Canadian Inflation Falls to 3.8%, Holding BOC’s Interest Rate Decisions Steady

In September, the inflation report brought positive news as it surpassed expectations, indicating the end of a three-month upward trend in inflation. Both headline and core inflation rates on a year-over-year and three-month moving average basis decreased, suggesting that the 5% overnight policy rate might have peaked. While rate cuts are not expected until the middle of the next year, it appears that the most severe phase of the tightening cycle has passed. Gasoline price increases offset the overall inflation deceleration, and the outlook for October’s Consumer Price Index (CPI) is favorable, although uncertainties stemming from the Middle East conflict linger.

On a monthly basis, the CPI dipped by 0.1% in September, primarily due to lower gasoline prices. Goods inflation fell by 0.3% from the previous month, marking the first such decline since December 2022, with a year-over-year growth of 3.6%. Meanwhile, services inflation remained unchanged compared to August, the first time it didn’t rise monthly since November 2021, with a yearly rate drop from 4.3% to 3.9%. Durable goods prices decelerated, with notable changes in categories like new passenger vehicles, furniture, household appliances, and air transportation costs.

In summary, the September inflation report presents a positive outlook with a decrease in inflation rates, possibly indicating the culmination of the tightening cycle. Gasoline prices and a favorable base effect for October’s CPI play essential roles. However, uncertainties arising from the Middle East conflict persist. While the Bank of Canada may aim to bring inflation back within its 2% target range next year, they are expected to proceed cautiously and consider rate cuts only in the middle of next year, as they assess the full effects of previous rate hikes.

Published by Sherry Cooper

https://sherrycooper.com/articles/canadian-inflation-dips-to-3-8-keeping-boc-on-the-sidelines/

Canadian single-detached housing construction in the first half of 2023 dropped by 25% compared to the previous year, resulting in 9,523 fewer units under construction in major metropolitan areas, according to the Canada Mortgage and Housing Corporation (CMHC). This decline is attributed to factors like high-interest rates, limited credit access, and elevated construction and labor costs, which have created challenging conditions for homebuilders nationwide.

The decrease in construction activities extends to other housing types, with semi-detached and row units experiencing declines of 22% and 17% year-over-year, respectively. However, despite these challenges, there has been a 1% increase in housing starts overall, primarily driven by a 15% surge in apartment dwelling starts, totaling 48,029 units during the first six months of 2023. Toronto and Vancouver have been the focal points for construction activity, accounting for nearly two-thirds of housing starts among the six metro areas.

Regional disparities in construction trends have been observed, with Vancouver, Toronto, and Calgary experiencing increased construction levels in contrast to declines in Montreal, Edmonton, and Ottawa. Montreal’s more significant decline of 58% year-over-year in housing starts is attributed to shorter construction periods and a greater proportion of low-rise structures. Conversely, Toronto’s longer planning-to-construction timeline for large apartment projects has resulted in growth, despite ongoing economic challenges, such as high interest rates. The CMHC anticipates that apartment starts in Toronto and Vancouver will return to 2022 levels due to sustained high rental demand.

Published by Steve Huebl

https://www.canadianmortgagetrends.com/2023/10/single-detached-housing-starts-down-25-from-last-year-cmhc/

Despite some minor improvements, housing affordability in Canada remains a critical issue. RBC’s aggregate housing affordability measure dipped slightly, falling by 0.3% to 59.5%. This means that it still takes a significant portion of the average household income to cover the costs of home ownership. In particular, affordability deteriorated in Vancouver and Toronto, where it takes a staggering 97.5% and 79.6% of a household’s income to cover ownership costs. The report suggests that even though there was a modest increase in household income, mortgage payments are on the rise due to higher home prices and record-high interest rates, which continue to pose challenges for prospective homebuyers.

Looking ahead, RBC predicts that housing affordability is likely to worsen in the third quarter, as income improvements may not be sufficient to offset higher carrying costs due to rising interest rates. Relief for buyers is not expected until 2024 when prices and rates are anticipated to stabilize. RBC’s report underscores the need for substantial efforts to address housing affordability in Canada. Increasing housing supply is identified as a key long-term solution, but it’s a complex process that may take years to address, especially given rising construction costs and finite construction capacity, as noted by the Canada Mortgage and Housing Corporation (CMHC).

In conclusion, while there has been a minor improvement in housing affordability, the situation remains challenging, particularly in major Canadian markets like Vancouver and Toronto. Long-term solutions, such as significantly increasing housing supply, are necessary to fully address this issue. However, these solutions will require concerted efforts and time, making it a complex problem to solve.

Published by Steve Huebl

https://www.canadianmortgagetrends.com/2023/10/despite-minor-improvement-housing-affordability-remains-near-all-time-worst-levels-rbc/

Bond Yields Surge, Predicted Impact on Mortgage Rates

Bond yields, including the Government of Canada 5-year bond, have risen significantly, leading to an anticipated 20 basis point increase in mortgage rates. Ron Butler of Butler Mortgage expressed concern over these developments, expecting rates to rise further. Two-year fixed rates are now around 7%, and 3-year terms are approaching 7%. Rising interest rates are driven by expectations of higher rates and Canada’s economic resilience.

Concerns About Bond Prices and Mortgage Impact

Falling bond prices, which lead to higher yields, are a result of rising interest rates on newly issued bonds. This poses challenges for bond owners, including major banks. Higher yields may push 5-year fixed mortgage rates towards 8%, though it’s not the base case. Mortgage holders are already facing higher rates, impacting affordability and renewals, with monthly payments rising significantly.

Increasing Mortgage Payment Burden

Over a third of mortgage holders have felt the impact of higher rates, with all mortgage holders expected to experience increased payments by 2026. The average monthly mortgage payment for an average-priced home has surged to nearly $3,600, up 21% YoY and over 80% in two years.

The bond yield surge is reshaping the financial landscape, impacting mortgage rates and homeowners’ budgets. It’s crucial to stay informed and make prudent financial decisions in these uncertain times.

Published By Steve Huebl

https://www.canadianmortgagetrends.com/2023/10/bond-yields-surge-to-new-heights-mortgage-rates-expected-to-jump-another-20-bps/