29 Jan

The Bank of Canada Cuts The Overnight Rate By 25 Bps

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The Bank of Canada (BoC) reduced the overnight rate by 25 basis points this morning, bringing the policy rate down to 3.0%. The market had anticipated a nearly 98% chance of this 25 basis point reduction, and consensus aligned with this expectation. The Federal Reserve is also set to announce its rate decision this afternoon, where it is widely expected to maintain the current policy rate. As a result, the gap between the US Federal Funds rate and the BoC’s overnight rate has widened to 150 basis points. This discrepancy is largely attributed to stronger growth and inflation in the US compared to Canada. Consequently, Canada’s relatively low interest rates have negatively impacted the Canadian dollar, which has fallen to 69.2 cents against the US dollar. Additionally, oil prices have dropped by five dollars, now at US$73.61.

The Bank also announced its plan to conclude the normalization of its balance sheet by ending quantitative tightening. It will restart asset purchases in early March, beginning gradually to stabilize and modestly grow its balance sheet in alignment with economic growth.

The projections in the January Monetary Policy Report (MPR) released today are marked by more-than-usual uncertainty due to the rapidly evolving policy landscape, particularly the potential threat of trade tariffs from the new administration in the United States. Given the unpredictable scope and duration of a possible trade conflict, this MPR provides a baseline forecast without accounting for new tariffs.

According to the MPR projections, the global economy is expected to grow by about 3% over the next two years. Growth in the United States has been revised upward, mainly due to stronger consumption. However, growth in the euro area is likely to remain subdued as the region faces competitiveness challenges. In China, recent policy actions are expected to boost demand and support near-term growth, although structural challenges persist. Since October, financial conditions have diverged across countries, with US bond yields rising due to strong growth and persistent inflation, while yields in Canada have decreased slightly.

The BoC press release states, “In Canada, past cuts to interest rates have begun to stimulate the economy. The recent increase in both consumption and housing activity is expected to continue. However, business investment remains lackluster. The outlook for exports is improving, supported by new export capacity for oil and gas.

Canada’s labor market remains soft, with the unemployment rate at 6.7% in December. Job growth has strengthened in recent months after a prolonged period of stagnation in the labor force. Wage pressures, previously sticky, are showing some signs of easing.

The Bank forecasts GDP growth to strengthen in 2025. However, with slower population growth due to reduced immigration targets, both GDP and potential growth will be more moderate than previously anticipated in October. Following a growth rate of 1.3% in 2024, the Bank now projects GDP to grow by 1.8% in both 2025 and 2026, slightly exceeding potential growth. As a result, excess supply in the economy is expected to be gradually absorbed over the projection horizon.

CPI inflation remains close to the 2% target, though with some volatility stemming from the temporary suspension of the GST/HST on select consumer products. Shelter price inflation remains elevated but is gradually easing, as anticipated. A broad range of indicators, including surveys on inflation expectations and the distribution of price changes among CPI components, suggests that underlying inflation is near the 2% target. The Bank forecasts that CPI inflation will remain around this target over the next two years.

Aside from the potential US tariffs, the risks surrounding the outlook appear reasonably balanced. However, as noted in the MPR, a prolonged trade conflict would most likely result in weaker GDP growth and increased prices in Canada.

With inflation around 2% and the economy in a state of excess supply, the Governing Council has decided to further reduce the policy rate by 25 basis points to 3%. This marks a substantial (200 bps) cumulative reduction in the policy rate since last June. Lower interest rates are expected to boost household spending, and the outlook published today suggests that the economy will gradually strengthen while inflation remains close to the target. Nevertheless, significant and widespread tariffs could challenge the resilience of Canada’s economy. The Bank will closely monitor developments and assess their implications for economic activity, inflation, and monetary policy in Canada. The Bank is committed to maintaining price stability for Canadians.Nevertheless, significant and widespread tariffs could challenge the resilience of Canada’s economy. The Bank will closely monitor developments and assess their implications for economic activity, inflation, and monetary policy in Canada. The Bank is committed to maintaining price stability for Canadians.

Bottom Line

The central bank dropped its guidance on further adjustments to borrowing costs as US President Donald Trump’s tariff threat clouded the outlook.

Bonds surged as the market absorbed the central bank’s decision not to guide future rate moves. The yield on Canada’s two-year notes slid some four basis points to 2.79%, the lowest since 2022. The loonie maintained the day’s losses against the US dollar.

In prepared remarks, Macklem said while “monetary policy has worked to restore price stability,” a broad-based trade conflict would “badly hurt” economic activity but that the higher cost of goods “will put direct upward pressure on inflation.”

“With a single instrument — our policy rate — we can’t lean against weaker output and higher inflation at the same time,” Macklem said, adding the central bank would need to “carefully assess” the downward pressure on inflation and weigh that against the upward pressure on inflation from “higher input prices and supply chain disruptions.”

In the accompanying monetary policy report, the central bank lowered its forecast for economic growth in 2025 due to the federal government’s lower immigration targets. The bank expects the economy to expand by 1.8% in 2025 and 2026, down from 2.1 and 2.3% in previous projections. The central bank trimmed business investment and exports estimates but boosted its consumption forecast.

The bank estimated that interest rate divergence with the Federal Reserve was responsible for about 1% of the depreciation in the Canadian dollar since October.

We expect the BoC to continue cutting the policy rate in 25-bps increments until it reaches 2.5% this Spring, triggering continued strengthening in the Canadian housing market.

Please Note: The source of this article is from SherryCooper.com/category/articles/
28 Jan

Experts bet on sixth straight Bank of Canada rate cut this week

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Economists and markets expect a 25-basis-point rate cut this week, bringing the Bank of Canada’s policy rate to a two-year low of 3%.

This cut, which would be the BoC’s sixth in a row since its policy rate reached a peak of 5%, is already largely priced into the market.

If it happens, the prime rate will drop to 5.20% (and TD’s mortgage prime a smidge higher at 5.35%), offering yet more relief to borrowers with variable-rate mortgages.

Bond markets are currently pricing in about an 83% chance of a quarter-point rate cut this week—coincidentally, not far off the results from CMT’s unofficial BoC rate-cut poll running on LinkedIn.

While this decision is widely expected, future rate cuts are going to become a little more tricky to predict.

The Bank of Canada is likely to adopt a more neutral stance in the coming months, particularly with increasing geopolitical risks and uncertainties around U.S. tariffs. At the same time, the U.S. Federal Reserve is expected to slow the pace of its own rate cuts, which could influence Canada’s future policy direction.

It’s worth noting that Scotiabank is the only major forecaster suggesting the BoC “should pass” on a rate cut this week. However, Derek Holt, VP and Head of Capital Markets at Scotiabank, acknowledges that the central bank “may as well take the easy route in what’s priced in.”

Here’s a look at what some economists and analysts are saying…

On the size of this and future rate cuts:

  • TD Economics: “Despite the tax cut driven dip in headline inflation, core inflation pressures have picked up over the past three months, suggesting that inflation readings are likely to move up a bit in the months ahead. This will give the Bank of Canada reason to adopt a more gradual pace of interest rate cuts this year. We expect a quarter point cut at every other decision in 2025.”
  • BMO: “We expect the Bank of Canada to next move in March, but we can’t rule out a January action. By September, with the policy rate at 2.50% and having fallen into the bottom half of the estimated neutral range, we expect the Bank to pause indefinitely.”
  • Desjardins: “With the inauguration of President Donald Trump…downside risks to the economy abound, not least from the threat of a 25% tariff being introduced on February 1. This economic uncertainty reinforces our call the next rate cut [this week] is likely to be a modest 25 basis points, and that subsequent rate reductions should be of a similar magnitude.”
  • CIBC: “Canada’s inflation data is only going to get harder to dissect in January, with the full month impact from the GST/HST tax break taking hold. Any news on the tariff front will also muddy the picture for inflation ahead. However, through the volatility it still appears that core price pressures are low enough, and the economy weak enough, to justify a 25bp reduction in interest rates from the Bank of Canada [this] week.”

On the impact of U.S. tariffs:

  • National Bank: “Rates will likely come down further if tariffs are applied, but the more uncertain question is how much they’ll need to fall. Given the high degree of uncertainty, this is a question Governing Council won’t be willing to answer but they may feel comfortable explaining the rate path would be pointed lower in this scenario…What might that look like? While obviously speculative, we can envision a ‘two-tiered’ easing cycle whereby the BoC cuts to around 2% while inflation temporarily spikes and then eases more after it passes, and the economy is left battered.”
  • RBC Economics: “Tariffs represent a complicated setup for central banks. They tend to increase costs (inflationary), but they also weaken an economy (deflationary). Most central banks have been clear that they are less likely to respond to inflation directly generated from tariffs, because they increase the price once, and then no longer contribute to year-over-year inflationary pressures. However, the follow on impact of rising inflation driven by a drop in demand could be more damaging. How the Bank of Canada will respond to this environment is not clear, but it has implications for other sectors like housing that could provide an offset from further interest rate cuts.”

Current policy rate & bond yield forecasts from the Big 6 banks

Current Policy Rate: Policy Rate:
Q1 ’25		 Policy Rate:
Q4 ’25		 Policy Rate:
Q4 ’26		 5-Year Bond Yield:
Q4 ‘25		 5-Year Bond Yield:
Q4 ‘26
BMO 3.25% 3.00% 2.50% 2.80%
CIBC 3.25% 2.75% 2.25% 2.25% NA NA
National Bank 3.25% 2.75% 2.25% 2.75% 2.50% 2.85%
RBC 3.25% 2.75% 2.00% 2.45% 2.45%
Scotiabank 3.25% 3.00% 3.00% 3.00% 3.50% 3.50%
TD 3.25% 3.00% 2.25% 2.25% 2.75% 2.75%

Updated: January 27, 2025

This article was written for Canadian Mortgage Trends by:

Steve Huebl

Steve Huebl is a graduate of Ryerson University’s School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.

24 Jan

Questions linger over the government’s new secondary suite refinancing program

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The federal government’s launch of the Secondary Suite Refinance Program on January 15 was largely met with optimism, but some brokers note that questions remain.

The program, first unveiled in October, allows homeowners to refinance up to 90% of their property’s value (capped at $2 million) to build secondary suites intended for long-term rental use, specifically excluding short-term rentals like Airbnb.

In a previous post, Canadian Mortgage Trends examined the pros and cons of the program, concluding that it appears to offer significant benefits for homeowners looking to boost their investments or ease financial pressures by adding a tenant. The initiative also holds potential to create jobs and contribute to the broader housing supply.

However, the program’s details remain unclear, creating uncertainty that has made some brokers hesitant to fully support homeowners seeking to refinance.

“It’s very bare bones,” says Connor Green, a mortgage agent with Concierge Mortgage Group, referring to the limited information and criteria available for the program so far. “Typically with a product of this nature you’d see something much more fleshed out.”

There has also been limited information available to homeowners eager to take advantage of the program, particularly regarding the application process.

The Canada Mortgage and Housing Corporation (CMHC), which is overseeing the program, told Canadian Mortgage Trends, “Interested homeowners should reach out to their lender or mortgage provider.”

Overall details of who will qualify remain vague

Since the program’s January 15 launch, key details remain unclear, including financing logistics, timelines, permit and zoning requirements, and inspection criteria, critics say.

“I think there needs to be more direction on how the funds are going to be managed,” notes Tracy Valko, Principal Mortgage Broker and Founder of Valko Financial. “They’re saying it’s a refinance, but typically with a refinance you give funds on closing … we know that won’t be the case with this but then there needs to be some rollout about what that expectation is.”

Young happy couple examining blueprints during home renovation process in the apartment.

Even the program’s very definition of a “distinct secondary suite” remains unclear.

With the core incentive open to interpretation, homeowners face uncertainty when deciding on specific development options, such as a basement suite, laneway house, garden suite, or a simple partition within the home. Each option carries the risk of not aligning with potential future clarifications provided by the government, critics say.

“‘Distinct secondary suite’ is very vague,” notes Green. “Is that an addition? A detached unit? A basement apartment? Is it splitting a basement apartment into two units, three units? … It’s all vague in that sense where I’m not exactly sure what they are looking to finance under this program.”

Opportunity for multi-generational home owners unclear

One demographic that appears to have been overlooked in the initial planning and follow-up information for the program is homeowners seeking to refinance for the creation of multi-generational homes—households that accommodate at least three generations of the same family.

A 2021 Statistics Canada report revealed a sharp rise in multi-generational homes over the past two decades, with their numbers increasing by 50% between 2001 and 2021.

Such homes would also benefit from support to expand but are more likely to focus on projects that accommodate additional family members rather than tenants, such as creating in-law suites or undertaking “non-distinct” expansions.

However, since the federal government’s new Secondary Suites Refinancing Program is specifically geared towards the creation of rental units, it seems, at least for now, to overlook the opportunity to offer refinancing options for this rapidly growing demographic of homeowners.

Looming tariffs add to the uncertainty

Another source of uncertainty is the looming U.S. tariffs, which could drive up the cost of labour and materials needed for renovations under the program.

Shortly after being sworn in on January 20, U.S. President Donald Trump announced plans to impose a 25% tariff on goods imported from Canada, set to begin February 1. While the tariffs might not directly impact renovation projects in Canada, the potential for retaliatory measures and an escalating trade war could disrupt supply chains and increase costs.

“Materials are expensive, labour is expensive in Canada now,” says Valko. “And there’s also the timeline—you don’t want to have a unit half completed and not be able to finish it by the end of the year … I think that’s why lenders are reluctant.”

This article was written for Canadian Mortgage Trends by:

Dylan Freeman-Grist

Dylan Freeman-Grist is a freelance journalist based in Toronto covering a variety of topics including finance, art, design and technology. You can follow him on X or Bluesky @freemangrist.

16 Jan

Canadian Existing Home Sales Edged Downward in December

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The Canadian Housing Market Ends 2024 On a Weak Note

Home sales activity recorded over Canadian MLS® Systems softened in December, falling 5.8% compared to November. However, they were still 13% above their level in May, just before the Bank of Canada began cutting interest rates.

The fourth quarter of 2024 saw sales up 10% from the third quarter and stood among the more muscular quarters for activity in the last 20 years, not accounting for the pandemic.

“The number of homes sold across Canada declined in December compared to a stronger October and November, although that was likely more of a supply story than a demand story,” said Shaun Cathcart, CREA’s Senior Economist. “Our forecast continues to be for a significant unleashing of demand in the spring of 2025, with the expected bottom for interest rates coinciding with sellers listing properties in big numbers once the snow melts.”

New Listings

New listings dipped 1.7% month-over-month in December, marking three straight monthly declines following a jump in new supply last September.

“While housing market activity may take a breather over the winter with fewer properties for sale, the fall market rebound serves as a good preview of what could happen this spring,” said James Mabey, CREA Chair. “Spring in real estate always comes earlier than both sellers and buyers anticipate. The outlook is for buyers to start coming off the sidelines in big numbers in just a few months from now.”

With sales down by more than new listings on a month-over-month basis in December, the national sales-to-new listings ratio eased back to 56.9%, down from a 17-month high of 59.3% in November. The long-term average for the national sales-to-new listings ratio is 55%, with readings between 45% and 65% generally consistent with balanced housing market conditions.

There were 128,000 properties listed for sale on all Canadian MLS® Systems at the end of 2024, up 7.8% from a year earlier but still below the long-term average of around 150,000 listings.

There were 3.9 months of inventory on a national basis at the end of 2024, up from a 15-month low of 3.6 months at the end of November but still well below the long-term average of five months of inventory. Based on one standard deviation above and below that long-term average, a seller’s market would be below 3.6 months and a buyer’s market would be above 6.5 months. That means the current balance of supply and demand nationally is still close to seller’s market territory.

Home Prices

The National Composite MLS® Home Price Index (HPI) rose 0.3% from November to December 2024 – the second straight month-over-month increase.

The non-seasonally adjusted National Composite MLS® HPI stood just 0.2% below December 2023, the smallest decline since prices dipped into negative year-over-year territory last April.

The non-seasonally adjusted national average home price was $676,640 in December 2024, up 2.5% from December 2023.

Bottom Line

The Bank of Canada’s aggressive rate-cutting and regulatory changes that make housing more affordable have ignited the Canadian housing market. While the conflagration isn’t likely to peak until spring, a seasonally strong period for housing, activity already started to pick up in the fourth quarter.

Today, we saw a welcome dip in US inflation in December. Softer core US CPI inflation in December will give the Fed some breathing room ahead of the uncertain impact of tariffs. With the coming inauguration of Donald Trump, there is an inordinate amount of uncertainty. If Trump imposed tariffs on Canada in the early days of his administration, the Canadian economy would slow markedly, and inflation would mount. This could curtail the Bank of Canada’s easing and even trigger a tightening monetary policy if inflation rises too much.

Market-driven interest rates have risen sharply in recent weeks, pushing the interest rate on 5-year Government of Canada bonds upward. US ten-year yields are at 4.67%, up considerably since early December. Canadian ten-year yields have risen as well, but at 3.44%, they are more than 120 basis points below the US, well outside historical norms.

The central bank meets again on January 29 and will likely cut the overnight policy rate by 25 bps to 3.0%. Canada’s homegrown political uncertainty muddies the waters. The Parliament is prorogued until March as the Liberals decide on a new leader. The subsequent election adds to the volatility and uncertainty. We hold to the view that overnight rates will fall to 2.5% by midyear, triggering a strong Spring selling season.

This article was posted by the DLC Marketing Team and sourced from SherryCooper.com/category/articles/

15 Jan

Home insurance premiums set to surge across Canada

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Severe weather events are contributing to spiking losses for insurers

This article was written for CMP by Jonalyn Cueto

 

Homeowners across Canada should prepare for significant increases in insurance premiums. Experts attributed the rising costs to record-breaking losses from natural disasters, inflation, and labour shortages in the construction industry, a report from CTV News highlighted.

The Insurance Bureau of Canada (IBC) reported $8.5 billion in insured losses in 2024, nearly tripling the previous year’s total. Severe weather events such as Calgary’s hailstorm, Quebec’s flooding, and the Jasper wildfire contributed to these staggering figures. Claims have increased by 115% over the past five years, while the cost of replacing personal property has surged by nearly 500%.

“2024 was the most devastating year on record in Canada for severe weather events,” said Jason Clark of the IBC. He emphasized the need for better disaster prevention measures, including investment in risk mitigation, infrastructure, and first responders.

Struggling to keep up

The rising premiums reflect insurers’ struggle to cope with mounting claims. Daniel Ivans, an insurance expert with Rates.ca, explained, “Insurance is a pooling of risk, and so when claims go up, costs go up.” While premium increases will vary by region, Ivans expects them to be substantial nationwide.

Inflation and rising construction costs compound the issue. Statistics Canada reports that residential building costs have increased by 66% since 2019, with home replacement costs up 24% during the same period.

High-risk areas under threat

The challenges faced by homeowners in high-risk regions, such as British Columbia and California, highlight a growing problem. In California, many wildfire victims were unable to secure insurance due to their location. British Columbians now fear a similar situation.

During periods of imminent wildfire threat, insurers in BC may temporarily restrict the sale of new policies, although renewals continue. The provincial government and the BC Financial Services Authority are monitoring the issue to improve insurance availability and affordability.

Peter Milobar, BC’s Conservative finance critic, warned of the strain these rising costs could place on households. “These are cost pressures that are going to be very difficult to manage for the average household,” he said, noting that many Canadians are already financially vulnerable.

Protecting livelihoods

Experts urge homeowners to maintain comprehensive insurance coverage despite the rising costs. Ivans cautioned against cutting corners, saying, “There’s a concept called saving pennies to lose dollars. We’ve seen a lot of instances where houses are fully burned down or demolished as a result of forest fires, as a result of flooding, where the foundation of the home is displaced. That’s somebody’s entire livelihood that they’re putting at risk for, something that they have no control over.”

To manage rising premiums, Ivans recommends shopping around for better deals and considering insurers outside one’s immediate region.

With extreme weather events on the rise, the future of home insurance remains uncertain. However, Clark stressed the importance of addressing the risks now: “The risk is present. It’s escalating, and we want to ensure that what we see happening south of the border doesn’t happen here.”