27 Jul

Cautious economic optimism – July 27 2022

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Posted by: Matthew J. Charlton

JULY 27 2022

Crystal-ball gazing to predict the economic future can be a murky business.

And some of the latest polling of Canadian economists shows just how opaque the view can be. The Globe and Mail surveyed 15 prominent Canadian economists about what, they think, is going to happen.

There is general agreement that a slowdown is coming. But when it came to the likelihood of a recession, expectations covered a very broad range from 25% at the low end to 90% at the high end. One of those economists sees the country sliding into recession next year. Some of the others are estimating longer timelines, stretching out to 24 months. Certainly, a less than clear picture.

The Bank of Canada has lowered its forecast for economic growth significantly to 1.8% for next year. Back in April the Bank was forecasting 3.2% growth.

Rampant inflation continues to be named as the culprit as the central bank pushes up interest rates in an effort to cool domestic demand. Highly indebted Canadian households are particularly sensitive to rising rates. That became apparent very quickly in the real estate market.

Demand for homes is easing, as illustrated by declining sales. There is a growing inventory and price increases are returning to historical norms.  The moderation is largely welcome news; a hopeful sign of stability and predictability returning to the market.

Overall, the broad expectation from economists is that the country can avoid a sustained economic contraction. They point to rising commodity prices that tend to benefit the Canadian economy and high, COVID-era savings that could stave-off a collapse in consumer spending even in the face of higher prices.

There is cautious optimism that any recession will be relatively shallow and relatively short.

Please note: The source of this article is from First National Financial LP


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20 Jul

Canadian Inflation Rises Further in June – July 20 2022

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Posted by: Matthew J. Charlton

JULY 20 2022

Canadian Inflation Surged to 8.1% in June

Another bad inflation number was posted today. The rate of consumer inflation continued to rise, reaching 8.1% year over year (y/y) in June, following the 7.7% gain in May. The increase was the largest yearly change since January 1983. The acceleration in June was mainly due to higher prices for gasoline; however, price increases remained broad-based, with seven of eight major components rising by 3% or more.

Excluding gasoline, the CPI rose 6.5% year over year in June, following a 6.3% increase in May (see chart below).

On a monthly basis, the CPI rose 0.7% in June, following a 1.4% increase in May. On a seasonally adjusted monthly basis, the CPI was up 0.6%.

On average, prices rose faster than hourly wages, which increased 5.2% from 12 months to June, based on the Labour Force Survey data.

Gasoline prices are highly visible and have surged a whopping 54.6% y/y. That compares to a 48% increase in May. There might be some reprieve in this component of inflation, as gas prices largely follow crude oil prices, which peaked in early June and have trended downward so far in July. This would be welcome news for the Bank of Canada.

Bottom Line

All central banks worldwide (except Japan) face much more than expected inflation. The rise in the annual pace of inflation past the 8% mark will keep the Bank of Canada on its tightening path, though the numbers show some evidence of softening. For example, food prices appear to be easing, and gasoline price inflation may have peaked. Food prices were up 0.1% in June, the slowest increase in a year. Shelter costs gained 0.4%, the smallest increase since November. Statistics Canada said that reflects lower real estate commissions as the housing market slowed.

With some luck, price pressures might be peaking. The chart below shows the Bank of Canada’s most recent forecast for inflation published last week in the July Monetary Policy Report. The Bank of Canada estimated inflation would average about 8% through the third quarter of 2022 before slowing.

According to the swaps market, traders are betting that the central Bank will hike its policy interest rate another 75 basis points on September 7 when it meets again, after the full percentage point increase last week. That would take the overnight rate from 2.5% current to 3.25%–above the Bank’s estimate of the neutral range. It would also push up the prime rate from 4.7% to 5.45%, leading to a 75 bps hike in variable rate mortgages. Last week’s action already took variable mortgage rates to roughly 4.25%, which increased the qualifying rate on such loans to 6.25%–above the 5.25% rate before the move. As a result, the gap between the qualifying rate for fixed-rate mortgage loans and variable-rate loans has fallen to only about 100 bps, its lowest level in years. This undoubtedly continues to slow housing activity, reducing economic growth in Canada. 

The question remains–will the Bank of Canada successfully reduce inflation without triggering a recession? Stay tuned.

Please note: The source of this article is from Sherry Cooper


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19 Jul

What to Know About the Latest Interest Rate Hikes

General

Posted by: Matthew J. Charlton

With recent Bank of Canada interest rate hikes, and more on the way, here is what you need to know about how these policy changes affect your mortgage.

First and foremost, the interest rate hikes directly affect individuals that currently have an adjustable-rate mortgage (ARM).

Depending on your mortgage amount, you’re looking at a potential mortgage payment increase of $40 per month for every $100,000 of balance owing. For example, if your mortgage balance is $400,000 then your monthly payment will increase approximately $160 per month.

As Canada’s lending prime has increased, variable rates increase as these rates are tied to prime. Payments need to increase to ensure the scheduled amortization remains the same. Hence you will still pay off your mortgage as the original amortization shows. For those individuals on a fixed-mortgage, you will not be affected by these interim changes outside of renewing your mortgage. If your mortgage is up for renewal, you will likely be renewing at a higher rate depending on your lender. If you’re still six months away from renewing, it may be a good idea to look into the options for early renewal to avoid getting caught up in another interest rate hike later this year.

All rates, fixed or variable are expected to rise more over the summer months. Feel free to reach out to discuss obtaining a rate hold. I can lock-in a fixed interest rate or the discount off the variable interest rate for 90-120 days while you plan your next step whether it is renewing, purchasing or planning for changes.

If you’re not currently a homeowner, but were looking at getting into the marketplace, it is a good idea to revaluate your budget and potential calculations for homeownership to ensure that your estimates are in line with the new interest rates. Get in touch and I can help you run some numbers.

While interest rate hikes affect everyone, understanding the dollar value change for your situation and adjusting your budget accordingly, can help ease the pressure from increased mortgage costs. If you have any questions or are not sure what your next move should be, don’t hesitate to reach out to me today! I’d be happy to help review your situation and walk you through your options.


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15 Jul

Canadian Home Prices Fall Sharply in June – July 15 2022

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Posted by: Matthew J. Charlton

JULY 15 2022

House Price Decline Accelerated in June

Statistics released today by the Canadian Real Estate Association (CREA) show that the slowdown that began in March in response to higher interest rates has broadened. Home sales recorded over Canadian MLS® Systems fell by 5.6% between May and June 2022, taking second-quarter sales down sharply (see chart below). The actual (not seasonally adjusted) number of transactions in June 2022 came in 23.9% below the record for that month set last year and is below its 10-year monthly moving average.

“Sales activity continues to slow in the face of rising interest rates and uncertainty,” said Jill Oudil, Chair of CREA. “The cost of borrowing has overtaken supply as the dominant factor affecting housing markets at the moment, but the supply issue has not gone away.” 

The Bank of Canada’s shocking 100 basis point hike in the benchmark policy rate will accelerate the slowdown in the coming months. 

“One important feature of the market right now that isn’t getting enough attention is the difference in mortgage qualification criteria between fixed and variable, because while variable rates adjust in real-time, fixed rates have already priced in most of what the Bank of Canada is expected to do over the balance of 2022,” said Shaun Cathcart, CREA’s Senior Economist. “As such, it’s no surprise to see people piling into variable rate mortgages at record levels, but probably not for the reasons they may have chosen them in the past. It’s because the 200 basis points plus the contract rate element of the stress test has, just since April, become much more difficult to pass if you want a fixed-rate mortgage. A strict stress test made sense when rates were at a record-low, but policymakers may want to assess if it continues to meet its policy objectives now that fixed mortgage rates are back at more normal levels.”

According to the Bank of Canada, “economic activity will slow as global growth moderates, and tighter monetary policy works its way through the economy. This, combined with the resolution of supply disruptions, will bring demand and supply back into balance and alleviate inflationary pressures. Global energy prices are also projected to decline. The July outlook has inflation starting to come back down later this year, easing to about 3% by the end of next year and returning to the 2% target by the end of 2024.”

New Listings

The number of newly listed homes climbed 4.1% month-over-month in June. The monthly increase was most influenced by a jump in new supply in Montreal, while new listings in the GTA and Greater Vancouver posted slight declines.

With sales down and new listings up in June, the sales-to-new listings ratio eased back to 51.7% – its lowest level since January 2015. It was also below the long-term average for the national sales-to-new listings ratio of 55.1%. Almost three-quarters of local markets were balanced markets based on the sales-to-new listings ratio being between one standard deviation above or below the long-term average in June 2022.
There were 3.1 months of inventory on a national basis at the end of June 2022, still historically low but slowly increasing from the tightest conditions recorded just six months ago. The long-term average for this measure is more than five months.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) edged down 1.9% on a month-over-month basis in June 2022.

Regionally, most of the monthly declines were seen in markets in Ontario. Home prices have also eased in parts of British Columbia, although the B.C. provincial totals have been propped up by mostly static prices in Greater Vancouver.

Prices continue to be more or less flat across the Prairies while only just now showing small signs of declines in Quebec.

On the East Coast, prices are mostly continuing to rise but appear to have stalled in Halifax-Dartmouth.

The non-seasonally adjusted Aggregate Composite MLS® HPI was still up by 14.9% on a year-over-year basis in June, although this was just half the near 30% record year-over-year increases logged in January and February (see chart and tables below for details by region). 

Bottom Line

In many respects, today’s housing data trends are already outdated. It changed with the blockbuster rate hike a couple of days ago. Excess housing demand is essentially over, and we are heading into a more fragile period for resale volumes and prices. The national sales-to-new listings ratio fell to 51.7% in June, which is considered balanced, but it’s the lowest ratio since 2015 and is headed in a softer direction. Buyers’ markets are already evident, especially in some of the suburbs/exurbs in Ontario and parts of BC. These are the regions that posted extreme price gains last year. Others, such as cities in oil-rich Alberta and Atlantic Canada, are still holding in well.

With the Bank of Canada’s most recent tightening, qualifying rates are ratcheting up for both variable and fixed mortgage rates. Before the one percentage point rate hike, variable rate loans were qualifying at 5.25%, but now that has shifted to around 6%. Fixed-rate borrowers are qualifying at about 7%. The Canadian prime rate has surged this year, increasing variable mortgage rates by roughly 300 basis points. Robert Kavcic at BMO has calculated that “going from 1.5% to 4.5% on the same loan value would crank up the monthly variable-rate mortgage payment by almost 40%, making the current episode an even more abrupt shift than the late-1980s  after adjusting for income levels.”

Kavcic continues, “the vast majority of borrowers currently on variable-rate mortgages have fixed payment features, but even there, things are now getting dicey. For example, moving a variable rate up from 1.5% to 4% with a fixed payment would effectively increase the amortization from 25 years to 45 years. Another 50 basis-point rate hike in September would take that above 60 years—that is, many will reach the point where payments are no longer taking down the principal. Each mortgage will have its unique terms when payments start to move higher, but for those that caught the low in variable rates, we’ll probably be there soon. Of course, HELOC payments used to finance many multiple-property purchases are ratcheting up in real time.”

There is also the risk that the federal financial institutions’ regulator, OSFI, will intervene to protect the big Chartered Banks from taking on too much risk rather than making it easier for borrowers to qualify or to carry variable-rate loans in this environment. 

Moreover, mortgage renewals pose a problem as well. Fixed mortgage rates five years ago were roughly 3%. Resetting the mortgage at 4.5% will lead to a monthly payment increase of approximately 15%, all else equal.

With the latest move by the Bank of Canada, more potential buyers will believe that home prices are likely to fall, taking the FOMO factor out of the housing market. This removes the critical ingredient that drove prices up rapidly since the pandemic began. 

Please note: The source of this article is from Sherry Cooper


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13 Jul

Bank of Canada Shocks With 100 bps Rate Hike – July 13 2022

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Posted by: Matthew J. Charlton

JULY 13 2022

A Super-Sized Rate Hike, Signalling More To Come

The Governing Council of the Bank of Canada raised its target for the overnight policy rate by a full percentage point to 2-1/2%. The Bank is also continuing its policy of quantitative tightening (QT), reducing its holdings of Government of Canada bonds, which puts additional upward pressure on longer-term interest rates.

In its press release this morning, the Bank said that “inflation in Canada is higher and more persistent than the Bank expected in its April Monetary Policy Report (MPR), and will likely remain around 8% in the next few months… While global factors such as the war in Ukraine and ongoing supply disruptions have been the biggest drivers, domestic price pressures from excess demand are becoming more prominent. More than half of the components that make up the CPI are now rising by more than 5%.”

The Bank is particularly concerned that inflation pressures will become entrenched. Consumer and business surveys have recently suggested that inflation expectations are rising and are expected to be higher for longer. Wage inflation has accelerated to 5.2% in the June Labour Force Survey. The unemployment rate has fallen to a record-low 4.9%, with job vacancy rates hitting a record high in Ontario and Alberta.

Central banks worldwide are aggressively hiking interest rates, and growth is slowing. “In the United States, high inflation and rising interest rates contribute to a slowdown in domestic demand. China’s economy is being held back by waves of restrictive measures to contain COVID-19 outbreaks. Oil prices remain high and volatile. The Bank expects global economic growth to slow to about 3½% this year and 2% in 2023 before strengthening to 3% in 2024.”

Further excess demand is evident in the Canadian economy. “With strong demand, businesses are passing on higher input and labour costs by raising prices. Consumption is robust, led by a rebound in spending on hard-to-distance services. Business investment is solid, and exports are being boosted by elevated commodity prices. The Bank estimates that GDP grew by about 4% in the second quarter. Growth is expected to slow to about 2% in the third quarter as consumption growth moderates and housing market activity pulls back following unsustainable strength during the pandemic.”

In the July Monetary Policy Report, released today, the Bank published its forecasts for Canada’s economy to grow by 3.5% in 2022–in line with consensus expectations–1.75% in 2023 and 2.5% in 2024. Some economists are already forecasting weaker growth next year, in line with a moderate recession. The Bank has not gone that far yet.

According to the Bank of Canada, “economic activity will slow as global growth moderates, and tighter monetary policy works its way through the economy. This, combined with the resolution of supply disruptions, will bring demand and supply back into balance and alleviate inflationary pressures. Global energy prices are also projected to decline. The July outlook has inflation starting to come back down later this year, easing to about 3% by the end of next year and returning to the 2% target by the end of 2024.”

Bottom Line

Today’s Bank of Canada reports confirmed that the Governing Council continues to judge that interest rates will need to rise further, and “the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation.” Once again, the Bank asserted it is “resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target.”

At 2.5%, the policy rate is at the midpoint of its ‘neutral’ range. This is the level at which monetary policy is deemed to be neither expansionary nor restrictive. Governor Macklem said he expects the Bank to hike the target to 3% or slightly higher. Before today’s actions, markets had expected the yearend overnight rate at 3.5%.

Please note: The source of this article is from Sherry Cooper


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