28 Feb

Bad News Is Good News for the Bank of Canada

General

Posted by: Mike Hattim

Statistics Canada released the real gross domestic product (GDP) figure for the final quarter of 2022 this morning, showing a marked slowdown in economic activity. This will undoubtedly keep the central bank on the sidelines when they announce their decision on March 8. The Bank had estimated the Q4 growth rate to be 1.3%. Instead, the economy was flat in Q4 at a 0.0% growth rate. This was the slowest quarterly growth pace since the second quarter of 2021.

Inventory accumulation in the fourth quarter declined for manufacturing and retail goods, driving investment in inventories to decline by $29.8 billion. Further, higher interest rates by the Bank of Canada hampered investment in housing (-8.8% at an annual rate), and business investment in machinery and equipment was a weak -5.5%. On the other hand, personal expenditure in the Canadian economy expanded by 2.0% (vs -0.4% in Q3), supported by the red-hot labour market. Government spending growth also accelerated. At the same time, net foreign demand contributed positively to GDP growth as exports grew by 0.8% while imports shrank by 12.0%.

The weak Q4 result reduced the full-year gain in GDP for 2022 to 3.4%, compared to 2.1% in the US, 4.0% in the UK, and 3.6% in the Euro area.

The January GDP flash estimate was +0.3%, pointing towards a rebound in the first quarter of this year. However, flash estimates are always volatile and subject to revision. Nevertheless, the growth in GDP this year will likely be much more moderate, less than 1%.
Bottom Line

The weakness in today’s economic data will be good news to the Bank of Canada, having promised a pause in rate hikes to assess the impact of the cumulative rise in interest rates over the past year. Today’s GDP report and the slowdown in the January CPI inflation numbers portend no interest rate hike on March 8.

Now the Bank will be looking for a softening in the labour market.

By Dr Sherry Cooper
21 Feb

Further Decline in Inflation in January Affirms Bank of Canada Pause in March

General

Posted by: Mike Hattim

Canadian inflation decelerated meaningfully in January despite the continued strength in the economy. Labour markets remain very tight, and retail sales continue strong. Nevertheless, the Bank of Canada’s jumbo rate hikes over the past eleven months have tempered inflation from a June ’22 peak of 8.1% y/y to 5.9% in January.

The 3-month average growth in the Bank of Canada’s preferred median and trim inflation measures – designed to look through volatility in individual product prices to better gauge underlying price pressures – are running at around 3.5% on a three-month annualized basis. That’s still above the BoC’s 2% inflation target but is well below peak levels last year.

Prices for cellular services and passenger vehicles contributed to the deceleration in the all-items CPI. However, mortgage interest costs and food prices continue to rise.

Last month, inflation excluding food and energy, rose 4.9% y/y. Prices excluding mortgage interest costs rose 5.4%. In both cases, year-over-year price growth was slower than in December. Some of the decline in inflation was due to base-year effects. In January 2022, mounting tensions amid the threat of a Russian invasion of Ukraine, coupled with supply chain disruptions and higher housing prices, put upward pressure on prices.

Monthly, the CPI rose 0.5% in January 2023, following a 0.6% decline in December. Higher gasoline prices contributed the most to the month-over-month increase, followed by a rise in mortgage interest costs and meat prices.
Another critical factor in today’s data is that inflation in services eased to 5.3% from 5.6%.

Food prices, however, remain elevated in January (+10.4%) compared to 10.1% in December. Grocery price acceleration in January was partly driven by year-over-year growth in meat prices (+7.3%), resulting from the most significant month-over-month increase since June 2004. Food purchased from restaurants also rose faster, rising 8.2% in January following a 7.7% increase in December.

Bottom Line

The Bank of Canada must feel pretty good about today’s inflation numbers. They confirm the wisdom of their announced pause in rate hikes at the January meeting. Despite continued strength in the labour market and January retail sales, headline and core inflation measures have declined again, with a five handle now on the headline rate. That is still a long way to the 3.0% inflation forecast by the end of this year, but it is moving in the right direction.

There will be no BoC action when they meet again on March 8. Their press release will be scrutinized for a hawkish versus dovish tone. Regardless of upcoming data, there is virtually no chance of any rate cuts this year.

By Dr Sherry Cooper
15 Feb

December Housing Data Ended 2022 on a Weak Note

General

Posted by: Mike Hattim

The Canadian Real Estate Association says home sales in January were the lowest for the month since 2009 and fell 37.1% from a year ago. The Canadian housing market has been sliding for eleven consecutive months as the unprecedented rise in interest rates–up from 25 basis points to 4.5% for the policy rate–has moved buyers to the sidelines. This is an abrupt reversal in the fevered pace of home sales during the pandemic.

The rapid rise in interest rates, designed to combat inflation, has driven many buyers to the sidelines. Higher borrowing costs have reduced affordability despite the sharp decline in prices in many regions.

On a regional basis, sales gains in Hamilton-Burlington and Quebec City were more than offset by declines in Greater Vancouver, Victoria and elsewhere on Vancouver Island, Calgary, Edmonton, and Montreal.
New Listings

Last month, the number of newly listed homes rose 3.3% on a month-over-month basis, led by increases across British Columbia. Despite the slight increase, new listings remain historically low nationally. New supply in January 2023 hit the lowest level for that month since 2000.

With new listings up and sales down in January, sales-to-new listings eased back to 50.7%. This is roughly where it had been over the entire second half of 2022. The long-term average for this measure is 55.1%.

There were 4.3 months of inventory on a national basis at the end of January 2023. This is close to where this measure was in the months leading up to the initial COVID-19 pandemic lockdowns, considered historically slow.
Home Prices

Canadian home prices fell by the most on record in 2022 as rapidly rising interest rates forced a market adjustment that is still ongoing.

The Aggregate Composite MLS® HPI was 15% below its peak in February 2022. Looking across the country, prices are down from peak levels by more than they are nationally in many parts of Ontario and some parts of B.C. and down by less elsewhere. While prices have softened to some degree almost everywhere, Calgary, Regina, Saskatoon, and St. John’s stand out as markets where home prices are barely off their peaks at all.

In contrast, some East Coast markets have bottomed and appear to be trending higher.

Housing Construction Falls

In other news, CMHC reported that the annual pace of housing starts fell 13% in January. The national housing agency says the seasonally adjusted annual rate of housing starts for the year’s first month was 215,365 units compared with 248,296 in December.

This is very troubling as the population growth in Canada is slated to be very strong, and rental properties are in very short supply. The housing shortage will only rise. Rents have surged in many parts of the country for new inhabitants, straining household budgets even more.

With interest rates high and the cost of construction booming, many developers are moving to the sidelines.
The table below shows the decline in MLS-HPI benchmark home prices in Canada and selected cities since prices peaked in March when the Bank of Canada began hiking interest rates. More details follow in the second table below. The most significant price dips are in the GTA and the GVA, where the price gains were spectacular during the Covid-shutdown.

Even with these large declines, prices remain roughly 33% above pre-pandemic levels.
Bottom Line

The Bank of Canada has promised to pause rate hikes assuming inflation continues to abate. We will not see any action in March. But the road to 2% inflation will be a bumpy one. I see no likelihood of rate cuts this year, and we might see further rate increases. Markets are pricing in additional tightening moves by the Fed.

There is no guarantee that interest rates in Canada have peaked. We will be closely monitoring the labour market and consumer spending.

 

By Dr Sherry Cooper
7 Feb

Economic Insights from Dr. Sherry Cooper

General

Posted by: Mike Hattim

Even bond traders and economists are stumped about what the next few years will bring. The repercussions of a global economy that stopped suddenly, shed millions of jobs and initially contracted 30% only to rebound in a flash on the back of free-money government programs are still being felt.

Predicting where the economy goes from here risks taking comfort in spurious accuracy. We’ve never experienced a similar set of circumstances. With hindsight, we now see that policymakers have made severe errors—taking interest rates to unprecedented lows and flooding the system with massive fiscal stimulus has precipitated global inflation; home prices in Canada surged 50% in the three years following the pandemic; variable-rate mortgages were much cheaper than fixed-rate loans as the central bank cut overnight rates to 25 basis points.

The volume of mortgage originations surged, with a record proportion, in VRMs. Now many borrowers have hit their trigger points. The banks allow the amortization of rising interest payments owed, easing the near-term pressure on borrowers. Those with adjustable-rate loans have seen their monthly payments rise seven consecutive times, with likely another rate hike next week. This, in addition to inflation, has reduced household purchasing power. Many are hoping that interest rates fall to pre-COVID levels soon.

Initially, the central banks argued that inflation was transitory. Many are betting that the old forces that worked to keep inflation under control for years would reassert themselves. The federal banking regulator is now proposing additional restrictions on mortgage lending to highly indebted households.

We hope for the best but must prepare for a slow return to 2% inflation. Home prices have fallen but are still up more than 35% from pre-pandemic levels. Labour markets are still robust, but a slowdown is inevitable. This will be a transition year with little likelihood of interest rate cuts. The Bank of Canada will pause soon to see if the lagged effects of higher rates further reduce inflation. Few believe the 2% target will be hit this year or next. The benchmark policy rate, now at 4.25% will not return to its pre-COVID level of 1.75%.

7 Feb

Family Day Ideas

General

Posted by: Mike Hattim

For those who celebrate Family Day, we thought we would highlight some ideas for special things you can do with your loved ones, and remind them how much you care!

From crafts and cooking to volunteer work or exercise classes, below are a few ways you can celebrate Family Day this year:

  • Cook a Meal Together: From making mini personalized pizzas to cooking up a brand-new recipe or baking something delicious, the kitchen is a great space for family time and making fun memories!
  • Get Crafty: Time to break out the glitter, glue and fun! Set up a craft station at your house this Family Day to entertain younger children – and reawaken your inner child! Don’t be afraid to get messy and create something fabulous.
  • Volunteer: A great way to make an impact (and bond with your family while you’re at it) is to volunteer your time together! Consider reaching out to a local organization or finding an event, such as a park clean-up, to participate in.
  • Try an Exercise Class: Want to enjoy your family and get a little exercise while you’re at it? Try joining a ZUMBA workout or an online exercise class! Not only is this a fun activity you can do with your kids from home, but it is a great way to teach them about health and start setting up healthy habits for life.
  • Record a Message: Sometimes, the entire family isn’t able to get together but recording a message together and sending it to those aunts, uncles and grandparents who live elsewhere is a great way to celebrate your family no matter where they are in the world.

No matter how you spend it, I hope you have a wonderful Family Day and I wish you and yours the best to come.
7 Feb

What to Know about Second Mortgages

General

Posted by: Mike Hattim

A second mortgage is a mortgage that is taken out against a property that already has a home loan (mortgage) on it. Generally people take out second mortgages to satisfy short-term cash or liquidity requirements, have an investment opportunity or to pay off higher-interest debts (such as credit cards and student loans) that a second mortgage might offer.

If you are considering a second mortgage for any reason, here are a few key points to keep in mind:

Second Mortgages and Home Equity: Your second mortgage and what you can qualify for hinges on the equity that you have built up in your home. Second mortgages typically allow you to access up to a max of 80% of the home value; very few lenders will consider a second mortgage over 80% of the home value.

For example, if you are seeking an 80% Loan-to-Value loan (“LTV”):

House Value $850,000
80% LTV (maximum mortgage amount) $680,000
less: First Mortgage ($550,000)
Amount Available Through Second Mortgage $130,000

Second Mortgages and Interest Rates: When it comes to a second mortgage, these are typically higher risk loans for lenders. As a result, most second mortgages will have a higher interest rate than a typical home loan. There is also the option of working with alternative and private lenders depending on your situation and financial standing. Keep in mind, typically lenders who offer a second mortgage are private lender MICs (Mortgage Investment Companies) – in addition to some trust companies and credit unions. For major banking institutions, you would need to hold your first mortgage with them in order to be considered for a second mortgage.

Second Mortgage Payments: One advantage when it comes to a second mortgage is that they have attractive payment factors. For instance, you can opt for interest-only payments, or you can select to pay the interest plus the principal loan amount. Work with your mortgage broker to discuss options and what would work best for your situation.

Second Mortgage Additional Fees: A second mortgage often comes with additional fees that you should be aware of before going into the transaction. These fees can vary widely but often are a percentage of the mortgage.  Other fees to consider include appraisal fees, legal fees to set up the second mortgage and any lender or broker administration fees (particularly with alternative or private lenders).

Second mortgages are a great option for many homeowners and, in some cases, may be a better solution than a refinance or a Home Equity Loan (HELOC). If you are interested in learning more or want to find out if a second mortgage is right for you, don’t hesitate to reach out to me today.