Do economic shifts keep you up at night? Recent economic conditions have prompted central banks, including the Bank of Canada (BoC), to recalibrate their monetary policies to carefully address slowing growth. At the same time, the threat of inflation hasn’t been fully neutralized, making policymakers cautious about how quickly they can normalize interest rates.
Economic indicators can have profound implications for public and private investments. Considering the recent trends in inflation, employment, and GDP growth, this article will explain the impact of economic indicators on private mortgage investments.
Understanding Economic Indicators and Their Relevance to Private Mortgage Investments
Economic indicators encompass a broad range of statistics used to gauge current and future trends in a national economy. Some of the most closely followed indicators include GDP growth, employment growth, the Consumer Price Index, retail sales, manufacturing production, consumer confidence surveys, and the Purchasing Managers Index.
Economic indicators have a profound impact on the performance of public markets, including stocks and bonds. However, for private mortgage investors, the impact is more nuanced.
In Canada, private mortgage investing involves individuals and corporations acting as lenders by providing short-term real estate-backed mortgage loans to borrowers. Because private mortgage companies are alternative lenders, they are not bound by the same rigid underwriting guidelines as traditional lenders. This flexibility enables them to serve a broader spectrum of borrowers while charging higher interest rates and fees than conventional mortgages. According to the Canada Mortgage Housing Corporation, private lenders accounted for 8% of new mortgage loans in the first quarter of 2023, with an estimated market share of 10-12% for the year.
Private mortgage investments have historically shown low correlation with public markets, meaning they are less directly impacted by factors that drive stock and bond market fluctuations. However, private mortgages can still be affected by economic indicators that influence mortgage rates, home prices, and housing affordability.
The Relationship Between Economic Indicators and Private Mortgage Investments
Economic indicators can signal shifts in mortgage demand, as factors like economic growth, employment trends, and inflation directly influence the demand for residential mortgage loans.
Monthly and quarterly GDP figures offer a snapshot of the growth and overall health of the economy. GDP expansion or contraction can affect real estate and mortgage demand, borrowing capacity, and investment returns.
Inflation trends play a key role in shaping central bank policy, which in turn affects the mortgage market. When inflation rises, central banks typically raise interest rates to cool the economy, making borrowing more expensive. This reduces spending and investment, helping to stall rising prices and curb inflation. As lenders face higher financing costs, they demand higher interest rates to maintain the real return on their loans, passing these increased costs on to borrowers.
Conversely, when inflation declines, central banks like the Bank of Canada often lower interest rates to stimulate economic activity by making borrowing cheaper. A reduction in inflation signals that price increases are slowing, decreasing the necessity for high interest rates to prevent the economy from overheating. In this scenario, mortgage rates usually decline as lenders pass on these cost savings to borrowers.
Unemployment rates are also a key economic indicator because they reflect changes in labour market conditions, including job growth and workforce participation. Rising unemployment often indicates weakness in the overall economy and could signal higher borrower default rates for mortgages and other types of loans.
Consumer confidence is another important economic indicator that mortgage investors monitor regularly. Research institutes like The Conference Board and the University of Michigan gauge consumer confidence by administering monthly surveys. These surveys provide a snapshot of how optimistic or pessimistic consumers feel about the economy and their personal financial situation.
During periods of high consumer confidence, demand for housing and mortgage financing tends to rise. People are more willing to take on mortgage debt and invest in homeownership, often driving up both home sales and prices.
Conversely, low consumer confidence can suppress housing demand, as potential buyers may delay or avoid purchasing homes due to concerns about their financial future. Instead, they might choose to rent, downsize, or hold off on upgrading to a new home.
Impact on Private Lending Market Dynamics
Changes in the economy and monetary policy directly influence the traditional mortgage market, since banks use stringent stress tests to determine a borrower’s eligibility for financing. Economic factors that negatively affect consumer finances can make it harder for certain borrowers to qualify for traditional mortgages offered by the banks.
While these trends also influence private mortgage investments, private mortgage portfolios have historically generated returns that are non-correlated with public markets. Since the 2008 financial crisis, demand for private mortgages has been growing steadily, driven by stricter lending regulations that make it harder for Canadians to qualify for conventional loans. For investors, private mortgages continued to offer high-yield investment opportunities compared to traditional mortgage investments and other fixed-income securities.
Nevertheless, economic conditions can still impact the risk-return profile of private mortgage investments, prompting lenders to employ a range of risk management techniques and dynamic portfolio strategies. Private lenders optimize portfolio performance and mitigate risk through strategic diversification and regular stress testing . Leading private mortgage lenders also maintain specialized in-house compliance teams that monitor market fundamentals, manage credit risk, and ensure compliance with regulatory changes on behalf of their investors.
Strategic Considerations for HNW Investors
A changing economic landscape presents a prime opportunity for high-net-worth (HNW) investors to diversify into private mortgages. Partnering with a professional mortgage firm enables investors to tailor their mortgage portfolio’s desired risk-return profile, establish regular review periods, and set thresholds for strategic portfolio rebalancing. Private mortgages offer a range of diversification strategies, including geographic distribution, loan duration, loan-to-value ratio, mortgage type and security position, including first and second mortgages.
A professional mortgage company can guide private mortgage investors on risk management strategies based on current economic trends. During periods of economic uncertainty, a common approach is to prioritize investments in more stable and liquid real estate markets. Conversely, during periods of economic growth, investors can enhance their yield potential by targeting borrowers in markets with strong growth prospects.
Opportunities in the Current Economic Climate
Despite economic headwinds, the private mortgage market continues to provide investors with attractive opportunities. Economic downturns often present unique conditions that make private mortgage lending more attractive, particularly when conventional lenders pull back or tighten their lending criteria.
Some of the most attractive opportunities include providing short-term bridge loans or lending to investors in growing real estate markets that are less affected by the economic downturn. There’s also growing demand for mortgages in the non-traditional labour market, which includes gig workers and the self-employed.
For investors looking for a turnkey portfolio solution, Mortgage Investment Corporations (MICs)provide additional diversification benefits. CMI MIC Funds have provided consistent returns during economic fluctuations, with net annual yields of between 6% and 11%, depending on the fund.
Future Market Outlook
Like other advanced industrialized nations, Canada’s economic outlook faces many potential headwinds, including weaker growth and slowing productivity. The Bank of Canada is widely expected to continue lowering interest rates in 2025 to support the economic recovery.
Declining interest rates will have a significant impact on traditional fixed-income securities, such as bonds, affecting both their market value and expected returns. While investors holding existing bonds may benefit by selling them at a higher price when rates fall, new bonds will generally offer lower yields, reducing future income potential for investors.
In a declining rate environment, private mortgage investments have historically delivered more predictable and competitive yields than compared to traditional fixed income securities. Private mortgages are also highly attractive if inflation proves more persistent than expected. While inflation erodes the purchasing power of fixed income assets like government bonds, private mortgage investments have historically provided higher returns, helping to preserve wealth during inflationary periods.
Strategic Recommendations
HNW investors considering private mortgage investments should partner with a private mortgage provider with a proven track record in the Canadian marketplace. Leading mortgage corporations in Canada excel in mortgage origination, innovation, and regulatory compliance, helping you invest with confidence.
Whether you are an active or passive investor, private mortgages can help diversify your portfolio and achieve a strategic balance between traditional and alternative allocations. Historically, private mortgage investments have demonstrated resilience across economic cycles, enhancing long-term portfolio returns. Understanding your risk tolerance, investment timeline, and long-term investment goals can help you set a desired portfolio allocation for private mortgages in your portfolio.
Conclusion
While economic indicators have historically guided decision-making in traditional financial markets, they can also directly and indirectly impact private mortgage investments. Understanding these indicators helps investors stay informed about the key factors that influence markets, the economy, and their investments.
To learn more about how private mortgage investments can help you build a well-diversified and resilient portfolio, contact CMI Financial Group for a consultation. As one of Canada’s leading non-bank financial institutions, CMI has facilitated nearly $3 billion in mortgage placements and manages more than $1 billion in mortgage assets.
