The recent Canadian jobs report for October signals a weakened labor market, diminishing the likelihood of further interest rate hikes by the Bank of Canada. The report reveals minimal job gains, a decline in full-time employment, stagnant working hours, and a slight easing in wage inflation. Most notably, the unemployment rate increased to 5.7%, the highest level in 21 months, raising concerns about the country’s economic strength. Given the underwhelming employment figures and the expectation of the economy moving into excess supply, it appears that the central bank’s policy rate has likely peaked at 5.0%.

The labor market’s challenges are further emphasized by a decrease in job vacancies and a rising unemployment rate. Despite this, the labor force participation rate remains relatively high, indicating that there is a significant pool of individuals either employed or actively seeking work. Job gains were observed in the construction sector, but economically sensitive sectors, such as manufacturing, retail, and finance, experienced job losses.

Wage inflation remains a concern for the Bank of Canada, with average hourly wages seeing a 4.8% increase in October. Looking ahead, the Bank of Canada is unlikely to make any rate adjustments at its December 6th meeting, considering the forthcoming economic reports and their tendency to avoid rate changes during the holiday season.

In the United States, a weaker employment report also suggests that the Federal Reserve will maintain a pause in interest rate adjustments for the remainder of the year. While rate relief may be on the horizon, it is expected to be several months away, with central banks likely to wait for sustained 2% inflation before considering interest rate cuts, possibly not until next summer. According to market expectations, a 25-basis point rate cut by the Bank of Canada is anticipated in July, marking a shift from previous predictions of a rate cut in September.

Published by Sherry Cooper

https://sherrycooper.com/articles/soft-jobs-report-weakens-impetus-for-further-bank-of-canada-rate-hikes/

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/

In Canada, rising delinquencies in both mortgage and non-mortgage debt during the second quarter indicate the strain of high-interest rates on borrowers. Delinquencies for non-mortgage debt increased by 26.3%, with notable jumps in missed payments across various types of loans. Auto loans and home equity lines of credit (HELOCs) are nearly back to pre-pandemic levels, with HELOC payments up by over $200 per month. While mortgage delinquencies are 32.6% higher than last year, they are still 36% lower than pre-pandemic levels. New mortgage originations are being driven by first-time buyers, up 59% from Q1, despite higher interest rates.

Overall, consumer debt in Canada rose by 1.9% to reach $2.4 trillion, primarily due to increased credit card balances. This growth is attributed to “new to credit” consumers, often immigrants, seeking Canadian credit for the first time. These consumers have lower initial debt levels. However, consumers with over two years of credit history saw a 1.9% increase in their average non-mortgage debt to $22,710 compared to the previous year.

Published by Steve Huebl

https://www.canadianmortgagetrends.com/2023/09/early-stage-delinquencies-for-all-credit-products-are-on-the-rise-equifax/

While year-over-year core inflation has now stopped rising. Headline inflation has fallen from a peak of 8.1% to 6.9%

The Bank of Canada has indicated its future rate decisions will be driven by economic data, but that it is “still prepared to be forceful” should the need arise.

Deputy Governor Sharon Kozicki made the comment during a speech on Thursday, in which she spoke about this week’s rate decision and the Bank’s shift towards becoming more “data-dependent.”

“We indicated that going forward, we will be considering whether to increase rates further. By that, we mean that we expect our decisions will be more data-dependent,” she said.

“If we are surprised on the upside, we are still prepared to be forceful,” she added. “But we recognize that we have raised interest rates rapidly and that their effects are working their way through the economy. In other words, we are moving from how much to raise interest rates to whether to raise interest rates.”

The inflation picture remains “mixed”

Kozicki also touched on how the bank’s monetary policy actions have so far impacted economic growth and inflation.

While she said there is growing evidence that the Bank’s rate hikes are restraining demand, on the other hand third-quarter GDP growth surprised to the upside and the economy continues to operate in excess demand.

On inflation, she said the Bank continues to see a “mixed picture.”

“On one hand, inflation remains too high, with many of the goods and services Canadians regularly buy showing large price increases,” she said. “On the other hand, three-month rates of change in core inflation have come down, an early indicator that price pressures may be losing momentum.”

Headline inflation has fallen from a peak of 8.1% to 6.9%, while year-over-year core inflation has now stopped rising.

Looking forward to the Bank’s next policy meeting on January 25, she noted the decision will be followed by a summary of deliberations that will be published on the Bank’s website about two weeks later.

This follows recommendations from an International Monetary Fund review of the BoC’s transparency practices, in which it called on the Bank to begin publishing such summaries.

“Being open is always important, but it is especially crucial in uncertain times—and as we work to bring inflation back to our 2% target,” she said.

OSFI increases capital buffer for Canada’s big banks

Canada’s banking regulator has upped the amount of capital the country’s largest banks will be required to maintain in the event of “vulnerabilities.”

As part of its semi-annual review of the Domestic Stability Buffer (DSB), the Office of the Superintendent of Financial Institutions increased the DBS level to 3%, up from 2.5%.

It also increased the range limit for the DBS to 4%, up from 2.5%. The changes will take effect February 1, 2023.

The DBS was launched in 2018 and applies specifically to Canada’s largest banks, referred to as Domestic Systemically Important Banks, or D-SIBs.

The DBS encourages those banks to “build capital resilience to vulnerabilities, thereby reinforcing the stability of Canada’s financial system and contributing to public confidence in it,” OSFI said.

Canadians view lack of supply as a key barrier to housing affordability

Four in 10 Canadians (43%) believe housing supply is a leading contributor to the decline in housing affordability, according to a Leger survey commissioned by Habitat for Humanity.

The survey also found 40% of respondents are concerned about paying their mortgage or rent over the next 12 months, with higher percentages among Gen Zs (51%) and Millennials (52%).

Nearly three in 10 respondents (28%) said they cannot currently afford a down payment for the purchase of a home.

Published by Steve Huebl

Canadian Mortgage Trends – https://www.canadianmortgagetrends.com/2022/12/the-latest-in-mortgage-news-bank-of-canada-still-prepared-to-be-forceful/

With some variable rates higher than fixed rates, people are leaning towards fixed as their preferred rate.

Now that the spread between fixed and variable rates has largely evaporated, a majority of borrowers are once again opting for fixed-rate mortgages.

As of August, 44.2% of new mortgage borrowers chose a variable rate, down from a peak of 56.9% in January, according to the Fall Residential Mortgage Industry Report published by the Canada Mortgage and Housing Corporation (CMHC).

The shift coincides with the Bank of Canada’s rate hikes, which started in March and have progressively made variable-rate mortgages more expensive.

CMT calculations based on more recent data from Statistics Canada show the trend continued in September, with the share of variable-rate mortgages falling to 39% of new originations. That’s the lowest share since April 2021.

Share of mortgages with variable rates in Canada

Courtesy: CMHC
“The spread between variable and fixed rates has been trending downward after peaking in the first quarter,” reads the CMHC report. “Consequently, consumers’ preference for variable rates has decreased.”

The Statistics Canada figures also reveal mortgage borrowers are increasingly favouring shorter fixed terms as opposed to the traditionally popular 5-year fixed.

For new mortgages originated as of September by Canada’s chartered banks, just 16% had a 5-year fixed-rate versus 40% that had terms of one to four years.

Mortgage debt growth is slowing
These shifts are taking place against a backdrop of slowing mortgage debt growth, CMHC noted.

As of August, total mortgage debt stood at $2.05 trillion, an 8.8% increase compared to a year earlier. That’s down from a peak annual growth rate of 10.8% reached in February and marks the fourth consecutive month that the pace of growth has slowed.

Mortgage grow

Other insights into the mortgage market
CMHC’s report includes a wealth of additional findings relating to Canada’s mortgage market. Here are some additional highlights:

Mortgage originations in Q1 and Q2 of this year are down from the same period last year in all categories (purchases, refinances and renewals), but remained above 2020 origination levels.
The delinquency rates for credit cards, lines of credit and auto loans in Q3 were higher for consumers without a mortgage (1.69%, 0.66% and 3.04%, respectively) compared to consumers with a mortgage (0.49%, 0.19% and 0.31%, respectively).
Approval rates for both home purchases (71.3%) and refinances (85.6%) were down slightly in Q2 from a peak reached in Q4 2021. They both remain above pre-pandemic levels, however.
Among mortgage borrowers at alternative lenders, a smaller percentage were able to switch to a conventional lender in Q3 (67%) compared to Q2 (70%) and Q1 (72%).

Written and published by: Steve Huebl, Canadian Mortgage Trends

–https://www.canadianmortgagetrends.com/2022/12/the-popularity-of-variable-rate-mortgages-continues-to-fall/