up the pieces?

The reality of arrears

Despite thousands of homeowners being left reeling by the aggressive rate hike cycle, the Canadian Bankers Association reported in May (their most recent publication) that of over 5,000,000 major bank mortgages, only around 7500 are in arrears. Why? Because as things have gotten tighter for Canadians, the government has stepped in to provide more support for borrowers, easing qualification guidelines for lenders. As much as it might not feel like it right now, neither the federal government nor the mortgage lenders want to see Canadians have to sell their homes at a loss or walk away.

Earlier this month, The Financial Consumer Agency of Canada introduced new guidelines for mortgage lenders, aimed at helping financially distressed mortgage borrowers navigate these murky waters. These proposed guidelines - not enforceable rules but rather powerful suggestions - start by discouraging interest-on-interest charges when extending the loan repayment period. They apply to existing mortgage loans on principal residences and are meant for borrowers facing “exceptional circumstances,” including high household debt, rapid interest rate increases, and rising living costs (so actually not that exceptional at all). In its release, the FCAC emphasized the need for lenders to work with at-risk customers to provide temporary mortgage relief, including waiving prepayment penalties and internal fees, and ensuring no interest is charged on interest during negative amortization. The goal is to help borrowers manage higher costs and restore amortization periods to reasonable lengths. Financial institutions are expected to proactively engage with customers to offer options for coping with potential payment shocks.

But government intervention is not the only thing keeping our economy afloat.

How strong is too strong?

You are no doubt familiar by now with the narrative that Canada’s economy is too strong. As inflation proves to be stickier than anyone anticipated (more on that below), it’s clear that despite nearly every factor trying to slow our bustling economy down, it just won’t budge.

Despite rate hikes intended to bring the economy to all but a halt, Canadians have (for the most part) been able to remain in their homes, pay their bills and continue to spend as they normally would. In past times of economic strife, homeowners would be forced to walk away from their inflating mortgages. But with the interventions mentioned above, a significant portion of Canada’s middle class has carried on with the status quo (or at least been able to borrow to do so).

Additionally, our jobs market has remained as robust as ever, and people are still very much spending money. Where is it all coming from? While there are many factors contributing to our continued strong GDP growth (for better or for worse), the one that many economists are zeroing in on this summer is immigration. While the sheer volume of the plan to welcome upwards of 400,000 new Canadians each year is a point of contention with housing affordability advocates, it has also been the crux of keeping our economy afloat through hardship.

Unemployment rose slightly in June (a positive indicator to the Bank of Canada that their hikes are doing their job), but that number was skewed in part due to the influx of new Canadians. While upwards of 60,000 new jobs were added in the month, the labour pool grew considerably as well, as our population crested 40 million. As new Canadians come home with money to spend, their contributions help to uphold the vitality of our economy.

While all of these economic indicators are positive on the surface, they are also in large part the inspiration the Bank of Canada has needed to continue its rate hike cycle, and to leave the door open for another hike this fall.

Inflation Blows

When June’s inflation numbers came out on the heels of the overnight rate reaching a 22-year high, the sense of nervous optimism in the air was palpable. With headline inflation clocking in at 2.8%, all signs pointed to the rate hikes finally doing their job and getting us back to the target range. But there is more to it than that.

Much like May's significant drop, June's decrease was ushered in in large part by gas prices, which continued to fall by 21% over June of last year. Telecommunications also rang it at nearly 15% lower than last June, but that can be largely attributed to promotions in Ontario and Quebec. Mortgage costs, on the other hand, are up by over 30% in the past year - that is probably the one that hurt the most. And as we all know all too well without even seeing the numbers, groceries are still taking a stab at our wallets. After the substantial increase from 2021 to 2022, June's additional 9% means that we are spending roughly 20% more on food now than we were just 2 years ago.

These details are integral to understanding the Bank of Canada’s decision pattern and to understanding what inflation really looks like. For example, if we took gas prices out of the data, the headline inflation rate would have been 4%; without groceries, it would be about 1.7%, and if we ignored the cost of mortgages, the rate would have been right on target at 2%.

So, what happens next?

You know well by now that there is no elusive crystal ball to instruct our future moves - although that would be wonderful. Instead, we can only make our best educated guesses at what the next few months and years will look like. So here is mine.

After seeing the nuance in June’s inflation, it’s likely that we’ll see another rate increase from the BoC in September. While it is likely going to hurt, the Bank has already made clear its directive to push through the base effect log jam of inflation at all costs. But there is some good news here. For the most part, variable rate mortgage holders who remain variable have more than likely made the conscious decision to stay there and are ready to assume that risk, with the subtle promise that what goes up must come down. If you are in a variable mortgage still and are feeling the pinch, there are still lots of options to lock your rate in and give yourself some room to breathe!

Then, although it doesn’t look like we’ll see decreases until at least later in 2024, we have every reason to believe that we also won’t see more decreases. As higher rates do their job and work through the layers of our economy, everything I mentioned above will help to ensure our robust economy remains that way, even if we slip into a slowdown.

While the path ahead isn’t necessarily paved with financial freedom, it isn’t lined with thorns either. The best things you can do for yourself now are to lock down your spending and take a careful look at your budget (if you haven’t already), focus on paying down high-interest debts before anything else, and get comfortable with the idea of getting by.

In my two decades in this industry, I have seen all types of ups and downs, and one thing remains true above everything else - even the hardest times always come to an end. And while it might not seem like it right now, we will all be able to breath a collective sigh of relief one day! All we have to do is prepare to navigate what comes between now and then - and that is what I am here for!