26 Oct

Bank of Canada Slows Pace of Rate Hikes

General

Posted by: Tony Passalacqua

The Bank of Canada Slowed the Pace of Monetary Tightening

 

The Governing Council of the Bank of Canada raised its target for the overnight policy rate by 50 basis points today to 3.75% and signalled that the policy rate would rise further. 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.

Most market analysts had expected a 75 bps hike in response to the disappointing inflation data for September. Headline inflation has slowed from 8.1% to 6.9% over the past three months, primarily due to the fall in gasoline prices. However, the Bank said that “price pressures remain broadly based, with two-thirds of CPI components increasing more than 5% over the past year. The Bank’s preferred measures of core inflation are not yet showing meaningful evidence that underlying price pressures are easing. Near-term inflation expectations remain high, increasing the risk that elevated inflation becomes entrenched.”

In his press conference, Governor Tiff Macklem said that the Bank chose to reduce today’s rate hike from 75 bps last month (and 100 bps in July) to today’s 50 bps because “there is evidence that the economy is slowing.” When asked if this is a pivot from very big rate increases, Macklem said that further rate increases are coming, but how large they will be is data-dependent. Global factors will also influence future Bank of Canada actions.

“The Bank expects CPI inflation to ease as higher interest rates help rebalance demand and supply, price pressures from global supply disruptions fade, and the past effects of higher commodity prices dissipate. CPI inflation is projected to move down to about 3% by the end of 2023 and then return to the 2% target by the end of 2024.”

The press release concluded with the following statement: “Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further. Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. Quantitative tightening is complementing increases in the policy rate. We are resolute in our commitment to restore price stability for Canadians and will continue to take action as required to achieve the 2% inflation target.”

Reading the tea leaves here, the fact that the Bank of Canada referred to ‘increases’ in interest rates in the plural suggests it will not be just one more hike and done.

Monetary Policy Report (MPR)

The Bank of Canada released its latest global and Canadian economies forecast in their October MPR. They have reduced their outlook across the board. Concerning the Canadian outlook, GDP growth in 2022 has been revised down by about ¼ of a percentage point to around 3¼%. It has been reduced by close to 1 percentage point in 2023 and almost ½ of a percentage point in 2024, to about 1% and 2%, respectively. These revisions leave the level of real GDP about 1½% lower by the end of 2024.

Consumer price index (CPI) inflation in 2022 and 2023 is anticipated to be lower than previously projected. The outlook for CPI inflation has been revised down by ¼ of a percentage point to just under 7% in 2022 and by ½ of a percentage point to about 4% in 2023. The outlook for inflation in 2024 is largely unchanged. The downward revisions are mainly due to lower gasoline prices and weaker demand. Easing global cost pressures, including lower-than-expected shipping costs, also contribute to reducing inflation in 2023. The weaker Canadian dollar partially offsets these cost pressures.

The Bank is expecting lower household spending growth. Consumer spending is expected to contract modestly in Q4 of this year and through the first half of next year. Higher interest rates weigh on household spending, with housing and big-ticket items most affected (Chart below). Decreasing house prices, financial wealth and consumer confidence also restrain household spending. Borrowing costs have risen sharply. The costs for those taking on a new mortgage are up markedly. Households renewing an existing mortgage are facing a larger increase than has been experienced during any tightening cycle over the past 30 years. For example, a homeowner who signed a five-year fixed-rate mortgage in October 2017 would now be faced with a mortgage rate of 1½ to 2 percentage points higher at renewal.

Housing activity is the most interest-sensitive component of household spending. It provides the economy’s most important transmission mechanism of monetary tightening (or easing). The rise in mortgage rates contributed to a sharp pullback in resales beginning in March. Resales have declined and are now below pre-pandemic levels (Chart below). Renovation activity has also weakened. The contraction in residential investment that began in the year’s second quarter is projected to continue through the first half of 2023, although to a lesser degree. House prices rose by just over 50% between February 2020 and February 2022 and have declined by just under 10%. They are projected by the Bank of Canada to continue to decline, particularly in those markets that saw larger increases during the pandemic.

Higher borrowing costs are affecting spending on big-ticket items. Spending on automobiles, furniture and appliances is the most sensitive to interest rates and is already showing signs of slowing. As higher interest rates work their way through the economy, disposable income growth and the demand for services will also slow. Past experience suggests that the demand for travel, hotels, restaurant meals and communications services will be impacted the most. Household spending strengthens beginning in the second half of 2023 and extends through 2024. Population growth and rising disposable incomes support demand as the impact of the tightening in financial conditions wanes. For example, new residential construction is boosted by strong immigration in markets that are already particularly tight.

Governor Macklem and his officials raised the prospect of a technical recession. “A couple of quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth” in the first half of next year, the bank said in the MPR.

Bottom Line

The Bank of Canada’s surprising decision today to hike interest rates by 50 bps, 25 bps less than expected, reflected the Bank’s significant downgrade to the economic outlook. Weaker growth is expected to dampen inflation pressures sufficiently to warrant today’s smaller move.

A 50 bps rate hike is still an aggressive move, and the implications are considerable for the housing market. The prime rate will now quickly rise to 5.95%, increasing the variable mortgage interest rate another 50 bps, which will likely take the qualifying rate to roughly 7.5%.

Fixed mortgage rates, tied to the 5-year government of Canada bond yield, will be less affected. The 5-year bond yield declined sharply today–down nearly 25 bps to 3.42%–with the smaller-than-expected rate hike.

Barring substantial further weakening in the economy or a big move in inflation, I expect the Bank of Canada to raise rates again in December by 25 bps and then again once or twice in 2023. The terminal overnight target rate will likely be 4.5%, and the Bank will hold firm for the rest of the year. Of course, this is data-dependent, and the level of uncertainty is elevated.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca
14 Oct

Canadian Housing Activity Slowed Again in September As Prices Continued to Fall

General

Posted by: Tony Passalacqua

Orderly Housing Correction Continues

 

There are many unusual aspects to the current housing correction, but fundamentally the most noteworthy is how orderly and non-chaotic it has been. Home sales have slowed, but so have new listings, so the price declines are more muted than we might have expected. This is not a housing collapse. It is a housing correction. We’ve seen little distressed selling, as most would-be sellers have lots of home equity and low mortgage rates–not anxious to buy new properties immediately. Moreover, with rents surging, most potential down-sizers aren’t keen to make that trade-off.

The full effects of the most recent rate hikes have not yet manifested. Statistics released today by the Canadian Real Estate Association (CREA) show that the slowdown that began in March in response to higher interest rates continued in September. Home sales recorded over Canadian MLS® Systems fell by 3.9% between August and September 2022. From May through August, month-over-month declines have been progressively smaller. The September result marked a slight increase in the current sales slowdown that began with the Bank of Canada’s first rate hike back in March.

While about 60% of all local markets saw sales fall from August to September, the national number was pulled lower by the fact markets with declines included Greater Vancouver, Calgary, the Greater Toronto Area (GTA) and Montreal.

The actual (not seasonally adjusted) number of transactions in September 2022 came in 32.2% below that same month last year. It stood about 12% below the pre-pandemic 10-year average for that month (see chart below).

“September was another month of lower sales activity, although, with many sellers also opting to play the waiting game, the market remains on the tighter side of balanced market territory,” said Jill Oudil, Chair of CREA. “It makes for an interesting dynamic, one that doesn’t really have many historical precedents. The market has changed so much in the last year, and the adjustment to higher borrowing costs is still underway.”

“Up until recently, higher borrowing costs had disproportionally affected the fixed-rate space, with buyers able to qualify more easily if they went with a variable rate mortgage,” said Shaun Cathcart, CREA’s Senior Economist. “The Bank of Canada’s most recent rate hike in early September finally closed that door, so it was not a big surprise to see additional softness on the sales side. The important thing to remember is we’re still in the middle of a period of rapid adjustment, with buyers and sellers trying to feel each other out while a lot of people have had to take their home search plans back to the drawing board. As such, resale markets may remain on the quiet side for some time yet, with the flipside of that coin being even more pressure on rental markets.”

New Listings
The supply of homes is still historically low. The number of newly listed homes edged back a further 0.8% on a month-over-month basis in September. This built on the 6.1% and 4.9% declines recorded in July and August, respectively, as some sellers appear content to stay on the sidelines until more buyers are ready to get back into the market. It was an even split between markets where new supply was down in September and those where it increased, with the most significant declines in the GTA offsetting the largest gains in British Columbia’s Lower Mainland.

Unusually, new listings would be so listless during a housing slowdown. However, the CREA data only go back 42 years, when interest rates trended sharply downward. Sellers today typically have mortgages at far lower than current rates, which no doubt dampens their enthusiasm to sell. Distressed sellers apparently listed their homes earlier this cycle, with the rest remaining on the sidelines for now. That could change if interest rates rise substantially further, although the incentives to stay in place continue high.

With sales down and new listings seeing a minor change in September, the sales-to-new listings ratio eased to 52% compared to 53.6% in August. The September 2022 reading for the national sales-to-new listings ratio was back on par with those in June and July and slightly below its long-term average of 55.1%.

There were 3.7 months of inventory on a national basis at the end of September 2022, up slightly from 3.5 months at the end of August. While the number of months of inventory is still well below the long-term average of about five months, it’s also up quite a bit from the all-time low of 1.7 months set at the beginning of 2022.

Home Prices
The Aggregate Composite MLS® Home Price Index (HPI) edged down 1.6% on a month-over-month basis in August 2022, not a small decline historically, but smaller than in June and July.

Breaking it down regionally, most of the monthly declines in recent months have been in markets across Ontario and, to a lesser extent, in British Columbia; however, in August, Ontario markets contributed most to the overall national decline.

Looking across the Prairies, prices in Alberta appear to have peaked. Prices still rise slightly in Saskatchewan, while Manitoba recorded the only decline. In Quebec, prices have dipped somewhat in the last couple of months. On the East coast, the softening of prices confined to Halifax-Dartmouth is now also appearing in New Brunswick, Newfoundland and Labrador. By contrast, prices in PEI continue to edge ahead on a month-over-month basis.

The non-seasonally adjusted Aggregate Composite MLS® HPI was still up by 7.1% on a year-over-year basis in August. This was the first single-digit increase in almost two years, as year-over-year comparisons have been winding down at a brisk pace from the near-30% record year-over-year gains logged just six months ago.
The Aggregate Composite MLS® HPI edged down 1.4% on a month-over-month basis in September 2022, not a small decline historically, but smaller than in June, July and August.

Breaking it down regionally, most of the recent monthly declines had been in markets across Ontario and, to a lesser extent, in B.C. The standout trend in August and September was that quite a few of those Ontario markets saw monthly price declines get stopped in their tracks, mainly in the Greater Golden Horseshoe. In a few markets prices even popped up a bit between August and September.

Looking across the Prairies, prices in Edmonton and Winnipeg are down a bit from their peaks, while prices are sliding sideways in Calgary, Regina, and Saskatoon. Similarly in Quebec, prices have dipped in Montreal but are mostly flat in Quebec City.

On the East Coast, price softness that had been confined to the Halifax-Dartmouth area appears to now be showing up in parts of New Brunswick and Newfoundland and Labrador, while prices in Prince Edward Island have flattened out in recent months but have not yet moved any lower.

The non-seasonally adjusted Aggregate Composite MLS® HPI was still up by 3.3% on a year-over-year basis in September, a far cry from the near-30% record year-over-year gains logged in early 2022.

US Inflation Surprises on the High Side in September

In other news, US CPI data, released yesterday for September, show inflation remains stubbornly high, assuring another 75 bps increase in the US overnight policy rate when the Fed meets again on November 3.

A closely watched measure of US consumer prices rose by more than forecast to a 40-year high last month, pressuring the Federal Reserve to raise interest rates even more aggressively. The core consumer price index, which excludes food and energy, increased 6.6% from a year ago, the highest level since 1982. From a month earlier, the core CPI climbed 0.6%. On the heels of a solid jobs report last week and record-low unemployment, the inflation data likely cement an additional 75-basis point interest rate hike at the Fed’s November policy meeting. Even more noteworthy, however, is that immediately following the release of the inflation report, the market assessment of the maximum overnight rate rose from 4.6% to 4.85% for March of next year, substantially above the current overnight rate of 3.25%.

Bottom Line

The Bank of Canada’s next policy announcement date is October 26, when we will likely see another hike in the overnight policy target of at least 50 bps to 3.75%. Much will depend on next week’s release of the September CPI report for Canada on Wednesday, October 19. All eyes will be on the Bank’s measures of core inflation, which have been stubbornly sticky at above 5% on average. If the data disappoint on the high side, we can’t rule out a 75-bps rate hike the following week.

I believe both the Bank of Canada and the Fed will hike overnight rates further later this year and into next year. They are also not likely to begin to reverse these rate hikes until 2024.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

 
12 Oct

The Versatility of the CHIP Reverse Mortgage

General

Posted by: Tony Passalacqua

The Versatility of the CHIP Reverse Mortgage

If you are a Canadian homeowner 55+ and require extra cash to satisfy your financial needs in retirement, then you should consider using a Reverse Mortgage as a source for funds. The CHIP Reverse Mortgage allows you to access up to 55% of your home’s equity in tax-free cash with no monthly payments required. With this money you can renovate your home, pay off debts, purchase new properties, or even take a vacation abroad. Many clients have experienced the benefits of the CHIP Reverse Mortgage by using its funds to meet their financial needs in retirement.

Here are some of the most common ways clients have used the CHIP Reverse Mortgage:

Health Care: 91% of Canadians say they want to remain in their own homes for as long as possible after retirement. If you are one of these Canadians, you can use the CHIP Reverse Mortgage to help you continue living in the comfort of your own home and community. Many Canadians cite that they are forced to move out of their homes because they cannot afford the high costs associated with in-home care. However, the CHIP Reverse Mortgage can give you the financial means to remain in the home you love and afford the health care you need as you age.

Renovations/Retrofitting: Many clients use the proceeds of the CHIP Reverse Mortgage for renovations and retrofitting. If this is something you have always wanted to do, but lacked the funds for, then the CHIP Reverse Mortgage may be able to provide the source of cashflow you need. You can finally get around to fixing that creaky floorboard, remodeling the entire kitchen, or even adding a lovely jacuzzi to enjoy retirement without worrying about the cost of improving your standard of living.

Income Supplement: Like many other Canadians, you might fear that you cannot maintain the same standard of living once you retire due to a decreased income. Furthermore, with interest rates rising and inflation hitting all-time highs, Canadian’s average annual expenses have ballooned. For these reasons, you may have to sacrifice your vacation plans, restaurant dinners, or annual subscriptions. However, with the CHIP Reverse Mortgage, you can get an increase in your cashflow with no monthly payments required and be financially secure to live out your retirement on your terms.

Unplanned Expenses: You may have the perfect retirement plan, which has been built to provide you with financial security. However, unplanned expenses are almost impossible to avoid, no matter how much planning you have done. Emergencies relating to damages to your home and unexpected health issues can always arise, the costs of which may not have been accounted for in your retirement plan. The CHIP Reverse Mortgage can help you by accessing the value of your home’s equity and giving you the tax-free cash, you need to be financially prepared for any unplanned expenses.

Early Inheritance: Many clients use the CHIP Reverse Mortgage funds to provide an early inheritance to their family. With the cash you receive from the CHIP Reverse Mortgage, you can help support your loved ones now and give them an early inheritance to help them with a down payment on a house or even help grandchildren with college fees. This way, you can share in the enjoyment of their inheritance well into your retirement.

Travel: We always talk about travelling but find excuses not to do it. Two of the biggest reasons are that there is no time to travel, or it is too expensive. When most people retire, they finally find themselves having the time for travel, but the cost of travelling often dissuades them. The CHIP Reverse Mortgage provides you with cash now, so that you can take the vacation you have always wanted. You can receive up to 55% of your home’s equity to use on your next destination without making any monthly payments. Whether the trip is local, a quick weekend getaway, or an all-inclusive beach resort, the CHIP Reverse Mortgage can help you afford your travels.

Purchase Mortgage: Have you ever dreamed about purchasing a nice cottage or beach house as a vacation home for you and your family? If you answered yes, you are like many clients who have used the tax-free cash they receive from the CHIP Reverse Mortgage to purchase their dream vacation home.

Debt Consolidation: One of the most common use of funds of the CHIP Reverse Mortgage is for Debt Consolidation. You can use the tax-free funds you obtain from accessing your home’s equity to pay off all your debts and live a peaceful retired life. The best part is that you are not required to make any monthly payments with a reverse mortgage, giving you even more monthly cash flow to use to improve your retirement after your debt has been covered.

These are only some of the different uses of the CHIP Reverse Mortgage.

Contact me to find out how versatile the CHIP Reverse Mortgage is and how it can be used to help you live a better retirement! 

Tony Passalacqua

Reverse Mortgage Expert

DLC Next Generation Mortgage

Cell: 778 895 4122

Email: tpassalacqua@dominionlending.ca