Weakening Housing Risk for Economy

On April 18, Canada’s national banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), released its second Annual Risk Outlook (ARO), outlining what it believes are the most significant headwinds facing the Canadian financial system – and what the regulator plans on doing about it.

According to the report, the severe downturn in real estate prices and demand following their significant rise during the pandemic was the most pressing issue. OSFI acknowledges that the housing market changed significantly over the past year, and house prices fell substantially in 2022. The regulator is preparing for the possibility that the housing market will experience continued weakness throughout 2023.

The report also highlights how the Bank of Canada’s rate hiking cycle has impacted borrowers’ ability to pay down mortgage debt, with the central bank increasing its benchmark cost of borrowing eight times between March 2022 and January 2023, bringing its Overnight Lending Rate from a pandemic low of 0.25% to 4.5% today.

Mortgage holders may be unable to afford continued increases in monthly payments or may experience a significant payment shock at the time of their mortgage renewal, leading to higher default probabilities. Given the considerable impact of real estate-secured lending (RESL) activities in the Canadian financial system, a housing market downturn remains a critical risk.

Weakening Housing Risk for Economy

OSFI also highlights the dangers posed by more borrowers hitting their trigger rates; according to a National Bank study, eight in ten variable fixed-payment borrowers who took their mortgages out between 2020-2022 are impacted. Lenders have addressed this by extending the amortization period for affected borrowers, but OSFI says this is just a temporary solution.

Borrowers and lenders alike will need to pay the price in due course, as OSFI points out. The growth in highly leveraged borrowers increases the risk of weaker credit performance, potentially leading to more borrower defaults, a disorderly market reaction, and broader economic uncertainty and volatility.

These recent comments strengthen expectations that stricter mortgage rules could be in the cards before the year ends. Back in January, OSFI announced it was considering making tweaks to its Guideline B-20, which outlines borrowing and risk requirements for banks underwriting residential mortgages and qualification rules for borrowers, including the mortgage stress test.

Weakening Housing Risk for Economy

OSFI may increase borrowers’ debt servicing ratio requirements, making it more challenging for those with larger debt loads to qualify for a mortgage. It is also considering limiting how many of these higher-leveraged borrowers banks can have in their portfolios, potentially leading to fewer borrowers making the cut at A-lenders and turning to the B-side and alternative mortgage market.

Finally, OSFI may change the threshold criteria for the mortgage stress test. Currently, borrowers must prove they can carry their mortgage at a rate of 5.25%, or 2% above the one they’ll receive from their lender, whichever is higher. However, following last year’s rapid rate increases, the 5.25% threshold has become obsolete, with all current market rates above 3.25%.

OSFI wrapped up consultations on these potential changes late last week and will release a report on its recommendations. Borrowers should keep an eye out for changes in the months to come.

Weakening Housing Risk for Economy

Questions? Comments? Reach out:
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Weakening Housing Risk for Economy

Great News on the Inflation Front

The Consumer Price Index (CPI) fell sharply in March to 4.3% year-over-year, continuing a pattern of repeated declines. Before we break out the champagne, however, much of the drop in inflation resulted from the steep monthly increase in prices in March one year ago (1.4% m/m), the so-called base-year effects.

Gasoline prices have fallen sharply since March 2022–down year-over-year by a whopping -13.8%. This was the second consecutive month in which gas prices caused inflation to fall. The fall in gasoline prices was mainly driven by steep price increases in March 2022, when gasoline rose 11.8% month-over-month due to supply uncertainty following Russia’s invasion of Ukraine. This increased crude oil prices, which pushed prices at the pump higher for Canadians. Gasoline price inflation was transitory.

There is no question that lower inflation portends a continued rate pause by the Bank of Canada.

Inflation at 4.3% was the smallest rise since August 2021. On a year-over-year basis, Canadians paid more in mortgage interest costs, offset by a decline in energy prices.
Excluding food and energy, prices were up 4.5% year over year in March, following a 4.8% gain in February, while the all-items CPI excluding mortgage interest cost rose 3.6% after increasing 4.7% in February.

Great News on the Inflation Front

Two key yearly measures tracked closely by the central bank — the so-called trim and median core rates — also dropped, averaging 4.5%, in line with forecasts.
On a monthly basis, the CPI was up 0.5% in March, following a 0.4% gain in February. Travel tours (+36.7%) contributed the most to the headline month-over-month movement, largely driven by increased seasonal demand during the March break. On a seasonally adjusted monthly basis, the CPI rose 0.1%.

While headline inflation has slowed in recent months, having increased 1.7% in March compared with six months ago, prices remain elevated. Compared with 18 months ago, for example, inflation has increased by 8.7%.

On a year-over-year basis, price growth for durable goods slowed in March (+1.6%) compared with February (+3.4%). Furniture prices led the deceleration in prices for durable goods, falling 0.3% year over year in March, following a 7.2% increase in February. The decline was primarily due to a base-year effect, as furniture prices rose 8.2% month over month in March 2022 amid supply chain issues.

Prices for passenger vehicles also contributed to the deceleration in prices for durable goods, increasing at a slower pace year over year in March 2023 (+4.7%) compared with February (+5.3%). Higher prices for passenger vehicles in March 2022, due to the global shortage of semiconductor chips, put downward pressure on the index in March 2023.

Month over month, new passenger vehicle prices were up 1.3% in March, attributable to the higher availability of new 2023-model-year vehicles. For comparison, prices for used cars rose 0.6% month over month in March, after a 1.9% decline in February.

Great News on the Inflation Front

Homeowners’ replacement costs continued to slow in March, rising 1.7% year over year compared with a 3.3% increase in February, reflecting a general cooling of the housing market.

In contrast, mortgage interest costs rose faster in March (+26.4%) compared with February (+23.9%). This was the most significant yearly increase on record as Canadians continued to renew and initiate mortgages at higher interest rates.

There has finally been some relief in grocery price inflation. Year over year, prices for food purchased from stores rose to a lesser extent in March (+9.7%) than in February (+10.6%), with the slowdown stemming from lower prices for fresh fruit and vegetables.

Service inflation slowed to 5.1% in March. But in a sign wage pressures could be picking up, more than 155,000 federal workers are set to go on strike starting Wednesday if no deal is reached on their talks with Prime Minister Justin Trudeau’s government by Tuesday night.

Great News on the Inflation Front

Bottom Line

The Bank of Canada is no doubt delighted that inflation continues to cool. The Bank expects price gains to reach 3% by midyear and return to near their 2% target by the end of 2024. But they said getting the prices back to 2% could prove more difficult because inflation expectations are coming down slowly, and service prices and wage growth remain elevated.

Governor Tiff Macklem, speaking at the IMF and World Bank meetings in Washington recently, said the Bank of Canada is prepared to end quantitative tightening earlier than planned if the economy needs stimulation. Quantitative tightening is the selling of government bonds on the Bank’s balance sheet, which takes money out of the economy.

Macklem said his officials discussed hiking rates further during deliberations for the April 12th decision to continue to pause and reiterated that “it is far too early to be thinking about cutting interest rates.”

His comments provide a glimpse into the Bank of Canada’s strategy for shrinking its balance sheet, which ballooned to more than $570 billion during the pandemic as it bought large quantities of government bonds — to restore market functioning during the initial Covid shock and then to provide a stimulus for the economy.

The remarks show an acknowledgment among policymakers that their plans could shift if there’s a negative economic shock that requires a loosening of monetary policy.

According to Bloomberg News, swaps traders are now betting the Bank of Canada’s next move will be a cut later this year. The governor pushed back on those expectations in a press conference this week. He and his officials discussed the possibility that rates need “to remain restrictive for longer to get inflation all the way back to target.”

In a speech last month, Deputy Governor Toni Gravelle said quantitative tightening will likely end in late 2024 or early 2025. That marked the first time the Bank of Canada put a date on abandoning the program.

Great News on the Inflation Front

Questions? Comments? Reach out:
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📲 705-606-2727
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Dominion Lending Centers – The Mortgage Source. Independently Owned and Operated.
License #: 10145
92 Caplan Ave #609, Barrie, ON L4N 9J2

Great News on the Inflation Front

Good News on Housing Front

The Canadian Real Estate Association says home sales in March edged up 1.4% in March. Homeowners and buyers were comforted by the fall in fixed mortgage rates as the Bank of Canada paused rate hikes. Bond market yields, though very volatile, have trended downward in March, although they have bounced since the release of this data this morning. The five-year government of Canada bond yield, tied closely to fixed mortgage rates, increased to 3.22% this morning compared to a low of roughly 2.8% in the week of March 20th. Rates had been as high as 3.9% over 52 weeks.

As we move into the all-important spring-selling season, green shoots of growth are evident. A standout in March was a significant sales increase in BC’s Fraser Valley.

The actual (not seasonally adjusted) number of transactions in March 2023 was 34.4% below a historically strong March 2022. The March 2023 sales figure was comparable to what was seen for that month in 2018 and 2019. It was also the smallest year-over-year decline since last September.

As we enter the spring season, some buyers are coming off the sidelines, but these are very tight markets. The inventory of unsold homes is exceptionally low in most regions of the country as sellers have been waiting for prices to rise. Home prices are now stabilizing across the country.

Good News on Housing Front

New Listings

The number of newly listed homes dropped a further 5.8% on a month-over-month basis in March. New supply is currently at a 20-year low. The monthly decline from February to March was led by a majority of major Canadian Census Metropolitan Areas (CMAs).

With new listings falling considerably and sales increasing again in March, the sales-to-new listings ratio jumped to 63.5%, the tightest market in a year. The long-term average for this measure is 55.1%. There were 3.9 months of inventory on a national basis at the end of March 2023, down from 4.1 months at the end of February and the lowest level since last October. It’s also now more than a full month below its long-term average.

Good News on Housing Front

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) was up 0.2% on a month-over-month basis in March 2023 – the first increase, albeit a small one–since February 2022. The trend of stabilizing prices from February 2023 to March 2023 was broad-based.

With few exceptions, prices are no longer falling across most of the country, although they’re not rising meaningfully anywhere. The Aggregate Composite MLS® HPI now sits 15.5% below year-ago levels, a smaller decline than in February.

Bottom Line

A gradual turnaround in the Canadian housing market is in train. While inventory remains extremely low, homes are not only selling but also selling fast. Short-term fixed-rate mortgages are popular with buyers. A significant change from before the Bank of Canada started raising rates.

While the Bank will likely hold rates steady for the remainder of this year, I do not expect Macklem to cut rates before then. All of this depends on inflation. We will get another read on that next week. It should be a good number (less than February’s 5.2% y/y posting) because of base effects. Stay tuned.

Good News on Housing Front

Questions? Comments? Reach out:
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📲 705-606-2727
📧 jmuir@dominionlending.ca
💻 https://jonmuirmortgages.ca
🌎 Google Business Page

Dominion Lending Centers – The Mortgage Source. Independently Owned and Operated.
License #: 10145
92 Caplan Ave #609, Barrie, ON L4N 9J2

Good News on Housing Front

Bank of Canada Holds 2% Inflation

The Bank of Canada left the overnight policy rate at 4.5%, as expected, stating their view that inflation will hit 3% by mid-year and reach the 2% target by next year. They admit, however, that demand continues to exceed supply, wage gains are too high, and labour markets are still very tight. The Bank is also continuing its policy of quantitative tightening.

“Economic growth in the first quarter looks to be stronger than was projected in January, with a bounce in exports and solid consumption growth. While the Bank’s Business Outlook Survey suggests acute labour shortages are starting to ease, wage growth is still elevated relative to productivity growth. Strong population gains are adding to labour supply and supporting employment growth while also boosting aggregate consumption. Housing market activity remains subdued.”

The Bank expects consumption spending to moderate this year “as more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly.”

“Overall, GDP growth is projected to be weak through the remainder of this year before strengthening gradually next year. This implies the economy will move into excess supply in the second half of this year. The Bank now projects Canada’s economy to grow by 1.4% this year and 1.3% in 2024 before picking up to 2.5% in 2025”.

Bank of Canada Holds 2% Inflation

Most economists believe the Bank of Canada will hold the overnight rate at 4.5% for the remainder of this year and begin cutting interest rates in 2024. A few even think that rate cuts will begin late this year.

In contrast, the Fed hiked the overnight fed funds rate by 25 bps on March 22 despite the banking crisis and the expectation that credit conditions would tighten. This morning, the US released its March CPI report showing inflation has fallen to 5% year-over-year. Next Tuesday, April 18, Canada will do the same. The base year effect has depressed y/y inflation. Canada’s CPI will likely have a four-handle.

Fed officials next meet in early May, and it is widely expected that the Fed will continue to raise the policy rate while the Bank will continue the pause.

Bank of Canada Holds 2% Inflation

Due to the differences in our mortgage markets and the higher debt-to-income level in Canada, our economy is much more interest-sensitive. Despite these disparate expectations, the Canadian dollar has held up relatively well.

Bottom Line

The Bank of Canada upgraded its growth projections for this year in a new forecast, suggesting the odds of a soft landing have increased. This may preclude interest rate cuts this year.

“Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target,” the bank said.

The April Monetary Policy Report suggests strong Q1 growth resulted from substantial immigration. With the population proliferating, labour shortages should continue to decline, and inflation will fall to 3% later this year. The global growth backdrop is better than expected, though the Bank continues to look for a slowdown in the coming months, citing the lagged effects of rate hikes and the recent banking sector strains.

Bank of Canada Holds 2% Inflation

Governor Macklem said in the press conference that the economy needs cooler growth to corral inflation, although the Bank’s forecast does not include an outright recession.

The Bank will refrain from cutting rates this year. The Governor explicitly said at the press conference that market pricing of rate cuts later this year is not the most likely scenario.

Bank of Canada Holds 2% Inflation

Questions? Comments? Reach out:
—
📲 705-606-2727
📧 jmuir@dominionlending.ca
💻 https://jonmuirmortgages.ca
🌎 Google Business Page

Dominion Lending Centers – The Mortgage Source. Independently Owned and Operated.
License #: 10145
92 Caplan Ave #609, Barrie, ON L4N 9J2

Bank of Canada Holds 2% Inflation

Strong Job Report

This morning’s Jobs Report was again solid. Job creation, though more tempered than in earlier months, is still robust. The unemployment rate remained at 5.0% for the fourth consecutive month. Very troubling to the Bank of Canada was the wage inflation, still above 5%.

No doubt the Bank does not welcome this news. But the jobs market is a lagging indicator, so the BoC will likely continue the pause on April 12th. DLC will host another In Conversation on that date with President, Eddy Cocciollo, and myself – stay tuned for more details.

The economy will report about 1.5% GDP growth in Q1–up from zero growth at the end of last year. Consumer spending remains strong, and the early indications suggest that the housing market is picking up and prices are rising on limited supply. As the year progresses, supply shortages will become more evident, and rent will increase sharply, making ownership more attractive.

All eyes will be on OSFI mid-month when the comment period on new initiatives end. The Department of Finance wants banks to ease credit conditions, especially for VRM borrowers now running negative amortization. OSFI has different ideas, especially with a mini banking crisis in the US and Switzerland.

Strong Job Report

Questions? Comments? Reach out:
—
📲 705-606-2727
📧 jmuir@dominionlending.ca
💻 https://jonmuirmortgages.ca
🌎 Google Business Page

Dominion Lending Centers – The Mortgage Source. Independently Owned and Operated.
License #: 10145
92 Caplan Ave #609, Barrie, ON L4N 9J2

Strong Job Report