The focus of the Bank of Canada is on slaying the inflation dragon. The good news is that the year has started with a marked decline in price pressures. Due to falling energy prices, airline fares and a deceleration in clothing and food, year-over-year inflation in January dipped to 2.9%. This follows 3.4% inflation in December.

The cost of shelter represents nearly a third of the Consumer Price Index, and the combination of rapidly rising population growth and already acute excess demand for housing will continue to underpin higher-than-target inflation. While mortgage interest costs will decline once the central bank begins to cut interest rates, and home replacement costs have already declined because of the overall decline in national home prices, rental costs are surging. In January, rents rose by nearly 8% y/y.

The pace of housing starts in Canada is inadequate to keep up with future demand. Over the past year, the population has increased by a whopping 1.3 million people, while housing starts are running at less than 250,000 annual pace. To be sure, starts saw strong year-over-year growth last year—the second-highest number of starts since 1990. Nonetheless, this is nowhere near sufficient to meet demand. Not to mention to meet affordable demand.

Even with the best intentions of governments at all levels, it is virtually impossible to maintain even this level of starts given zoning restrictions, land development costs, labour shortages and rising construction costs. Actions taken thus far by federal, provincial and municipal governments help, but we cannot house the current pace of immigration without seeing substantial upward pressure on rents.

According to economists at the National Bank, the difference between annual headline CPI inflation and shelter inflation is at its highest level since 1982. The Bank of Canada is mindful of these conditions. Inflation has fallen to the 2% target, excluding shelter costs, but those costs feed into inflation expectations and mounting wage demands.

Next week, Statistics Canada will release the fourth quarter GDP data, which is expected to run at about a 1.0% annual rate. There will be revisions to the -1.1% Q3 number as well. With the help of population growth, Canada has avoided a recession despite the huge increase in interest rates this cycle. But the labour market is slowing, and job vacancies have fallen sharply.

Homeowners will suffer marked increases in their monthly mortgage payments as they renew this year and next. Aware of this, the Bank will likely begin to cut interest rates by mid-year—beginning a series of rate cuts that will continue over the next two years.

Housing activity has likely bottomed, and home price pressures will begin to mount, especially in the GTA and GVA, where price declines were the largest. We believe the central bank will start cutting interest rates by mid-year.

Did you know? March is Fraud Awareness Month. Protecting yourself and your mortgage from fraud is crucial to safeguard your financial well-being. Understanding some of the more common mortgage fraud scams and how to protect yourself can make all the difference!

The most common type of mortgage fraud involves a criminal obtaining a property, and then increasing its value through a series of sales and resales involving the fraudster and someone working in cooperation with them. A mortgage is then secured for the property based on the inflated price.

Below are some red flags to be aware of as potential lead-ins to fraud:

• If someone offers you money to use your name and credit information to obtain a mortgage
• If you are encouraged to include false information on a mortgage application
• If you are asked to leave signature lines or other important areas of your mortgage application blank
• If the seller or investment advisor discourages you from seeing or inspecting the property you will be purchasing
• If the seller or developer rebates money on closing, and you don’t disclose this to your lending institution

Another fraud scheme to be aware of is title fraud. Title fraud is essentially a form of identity theft and is typically discovered when your mortgage mysteriously goes into default and the lender begins foreclosure proceedings.

With title fraud an individual, who is using false identification to pose as you, will register forged documents transferring your property to his/her name. From there, they register a forged discharge of your existing mortgage and get a new mortgage against your property. Then the fraudster makes off with the new home loan money without making mortgage payments. The bank thinks you are the one defaulting – and your economic downfall begins.

But don’t panic! There are lots of ways you can protect yourself from title fraud:

• Always view the property you are purchasing in person
• Check listings in the community where the property is located – compare features, size, and location to establish if the asking price seems reasonable
• Make sure your representative is a licensed real estate agent
• Beware of realtors or mortgage professionals with a financial interest in the transaction
• Ask for a copy of the land title or go to a registry office and request a historical title search
• In the offer to purchase, include the option to have the property appraised by a designated or accredited appraiser
• Insist on a home inspection to guard against buying a home that has been cosmetically renovated or formerly used as a grow house or meth lab
• Ask to see receipts for recent renovations
• When you make a deposit, ensure your money is protected by being held “in trust”
• Consider the purchase of title insurance. While title can be purchased after taking possession or years later, the best time to purchase a title insurance policy is NOW before an issue like fraud is discovered.

Remember, being proactive and vigilant is key to protecting yourself and your mortgage from fraud. If you suspect fraudulent activity, act promptly to mitigate potential damage and report it to the appropriate authorities.

The Bank of Canada has left its benchmark rate unchanged in its latest decision, keeping rates where they are for the fifth time in a row.

The central bank said on Wednesday morning that it was maintaining its overnight rate, which leads variable mortgage rates in Canada, at its current level of 5.0%. That means the rate remains at a 22-year high but has not increased since July of last year.

After a series of rapid interest rate hikes throughout 2022 and 2023, recent announcements by the Bank have contained little in the way of surprises – and its latest statement was no different. Markets had seen virtually no chance of a rate cut today, although sentiment is more bullish about a possible move toward lower rates in April or June.

The Bank said it remained “concerned” about risks on the inflation outlook, and that it needed to see “further and sustained easing” in core inflation in the months ahead.

Inflation ticked downward by more than expected at last reading, hitting 2.9% with the consumer price index (CPI) inching toward the Bank’s target rate.

However, the Canadian economy has also defied expectations of a recession, expanding in the fourth quarter and growing at a 1.0% annualized rate as gross domestic product (GDP) also likely increased in January.

While it left rates unchanged in January, the central bank dropped language from prior statements indicating a preference toward further hikes – and economists surveyed by Bloomberg had suggested no movement up or down was likely in today’s announcement, with June likely to mark the first move in the Bank’s rate-cutting salvo.

The Bank is expected by those economists to ease the policy rate to 3% by the end of 2025, with traders estimating chances of a cut at its next meeting – scheduled for April 10 – at around 33%.

Are rate hikes now a thing of the past?

The Bank of Canada slashed its benchmark rate to a rock-bottom 0.25% at the onset of the COVID-19 pandemic, easing borrowing costs as the escalating public health crisis ground the economy to a halt.

It kept rates at that level for nearly two years, ending that streak with a 25-basis-point hike in March 2022 amid growing concerns over rising inflation and introducing nine further hikes until last July.

With inflation ticking resolutely downwards from a 39-year high of 8.1% in the summer of 2022, the central bank has softened its tone on the prospect of further hikes in recent months – and governor Tiff Macklem all but confirmed at the end of last year that rate cuts were on the way.

Source CMP
By Fergal McAlinden

Several economists are expecting the Bank of Canada to hold interest rates in its upcoming announcement following the weakening economic conditions, according to The Canadian Press.

Many believe that the central bank will be keeping its key interest rate at 5%, with a first rate cut set to arrive around June, as the economy slows at a slightly stronger pace than the central bank’s expectations.

“At the margin, things are looking a little bit weaker than what the Bank of Canada might have envisaged. Domestic spending was lower in the fourth quarter than it was in the third quarter. And that’s particularly concerning, given the fact that the population grew so dramatically during that period,” said Royce Mendes, managing director and head of macro strategy at Desjardins.

While growth in the economy by an annualized rate of 1% in Q4 exceeded the expectations of economists as well as the central bank’s forecast, the headline figure may be hiding the true state of the economy.

“This is probably the weakest one-per-cent growth I think any of us have lived through,” said Doug Porter, chief economist at the Bank of Montreal (BMO).

The central bank’s rate hikes have largely contributed to the slowing Canadian economy, with consumers being forced to cut back on spending as many of them continue to deal with higher borrowing costs on mortgages as well as other debt.

While companies are also impacted through the falling business investment, the unemployment rate showed a much more positive result compared to other parts in the economic data as Statistics Canada’s labour force survey showed that it managed to decrease to 5.7% in January, which was near the levels seen prior to the pandemic.

“I think the Bank of Canada is looking at all of these data in totality, and will come to the conclusion that if anything, the labour market has weakened since the time of the January monetary policy report,” said Mendes.

Most observers will be closely watching the Bank’s language regarding core measures of inflation.

“At the least I expect the Bank of Canada to take a more holistic view of the inflation indicators and to acknowledge the progress that we are seeing in taming underlying inflationary pressures. If they don’t, I would take that as a very, very hawkish signal,” said Mendes.

Source CMP
By Abigail Adriatico

The federal government has discontinued the First-Time Home Buyer Incentive, a much-criticized program aimed at improving housing affordability for new buyers that saw muted uptake in major markets.

Canada Mortgage and Housing Corporation (CMHC), the national housing agency, said in a statement on its website that the program was winding up, with no new or updated submissions to be accepted after midnight ET on March 21.

Applications resubmitted after that date will be subject to a manual review, with review requests to be submitted no later than midnight ET on March 25 and no new approvals to be granted after March 31.

Introduced in 2019, the Incentive was aimed at reducing monthly mortgage payments for qualified first-time buyers through a shared-equity scheme. It offered a contribution of 5% or 10% towards the purchase of a newly constructed home, and 5% of the purchase of a resale existing home or new/resale mobile or manufactured home.

Still, that shared-equity component, which meant the government would also benefit from the potential future sale of a home, proved unpopular with buyers, who would have to repay the Incentive either after 25 years or upon sale.

The program faced challenges from the off. In 2020, federal Conservative MPs Tom Kmiec and Stephanie Kusie slammed its cost and low levels of consumer interest, urging CMHC to torpedo the scheme after an annual report showed its uptake lagged far below projections.

Mortgage Professionals Canada (MPC) also criticized the Incentive at its 2022 summit, when vice chair Veronica Love said the scheme was “simply failing” with data showing participation in the program was less than a third of what the government had originally envisaged.

Between its launch in September 2019 and the end of March 2021, the program had seen fewer than 10,000 successful applicants, with Edmonton and Calgary accounting for nearly 2,000 of that total.

Source CMP
By Fergal McAlinden

Experts anticipate a rise in Canada’s home prices this year, with expectations of further increases in 2025, according to Reuters. This prediction comes amid continuous strong demand for housing and a notable lack of new supply, coupled with the likelihood of interest rate cuts later in 2024.

The surge in Canadian home prices by over 50% during the pandemic was fuelled by exceptionally low interest rates and a scramble for more spacious living by homeowners. However, a subsequent 14% drop from the peak in early 2022 highlighted a cooling period. This cooling, in the face of an ongoing housing shortage, was attributed to the dampening effect of higher mortgage rates and steep prices, which sidelined many potential buyers.

Lately, a slight dip in mortgage rates—spurred by expectations of the Bank of Canada trimming rates after its aggressive hikes—has nudged some buyers back into the market. A Reuters poll involving 17 analysts predicts a modest 1.2% increase in average home prices this year, following a 5.5% decline last year, with an anticipated 3.3% rise in 2025.

“This winter’s renewed market vigour is making it a more competitive environment for buyers… we think a pivot towards rate cuts mid-year will get the wheels turning faster over the second half, perhaps even sooner,” Robert Hogue, assistant chief economist at RBC, told Reuters.

“There will be a lot of pent-up demand to satisfy once confidence returns, which could heat things up in a hurry. However, poor affordability conditions will restrain the recovery and make it a gradual liftoff.”

All eyes in the mortgage world will be on the Bank of Canada next week as the central bank reveals its much-anticipated decision on interest rates – but those holding out hope for a rate cut are likely to be left disappointed.

The Bank is widely expected to begin trimming its benchmark rate this year but while some observers believe a spring cut could still be in the offing, few believe next week’s announcement will mark the beginning of that path.

A new analysis by Desjardins Group suggested the central bank “should begin cutting interest rates around the spring,” although chief economist Jimmy Jean told the Financial Post that April is probably the earliest a rate drop will occur.

Recent indications of a still-strong labour market may have given the Bank of Canada pause for thought on its rate-cut timeline, even if overall inflation fell by more than expected at last reading to 2.9%.

Keith Reading, senior director of research at real estate firm Morguard, told Canadian Mortgage Professional that while economic factors largely appear to be trending in the right direction for the Bank, they will likely be eager to pour cold water on the prospect of an unexpected uptick in economic activity.

“Right now, I think the Bank of Canada is hinting that rate cuts might be a little further off than first anticipated,” he said. “There were a lot of people thinking the spring or summer of this year. But I think the Bank is sort of [indicating], ‘Hold on – it may be a little bit longer.’

“Part of that is we’ve had a pretty good job growth figure to open January, and inflation has certainly come down. But we’re still not at the 2% target that the Bank likes – so it may take longer for rates to come down.”

How much will the Bank of Canada eventually cut rates by?

Desjardins’ outlook calls for five 25-basis-point cuts to both the Canadian and US overnight rates in 2024, with further declines expected to take place next year. Reading said he’s expecting a cautious approach from the central bank, although the onset of cuts is likely to help boost investor confidence and bring them off the sidelines.

“I’m of the opinion that the Bank, as it’s done historically, will be careful and conservative. I don’t think we’re going to see a 50-basis-point drop in the Bank’s policy rate immediately,” he said.

“I think you might see a 0.25% drop, and then much more gradual cuts. But I think once they do start to come down, you’ll see investor confidence pick up and it should kick off what investors are looking for: stability in terms of interest rates, and what the debt market’s going to look like.”

March rate hold likely – but April could be a different story

Against that backdrop, the Bank’s most likely course of action in next week’s announcement is another rate hold, which would mark a fifth consecutive decision with no upward change.

Still, that better-than-expected January inflation data has helped boost market confidence that an April cut could be on the way.

Money markets’ expectations of an April rate drop soared to 58% in the wake of last Tuesday’s (February 20) consumer price index (CPI) reading, up from 33% prior to the news.

The central bank last slashed its policy rate, which leads variable interest rates in Canada, at the onset of the COVID-19 pandemic – cutting that trendsetting rate to a rock-bottom 0.25% in March 2020 as the economy reeled from shutdowns and global uncertainty.

That rate remained unchanged for nearly two years, with ultra-low borrowing costs helping herald a housing market boom as borrowers rushed to take advantage of access to cheap credit, before the Bank began hiking again in 2022 amidst surging inflation.

Bank governor Tiff Macklem hinted at the end of last year at possible rate cuts coming down the line in 2024 – but refused to be drawn on a potential timeline.

Source CMP
By Fergal McAlinden

Canada’s inflation rate for January eased to 2.9%, a drop beyond economists’ expectations, potentially paving the way for the Bank of Canada (BoC) to consider rate cuts as soon as June. Economists have analyzed the latest figures and shared their insights.

According to Olivia Cross, a North America analyst at Capital Economics, the BoC will be pleased to see improvements in its measures of core inflation. Core inflation, excluding food and energy, only increased by 0.1% month-over-month, a deceleration from December’s 0.3% gain. The BoC’s preferred measures, CPI-trim and CPI-median, both slowed to 3.4% and 3.3%, respectively.

However, Cross advises caution, emphasizing the BoC will be monitoring whether this deceleration will continue before considering rate cuts. Capital anticipates the first rate cut to occur at the central bank’s June 5 meeting, according to the Financial Post.

Andrew Grantham from CIBC Economics observes that elevated interest rates are affecting consumer spending, as evidenced by significant declines in airline fares and clothing prices. Grantham notes a potential rebound in inflation but predicts a first-quarter rate of 2.9%, below the BoC’s forecast.

“So even with GDP growth running somewhat stronger than they expected, we still anticipate that interest rate cuts will start in June,” Grantham said.

Abby Xu of RBC Economics highlights a decrease in inflation acceleration and expects shelter inflation to persist due to higher mortgage rates and housing shortages. This persistent inflation presents challenges for the BoC’s 2% target. Likewise, Xu anticipates the BoC to start lowering interest rates by mid-year.

National Bank of Canada economists Matthieu Arseneau and Alexandra Ducharme attribute the 6.2% annual surge in shelter costs to elevated mortgage interest rates and rising rental prices driven by population growth. They anticipate continued pressure on the economy and labor market due to restrictive monetary policies, maintaining their forecast for a first interest rate cut in June while acknowledging increased prospects for an April adjustment following the latest report.

Charles St-Arnaud of Alberta Central believes it’s premature to declare victory against inflation, emphasizing the importance of core inflation remaining below 3% for sustained periods before considering rate cuts. “We continue to believe that the BoC is unlikely to contemplate rate cuts until inflation has been brought sustainably below three per cent,” he said. “With this in mind, a cut in June looks like the most probable timing.”

Overall, while the January inflation figures provide some relief, economists remain cautious, noting the importance of sustained trends and core inflation metrics.

Source CMP
By Jonalyn Cueto