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Posted by: Dean Kimoto
Today the bank of Canada held its policy interest rate at 5% citing slowed economic growth due to a weakening in consumption growth, decline in housing activity, and the impact of wild fires across the country.
See the full Bank of Canada post here:
Bank of Canada maintains policy rate, continues quantitative tightening
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Posted by: Dean Kimoto
Weaker-than-expected GDP data last week likely sealed the deal for a rate hold tomorrow by the Bank of Canada. But not all economists are convinced that this marks the end of the current rate-hike cycle.
Statistics Canada reported on Friday that second-quarter economic growth contracted by 0.2% compared to Q1, well down from the Bank of Canada’s 1.5% forecast for the quarter.
The surprising slowdown in economic growth, together with rising unemployment and easing inflation, firmed up the consensus expectation for a rate hold at tomorrow’s monetary policy meeting.
It also led to some suggesting we’re now reached the end of the current rate-hike cycle.
“The broad softening in the domestic economy will almost certainly move the BoC to the sidelines at next week’s rate decision after back-to-back hikes,” wrote BMO chief economist Douglas Porter. “Between the half-point rise in the unemployment rate, the marked slowing in GDP, and some cooling in core inflation, it now looks like rate hikes are over and done.”
But not everyone is convinced.
“I think [the Bank of Canada] should have comfort to deliver another rate hike at this point, but they will probably seek the cover of the latest GDP figures and defer a fuller forecast assessment to the October meeting by which point they will also have a lot more data,” wrote Scotiabank’s Derek Holt.
“Nevertheless, I’m unsure that rate hikes are done,” he continued. “The Governor has been clear that a protracted period of actual GDP growth under-performing potential GDP growth will be required in order to open up disinflationary slack in the economy. In plain language, he realizes he has to break a few things in order to achieve his inflation goals. I don’t think he has the confidence to this point to say that they are clearly on such a path.”
The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.
| Target Rate: Year-end ’23 |
Target Rate: Year-end ’24 |
Target Rate: Year-end ’25 |
5-Year BoC Bond Yield: Year-end ’23 |
5-Year BoC Bond Yield: Year-end ’24 |
|
| BMO | 5.00% | 4.25% | NA | 3.70% (+5bps) |
3.10% (-5bps) |
| CIBC | 5.25% | 3.50% | NA | NA | NA |
| NBC | 5.00% | 4.00% | NA | 3.55% | 3.05% (-5bps) |
| RBC | 5.00% | 4.00% | NA | 3.50% | 3.00% |
| Scotia | 5.00% | 3.75% | NA | 3.65% | 3.60% |
| TD | 5.00% | 3.50% | NA | 3.55% | 2.70% |
This article was written for Canadian Mortgage Trends by:
Posted by: Dean Kimoto
The Canadian economy weakened surprisingly more in the second quarter than the market and the Bank of Canada expected. Real GDP edged downward by a 0.2% annual rate in Q2. The consensus was looking for a 1.2% rise. The modest decline followed a downwardly revised 2.6% growth pace in Q1. (Originally, Q1 growth was posted at 3.1%.) According to the latest monthly data, growth dipped by 0.2% in June, and the advance estimate for economic growth in July was essentially unchanged. This implies that the third quarter got off to a weak start.
The Bank of Canada forecasted growth of 1.5% in Q2 and Q3 in its latest Monetary Policy Report released in July. The central bank is now justified in pausing interest rate hikes when it meets again on September 6th. Today’s report is consistent with the recent rise in unemployment. It suggests that excess demand is diminishing, even when accounting for such special dampening factors as the expansive wildfires and the BC port strike.
Some details of Q2 Growth
Housing investment fell 2.1% in Q2, the fifth consecutive quarterly decline, led by a sharp drop in new construction and renovations. No surprise, given the higher borrowing costs and lower demand for mortgage funds, as the BoC raised the overnight rate to 4.75% in Q2. Despite higher mortgage rates, home resale activity rose in Q2, posting the first increase since the last quarter of 2021.
Significantly, the growth in consumer spending slowed appreciably in Q2 and was revised downward in Q1.
Bottom Line
The weakness in today’s data release may be a harbinger of the peak in interest rates. Inflation is still an issue, but the 5% policy rate should be high enough to return inflation to its 2% target in the next year or so. As annual mortgage renewals peak in 2026, the increase in monthly payments will further slow economic activity and break the back of inflation.
The Bank of Canada will be slow to ease monetary policy, cutting rates only gradually–likely beginning in the middle of next year. In the meantime, the central bank will continue to assert its determination to do whatever it takes to achieve sustained disinflationary forces.
Today’s release of the US jobs report for August supports the view that the Canadian overnight rate has peaked at 5%. (The Canadian jobs report is due next Friday). Though the headline number of job gains in the US came in at a higher-than-expected 187,000, the unemployment rate rose to 3.8% as labour force participation picked up, growth in hourly wages was modest, and job gains in June and July were revised downward.
In Canada, 5-year bond yields have fallen to 3.83%, well below their recent peak shown in the chart below.
Posted by: Dean Kimoto
Originally introduced to mitigate borrower default risks in the event of rising interest rates, some brokers now argue that Canada’s mortgage stress test is no longer needed with interest rates presumably near their peak.
Others, however, say it’s a tool that’s best left in place for the time being.
Back in 2016, the federal government rolled out the stress test as a way to curb risks associated with lending in times of low interest rates and high market prices. The test acts as a buffer, ensuring that potential homebuyers with a 20% or greater down payment are able to afford monthly mortgage payments at a rate of 5.25% or 2% over their contracted rate—whichever is greater.
Two years later, the Office of the Superintendent of Financial Institutions (OSFI) extended the test to apply to insured mortgages as well, or those with down payment of less than 20%.
As interest rates currently stand, this means today’s borrowers are having to qualify for mortgages at rates between 7% and 9%.
Though the stress test is still serving its purpose as a buffer for new homebuyers and investors, today’s economic and interest rate environment is quite different compared to when the stress tests were put in place.
That’s why some mortgage professionals say it’s time to take a hard look at the stress test.
“I would say that maybe the stress test applying 2% above what current rates are is exceeding what the risks are,” says Matt Albinati, a mortgage broker with TMG The Mortgage Group. “I am all for building a buffer for people’s financial situation, but the stress test limits the amount people can borrow.”
Albinati thinks that this change of environment does constitute a review of the stress test, something that OSFI does with its guidelines once a year.
“You look back a year, the stress test was doing a pretty good job. This time—or near in the future—it might be a good time to take a closer look at it,” he told CMT.
Others, however, like Tribe Financial CEO Frances Hinojosa, think the stress test should be left as is, at least for now.
“I don’t think we should be so quick to change the stress test until we’re out of the current economic storm that we’re in today,” she told CMT in an interview.
“At the end of the day, it is there to also protect the consumer [in addition to financial institutions] to ensure that they’re not over-leveraging themselves in a mortgage that they could potentially not be able to afford down the road,” she added.
Hinojosa thinks that the stress test proved its worth during the recent run-up in interest rates, the impact of which was felt immediately by adjustable-rate mortgage holders.
“What I noticed with a lot of these clients when the rates were ratcheting up was that it wasn’t a question of whether they couldn’t afford it,” she said. “It was just uncomfortable because they had to readjust the budget.”
Without the stress test in place when these borrowers were qualifying for their mortgages, they could have potentially over-leveraged themselves and potentially put themselves at risk of default if rates rose high enough, Hinojosa added.
While all federally regulated financial institutions are required to follow stress test guidelines, there are still other options for consumers.
Some provincial credit unions, for example, can issue mortgages with a qualifying rate equal to the contract rate or just 1% higher, giving stretched borrowers more leeway.
But, are they using credit unions?
Albinati and Gert Martens, a broker with Dominion Lending HT Mortgage Group based out of Grande Prairie, AB, say that their clients are not typically turning to credit unions.
Albinati noted that in order for his clients to receive insurance for their mortgage—which makes up about two-thirds of his purchase files—they will need to follow federal guidelines and qualify under the stress test.
Hinojosa, however, said she has seen the stress test push borrowers to other lending channels, including the private mortgage sector. “I think the other part of this is the unintended consequences of having such a high stress test,” she said. “It’s not only pushing clients necessarily to credit unions, [but] also increasing the amount of business that’s been going into alternative lenders.”
Although these alternative channels have seen a spike in activity, Hinojosa notes that it isn’t because these institutions do not stress test, but because they also have the ability to approve clients with extended debt-to-income ratios that the banks can’t necessarily do.
Albinati said he is also starting to send business to lenders other than the big banks. “We are doing a lot of renewals [and] pulling business away from the chartered banks, as they are not being competitive,” he said. “[With] record mortgage lending in 2020-2021, they are scaling back as mortgages are pretty competitive in terms of profit margins.”
Posted by: Dean Kimoto
Despite detached home prices in Toronto and Vancouver posting year-over-year declines in the first half of the year, a longer-term view shows prices are still elevated, and in many cases higher compared to two or three years ago.
In its Hot Pocket Communities Report released Tuesday, RE/MAX found that detached homes in nearly 93% of the 82 districts it analyzed in both cities—which included downtown neighbourhoods and exurbs—were cheaper in the first half of 2023 compared to the previous year.
The exact amount varied between as little as 1.5% in West Vancouver to a whopping 25.6% in the Toronto exurb of Brock.
“Anxious homebuyers were quick to identify the bottom of the market and jumped in with both feet in the second quarter of the year,” Christopher Alexander, president of RE/MAX Canada, said in a statement.
RE/MAX said the easing of home prices was the biggest driver of buying activity in the first half of 2023, especially for existing homebuyers looking to upgrade their current residence.
However, historical RE/MAX data show that despite the recent price drops, valuations remain on par with—or still above—pre- and early-pandemic prices.
In Toronto, prices in the district encompassing the Don Valley Village and Henry Farm neighbourhoods—among the cheapest in the downtown core—dropped by 10.8% to nearly $2 million in 2023. In the previous year, prices in the district had jumped by 17.4%, from $1.87 million to $2.1 million.
Vancouver East saw an 8.1% price drop in 2023, but that followed last year’s whopping 17.3% price gain.
And when it comes to towns outside of Toronto and Vancouver, the situation is even more stark.
In the Whistler/Pemberton area, outside of Vancouver, detached home prices declined 24.8% between 2022 and 2023, according to RE/MAX data. However, they also rose by 39.3% the previous year, more than cancelling out any benefits from this year.
Detached home prices in Orangeville, outside of Toronto, dropped by 14.3% in 2023, but they had shot up 26.47% the previous year.
In other words, prices for detached homes in these neighbourhoods largely haven’t declined over time.
“When we start to compare them over three years, we see virtually no price reduction because of what pricing was in 2020-2021 to where it is today,” Elton Ash, executive vice-president of RE/MAX Canada, told CMT in an interview. “Ultimately, if you purchased a home prior to 2020 and you sell today, you’re likely going to sell for higher than what you paid for it.”
RE/MAX cites a lack of housing supply as the largest factor driving affordability issues today.
It says that nine out of the 16 districts it surveyed reported inventory shortages. This included the Gulf Islands and Whistler/Pemberton, where new listings are down by nearly 43% and 23%, respectively.
Ash says homebuilders are slowing their construction projects largely because of higher interest rates, inflation and uncertainty around carrying costs, not to mention buyer uncertainty.
Potential buyers are staying in their homes unless they absolutely need to move, which then reduces demand for new houses to be built. “That then becomes a self-fulfilling cycle,” Ash says. “You can’t get increased inventory if people just aren’t going to move.”
But the housing inventory shortage isn’t new. In 2022, the Canada Mortgage and Housing Corporation (CMHC) concluded that developers would need to build 3.5 million more housing units by 2030 than they normally would to make housing more affordable for the average Canadian buyer.
Ultimately, Ash doesn’t see housing affordability relief in the near term for prospective buyers looking to buy in the greater Toronto or Vancouver markets.
With interest rates at historic highs, and the potential for them to rise further, Ash says he expects the market to be muted throughout the winter. But he doesn’t expect that will last.
Assuming interest rates remain under control and the Bank of Canada doesn’t increase interest rates beyond September, Ash expects the spring of 2024 to be a repeat of last spring.
Pent-up demand and higher buyer confidence, along with a stable interest rate environment, could see a return to 2023’s market conditions, he says. That ultimately means higher overall house prices, especially if developers don’t pick up the pace—and anything they do start this year won’t be ready for some time.
“I don’t see inventory increasing a great deal,” Ash says. “I do see buyer demand increasing. So, therefore, pricing will start to edge up next spring.”
This article was written for Canadian Mortgage Trends by:
Posted by: Dean Kimoto
Maybe I work with your bank already. Except… I might have a better option. It’s worth asking! I just did a quick scan and from what I just saw The Dominion Lending Centres network has access to at least 76 lenders (and some local credit unions we work with I noticed weren’t on this list, so there’s even more!).
The following article was just published on Canadian Mortgage Trends:
BMO’s decision to work with First National as its underwriting partner for its return to the broker channel served as an endorsement of both FN’s services and the channel as a whole.
Those were the comments First National President and CEO Jason Ellis delivered as part of the lender’s second-quarter earnings call.
As part of BMO’s announced re-entry to the broker channel starting in early 2024, the bank confirmed it would be partnering with First National to provide its underwriting and funding services.
In comments made to CMT at the time, Justin Scully, Head, BMO BrokerEdge, said they chose First National based on its “discipline” and 30-year track record of broker underwriting and servicing.
Ellis was asked about the partnership during First National’s latest earnings call.
“To the extent that BMO made the decision to outsource the activity of adjudication and fulfillment of the mortgage applications, I can’t speak to definitively,” he said. “But I imagine having been absent from the channel for a period of time and perhaps viewing the success of TD by outsourcing that activity, may have turned their mind to the idea.”
He added that First National is “thrilled” to have earned the mandate, which he called a “great endorsement for the channel, and we think it’s a great endorsement for the service we provide here at First National.”
And while Ellis said the underwriting and servicing deal will be a “2024 event,” he noted that “very, very heavy lifting has now been done.” He also confirmed that the underwriting partnership with BMO will be “very similar” to the work it provides to its two other counter-parties, TD and Manulife.
Asked if he thinks it’s just a matter of time before the other big banks make their own moves into the broker channel, Ellis said there’s no indication of that right now.
“I guess there’s always a risk of having one share diluted as more and more participants enter the market, but I right now don’t have any clear indication that the other [big banks] are on the verge of making any significant changes with respect to their view of how they access the market,” he said.
For now, he said First National’s opportunity to work alongside the big banks as a service provider is “a great diversification opportunity for revenue streams in a way to leverage our core competencies of underwriting and both servicing, which we continue to provide as a third-party service as well.”
In his prepared comments on First National’s lending portfolio, Ellis confirmed that there are currently no heightened challenges being posed by the lender’s variable-rate clients.
Part of the reason is because First National offers a true variable-rate mortgage, also known as an adjustable-rate, where payments automatically adjust based on changes to the prime rate, which keeps clients on their contracted amortization schedule.
He added that clients are now overwhelmingly choosing fixed-rate products, a trend being seen industry wide among new originations. First National reported that just 8% of its borrowers chose an adjustable-rate mortgage in the second quarter, down from 62% a year earlier.
“Also through the quarter, there was an unusually large number of borrowers selecting 3-year terms,” Ellis added. “I think some borrowers, perhaps advised by their brokers or on their own terms, viewed a shorter term, albeit at a higher rate, as the better strategy as they looked ahead to an earlier renewal and an opportunity to access what they viewed perhaps lower rates in the near future.”
Source: Q2 2023 earnings release
First National President and CEO Jason Ellis commented on the following topics during the company’s earnings call:
First National Q2 conference call
This article was written by:
Posted by: Dean Kimoto
Just read a great article on Real Estate Invesment Properties vs other options, CLICK HERE to read in full.
The quick review: in terms of cashflow, purchasing an investment property right should be compared against other investments. For the long term, in terms of asset appreciation, well that may be another story!
As always, best to speak with your team of professionals to see what makes sense for your situation and comfort level. If you don’t know where to start, call me and lets come up with a plan.
Posted by: Dean Kimoto
Real estate markets in the country’s largest metro areas remained relatively strong in July despite the Bank of Canada’s most recent rate hikes.
Data from some of the key real estate boards show continued year-over-year growth in activity and continued upward momentum in prices.
In Toronto, sales posted a 7.8% year-over-year gain, while in Vancouver they were up nearly 29%.
However, Andrew Lis, the Real Estate Board of Greater Vancouver’s director of economics and data analytics, said part of the strength is due to weaker sales a year ago as interest rates were starting to rise.
“Last July marked the point when the Bank of Canada announced their ‘super-sized’ increase to the policy rate of one full per cent, catching buyers and sellers off guard, and putting a chill on market activity at that time,” he noted.
Still, Lis notes that the current strength is against the backdrop of borrowing rates that are much higher compared to a year ago. “Despite borrowing costs being even higher than last July, sales activity surpassed the levels we saw last year, which I think says a lot about the strength of demand in our market and buyers’ ability to adapt to and qualify for higher borrowing costs,” he continued.
On a monthly basis, sales in most markets were down, including in Vancouver (-3%), Toronto (-8.8%), while price gains moderated.
Pressure eased on prices thanks in part to an increase in supply as sellers have started listing homes in greater numbers, particularly in Ontario and British Columbia.
“If sustained, we would expect price gains to continue moderating in the coming months,” noted RBC economists Robert Hogue and Rachel Battaglia.
“Signs of cooling activity in some of Canada’s largest markets are consistent with our view that the spring rebound was premature, and will taper off further amid high interest rates, ongoing affordability issues and a looming recession,” they added. “We think the path ahead is more likely to be slow and bumpy, with the recovery gaining momentum when interest rates come down—a 2024 story.”
Here’s a look at the July statistics from some of the country’s largest regional real estate boards:
QUICK LINKS:
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| July 2023 | YoY % Change | |
| Sales | 75,250 | +7.8% |
| Benchmark price (all housing types) | $1,118,374 | +4.2% |
| New listings | 13,712 | +11.5% |
| Active listings | 15,371 | +0.3% |
“Home sales continued to be above last year’s levels in July, which suggests that many households have adjusted to higher borrowing costs. With that being said, it does appear that the sales momentum that we experienced earlier in the spring has stalled somewhat since the Bank of Canada restarted its rate tightening cycle in June,” said TRREB President Paul Baron.
“Compounding the impact of higher rates has been the persistent lack of listings for people to purchase compared to previous years,” he added.
Source: Toronto Regional Real Estate Board (TRREB)
| July 2023 | YoY % Change | |
| Sales | 2,455 | +28.9% |
| Benchmark price (all housing types) | $1,210,700 | +0.5% |
| New listings | 4,649 | +17% |
| Active listings | 10,301 | -4% |
“While sales remain about 15% below the 10-year average, they are also up about 30 per cent year-over-year, which is not insignificant,” said Andrew Lis, REBGV Director of Economics and Data Analytics.
“Looking under the hood of these figures, it’s easy to see why sales are posting such a large year-over-year percentage increase,” he added. “Last July marked the point when the Bank of Canada announced their ‘super-sized’ increase to the policy rate of one full per cent, catching buyers and sellers off guard, and putting a chill on market activity at that time.”
Source: Real Estate Board of Greater Vancouver (REBGV)
| July 2023 | YoY % Change | |
| Sales | 3,098 | +1% |
| Median Price (single-family detached) | $555,000 | +1% |
| Median Price (condo) | $395,000 | 0% |
| New listings | 4,354 | -9% |
| Active listings | 14,820 | +20% |
“After a disappointing month of June, transaction activity is picking up in the Montreal CMA. For the first time since the summer of 2021, it is the Island of Montreal that is pushing activity in the metropolis, driven by sales of small income properties and single-family homes,” said Charles Brant, Director of the QPAREB’s Market Analysis Department.
“Clearly, some buyers are less affected by the rise in interest rates. The majority of buyers currently in the market can count on income or equity from their real estate holdings, with values compared to last year,” he added. “The many newcomers with immigration status allowing them to buy a property in Quebec are also joining the ranks of this category of buyers with good purchasing power.”
Source: Quebec Professional Association of Real Estate Brokers (QPAREB)
| July 2023 | YoY % Change | |
| Sales | 2,647 | +17.7% |
| Benchmark price (all housing types) | $567,700 | +5.7% |
| New listings | 3,247 | +2.2% |
| Active listings | 3,488 | -34.8% |
“Continued migration to the province, along with our relative affordability, has supported the stronger demand for housing despite higher lending rates,” said CREB Chief Economist Ann-Marie Lurie.
“At the same time, we continue to struggle with supply in the resale, new home and rental markets resulting in further upward pressure on home prices,” she added.
Source: Calgary Real Estate Board (CREB)
| July 2023 | YoY % Change | |
| Sales | 1,658 | +11% |
| Average Price (residential property) | $746,445 | -4% |
| Average Price (condominium) | $448,380 | +2% |
| New listings | 2,758 | -14% |
“Both transactions and average prices are up from last July indicating consumers remain confident in the market notwithstanding the two recent quarter-percent interest rate hikes by the Bank of Canada,” said OREB President Ken Dekker.
“We’re only a month into the third quarter, but based on July’s positive indicators, we are likely to see solid year-over-year results in the second half,” he added.
Source: Ottawa Real Estate Board (OREB)
This article was written for Canadian Mortgage Trends by:
Posted by: Dean Kimoto
In addition to the stats on renting vs buying there’s some great economic data following!
This article was written by Steve Huebl for Canadian Mortgage Trends: Renting vs. buying in today’s market: how monthly payments compare
A new study has found the cost of renting vs. buying comparable housing in select Canadian markets is nearly on par.
In fact, the difference between renting and buying was less than $500 per month in 11 different markets, according to the report from Zoocasa.
“Though no market is more affordable to buy in than rent, there are several markets where the rental and mortgage payments are similar, though these are all outside of Ontario and British Columbia,” the report notes.
For example, in Winnipeg the average monthly rent is $1,475, while the average mortgage payment was calculated at $1,493, for a difference of just $18. Similarly in Quebec City and Regina, the Zoocasa report found average rents were just slightly more affordable, by $54 and $148, respectively, per month.
It’s important to note that the study didn’t factor in other costs such as utilities, maintenance or property taxes.
In other markets, the monthly cost between renting and owning was more drastic. The largest payment difference was found in Surrey, B.C., where the average mortgage payment was calculated at $2,639 more than the cost of renting. Similar large gaps were seen in the Ontario cities of Burlington and Brampton.
The results were in contrast to a 2021 Royal LePage survey that found, on average, the cost of homeownership was actually less than the cost of renting a comparable housing unit. At that time, of course, homeowners were benefiting from record-low interest rates.
Zoocasa said the average rental rates were sourced from Rentals.ca, while mortgage payments were based on average house price data from the Canadian Real Estate Association and calculated assuming a 20% down payment, and a 5.04% rate amortized over 30 years.
The Bank of Canada’s benchmark interest rate is expected to spend the remainder of the year at its current 22-year high of 5.00%, according to a median of responses from market participants.
The findings were released in the Bank of Canada’s second-quarter Market Participants Survey, which surveyed 30 financial market participants between June 8 and 19, 2023.
Asked for their forecast for the Bank of Canada’s policy interest rate, respondents were near-unanimous in believing the policy rate will remain at 5% through the end of the year.
That’s contrary to current bond market pricing, which currently sees a near 80% chance of one more quarter-point rate hike at the Bank’s September meeting.
Most survey respondents expect rates to fall to 4.75% by March 2024, and believe the benchmark rate will end 2024 at 3.50%. By the third quarter of 2025, a median of responses from participants see the Bank of Canada cutting rates further to 2.50%.
The respondents pointed to higher interest rates as the top risk facing economic growth in Canada, followed by tighter financial conditions and a decrease in purchasing power.
A majority of respondents also now believe Canada will skirt a recession and see annual gross domestic product growth remaining positive throughout both 2023 (+0.7%) and 2024 (+1.2%). In the first-quarter survey, the median forecast was for slightly negative growth in 2023.
On inflation, the participants expect total CPI inflation to slow to 3% by the end of 2023 (up from 2.7% in the previous survey), easing further to 2.2% by the end of 2024 (unchanged from the Q1 survey).
Canada’s job vacancy rate continued to trend down in May, reaching a two-year low.
Statistics Canada reported on Thursday that the number of unfilled positions fell to 759,000 in May, a decline of 26,000 from April. The declines were concentrated in Quebec (-10,800), Manitoba (-3,700) and Saskatchewan (-2,400).
This resulted in the job vacancy rate falling to 4.3%, down by 0.1% from the previous month. Compared to last year, the job vacancy rate is down by 1.5 percentage points.
The StatCan report shows the number of payroll employees rose by 129,900 in the month, led by gains in public administration (106,200) and healthcare and social assistance (+7,000).
Average weekly earnings were up 3.6% on an annual basis to $1,200.75. That’s up from the 2.9% pace reported in April.
On Wednesday, the U.S. Federal Reserve raised its benchmark borrowing costs to the highest level seen in more than 22 years. The Federal Open Market Committee (FOMC) raised the fed funds rate to a target range of 5.25% to 5.5%. The midpoint of this range represents the highest benchmark rate level since early 2001.
Financial markets had largely expected this rate hike.
Fed Chairman Jerome Powell noted during a news conference that inflation has shown some moderation since the middle of the previous year, but still has a way to go to reach the Fed’s 2% target. Powell left open the possibility of maintaining rates at the next meeting in September, stating that future decisions would depend on carefully assessing incoming data and its impact on economic activity and inflation.
“It’s certainly possible we would raise (rates) again at the September meeting, and it’s also possible we would hold steady,” he said.
Posted by: Dean Kimoto
This article is from the Canadian Mortgage Trends website: https://www.canadianmortgagetrends.com/2023/06/another-week-another-rise-in-fixed-mortgage-rates-how-much-higher-could-they-go/
Another week and another round of fixed rate hikes have swept Canada’s mortgage market.
Mortgage lenders, including most of the big banks, have continued to hike their fixed mortgage rates following the recent surge in Government of Canada bond yields, which are used to price fixed-rate mortgages.
Several big banks, including BMO, CIBC and RBC, have hiked their posted rates by 15 to 40 basis points over the past week (one basis point is equivalent to 1/100th of a percentage point, or 0.01%).
Some of the biggest moves were seen in shorter 1- and 2-yr terms, according to data from MortgageLogic.news. Among national mortgage providers, average deep-discount rates for a 1-year term are now up to 6.25% (from 5.99% a week ago). And among the big banks, posted 2-year rates are up by about the same amount, averaging nearly 6.40% now.
Ron Butler of Butler Mortgage points out that bond yields are now up by over 100 basis points, or a full percentage point, from their March lows.
In previous weeks, rates with a 4-handle—that is, those in the 4% range—have largely disappeared. But the latest rounds of rate hikes are taking many fixed rates well into 6% and 7% territory.
Asked if 5-handle rates could be next to dry up, Butler said borrowers can expect 1- and 2-year rates in the 6% range, while 3- and 5-year rates should stay in the 5% range “for the time being.”
He adds that clients are continuing to express interest in both two and three-year terms.
Given the surge in bond yields, Butler suspects lenders and brokerages will continue to raise fixed rates next week, potentially by as much as 30 bps.
And now that the 5-year yield has broken 3.60%, a key threshold, it still has its sights on the next important level of 4.00%, says Ryan Sims, a TMG The Mortgage Group broker and former investment banker.
“If we see a large drop today on the close, I think a lot of lenders will hold, but if we close up or even flat today, and next week is the same, then I think we could see some further fixed rate increases,” he told CMT.
“If we see the Canada 5-year bond hit the magical 4.00%, there is not a lot of resistance between 4.00% and 5.00%,” he added. “It’s not my prediction at all, but if we hit 4%, hold the 4%, and get any little bit of inflationary news, then it will be rocket fuel to the yield.”
Michael Gregory, Deputy Chief Economist at BMO Economics, notes that 2-year yields are up 43 bps from May’s average so far and are “poised to become the highest monthly mark in almost 15 years.”
He said the increase reflects “the prospects for a higher terminal policy rate and a ‘higher-for-longer’ theme to subsequent easing (presuming the economy steers clear of a deep recession).”
“Meanwhile, on both sides of the border, we look for the yield curve (2s-10s) to reach peak inversion for the cycle (on a monthly average basis) within the next month or two,” he added.
The increase in Canadian bond yields came following recent rate hikes by other world central banks, as well as a rise in U.S. Treasury yields that came in response to hawkish comments from Federal Reserve Chair Jerome Powell.
Testifying before U.S. lawmakers, Powell suggested more policy tightening will be needed. At a separate event, Fed Governor Michelle Bowman said “additional policy rate increases” would be needed to bring inflation under control.
Last week, Powell also said that rate cuts would only be considered by the Fed once inflation comes down significantly. “It will be appropriate to cut rates at such time as inflation is coming down really significantly, and again, we’re talking about a couple years out,” he said.
U.S. markets are now pricing in a higher chance of two additional FOMC rate hikes this year., and any moves south of the border inevitably have an impact on Canadian interest rates.
This week also saw rate hikes by the Swiss National Bank, the Bank of England and Norges Bank. The latter two surprised markets with larger-than-expected increases of 50 bps.
Taken all together, the latest rate commentary and central bank moves have heightened market concerns about global inflation as well as the economic impact of higher-than-expected policy rates.
Those with a variable rate are also expected to feel more pain from rising rates, potentially as soon as the Bank of Canada‘s next policy meeting on July 12.
Markets are pricing in a nearly 70% chance of an additional quarter-point rate hike next month, with those odds rising to 100% by September. All eyes will be on May inflation and employment figures, which could sway the BoC decision either way.
The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.
| Target Rate: Year-end ’23 |
Target Rate: Year-end ’24 |
Target Rate: Year-end ’25 |
5-Year BoC Bond Yield: Year-end ’23 |
5-Year BoC Bond Yield: Year-end ’24 |
|
| BMO | 5.00% (+50bps) | 4.00% (+50bps) | NA | 3.55% (+5bps) |
3.05% (-20bps) |
| CIBC | 5.00% (+50bps) | 3.50% (+50bps) | NA | NA | NA |
| NBC | 5.00% (+100bps) | 3.75% (+75bps) | NA | 3.40% (+60bps) | 2.95% (+25bps) |
| RBC | 5.00% (+50bps) | 3.50% (+50bps) | NA | 3.30% (+55bps) | 2.75% (+20bps) |
| Scotia | 5.00% (+25bps) | 3.75% (+50bps) | NA | 3.65% (+40bps) | 3.60% (+35bps) |
| TD | 5.00% (+50bps) | 3.50% (+100bps) | NA | 3.65% (+60bps) | 2.85% (+25bps) |