Good afternoon! This is Market Pulse, the newsletter that tells you what you need to know about Canadian Real Estate in 2-3 minutes.
Are Interest Rate Hikes Over?
The Canadian bank prime rate currently sits at 6.7% as the Bank of Canada decided not to hike rates in their previous two announcements and kept their overnight lending rate at 4.5%. Right now, this seems to be sending the signal that rates will either continue to stay steady and may even come down by the end of the year. So is the high rate environment about to come to an end? Will home prices shoot back up to the moon by year's end? Let’s look at some things that will have the most impact on the direction the BoC goes:
Inflation
Right now the BoC is looking pretty smart as the Consumer Price Index (CPI) rose only 4.3% year over year in March, following a 5.2% increase in February. This puts us at the smallest increase since August of 2021 (+4.1%). The aim of BoC is to reach the coveted 2% YoY inflation rate and it seems like we’re headed there if we start seeing subsequent months of declining CPI.
We can debate all day whether CPI is a good measure of inflation but the fact is that the people driving our economic policy are using it to guide their decision making. So, we’re stuck hoping it’s fair enough. Right now this indicator is leaning towards keeping rates steady.
Negative Amortizations/Extend and Pretend
We’ve been talking about this for quite a while now and it’s still looking like a serious issue. If you’re new to this newsletter, I’m talking about the Canadian banks being given the flexibility (by our government) to extend people’s mortgages to above the 30-year limit, in some cases, putting people into negative amortization where they are paying less than interest. Essentially a forever mortgage. The latest numbers we saw a few months ago showed how many banks went from almost 0 mortgages above 30 years to substantial numbers in that category:
BMO (TSX:BMO): 32.4%
CIBC (TSX:CM): 30%
TD (TSX:TD): 29.3%
RBC (TSX:RY): 25%
These numbers are derived from Canadian banking regulatory filings
This situation has likely worsened since these numbers last came out as more mortgages are renewing at much higher rates and many households are not able to afford the new payments. In these cases, they would be considered eligible for extended amortizations. This policy is preventing many defaults right now and preventing the free market from correcting itself. The banking sector together with our government are artificially insulating the housing sector from the rate hikes. If we use this scenario as an indicator for where rates are headed, my bet would be down. The banks are definitely banking on rate drops to get them out of this mess.
In summary, we have some forces at play here that may force BoC to prematurely drop rates before we’ve reached the 2% inflation goal. Will rates come down to where they were in the last few years? Definitely not that low.
Caption: Tweet of an investors mortgage amortization set to 93 years.
House Prices Back To The Moon
The other impact of the amortization extension policy is more unaffordable housing. Multiple offers on properties are being reported by realtors left and right and sold prices are starting to curve back up since last quarter. In Toronto, the average sold price went up by 7.7% since last month and it's up 14.8% this quarter according to Zolo.ca.
On the other hand, supply is still tight since sellers have mentally set the prices from last year as the precedent for what their property is worth. The FOMO is coming back into the market while continuous volatility seems to be lurking around the corner.
There’s been whispers of developer bankruptcies which may be another force that continues to constrict new supply if this ends up being a trend. In other parts of the world, such as Australia, developer bankruptcies have been on the rise since last year. Not to say that Australia is Canada but the real estate industries of the two countries share a lot of similarities.
The Rental Market Update
The interest rate pause has given landlords some confidence that their mortgages won’t continue skyrocketing and we’ve seen this reflected in rents. Rents across the country appear to be stabilizing with some outliers such as Halifax where we are seeing continually increasing rental demand. In the coming months, we expect rents to remain steady or increase slightly as supply remains tight in pretty much all markets across the country.
Tweet Of The Week
Nothing to see here folks, everything is completely normal and our housing is going to the moon and staying there.
Caption: Mortgage delinquency rates in Canada
This content was originally published by the Market Pulse Newsletter.