Introduction

In a surprising turn of events, Canada witnessed a slowdown in its annual inflation rate in September, leading to expectations that the Bank of Canada (BoC) will not raise interest rates on October 25. This article dives into the details of this development and its potential implications.

Understanding the Inflation Data

The most recent Consumer Price Index (CPI) data from Statistics Canada reveals that inflation increased by 3.8% year over year in September, a decrease from the 4% recorded in August. This deceleration in inflation was widespread and primarily attributed to reduced prices in specific categories.

Groceries: A Key Contributor

Grocery prices played a significant role in the inflation slowdown. In September, they saw a year-over-year increase of 5.8%, down from a 6.9% rise in August. This was mainly driven by a slowdown in the cost of items like meat, dairy products, coffee, and tea.

Durable Goods and Travel-Related Services

Durable goods also experienced a more modest annual increase of 0.4% in September, compared to the 1.4% surge in August. Additionally, the price of air transportation plummeted by 21.1% in September, contributing to the overall slowdown.

Gasoline Prices on the Rise

Offsetting the deceleration in the overall CPI was an increase in gasoline prices, which rose by 7.5% annually due to base-year effects. However, on a monthly basis, gas prices fell by 1.3%, playing a significant role in the 0.1% month-over-month decline in the CPI.

Core Inflation Measures: CPI Median and CPI Trim

The CPI median and CPI trim, the Bank of Canada's preferred measures of core inflation, also decelerated to 3.8% and 3.7%, respectively, on an annual basis in September. On a three-month annualized basis, CPI median fell to 3.5%, while CPI trim eased to 3.8%.

What This Means for the BoC's Interest Rates

Despite inflation remaining notably above the Bank of Canada's 2% target, September's inflation figure fell short of economists' expectations. Alongside signs of a slowing economy, such as a lackluster Business Outlook Survey and stagnant GDP, economists anticipate that the Bank will, for the second consecutive month, choose to keep interest rates steady at 5%.

Expert Opinions

Benjamin Reitzes, Managing Director at BMO, expressed that "inflation is currently uncomfortably high, but the trend favors the Bank of Canada." He emphasized that, given the lagging nature of inflation indicators and the weakening economy, there appears to be no immediate need for further rate hikes.

Marc Ercolao, an Economist at TD, concurred with the expectation of the Bank of Canada maintaining its current rates, stating that September's data marks "another small step toward addressing the remaining inflation concerns."

However, Randall Bartlett, Senior Director of Canadian Economics at Desjardins, cautioned that the Bank of Canada's announcement might include a "hawkish tone" and a "threat to raise interest rates again if data does not cooperate." This stance would align with Bank of Canada Governor Tiff Macklem's remarks in September.

Macklem pondered, "The focal point for the governing council will be whether to retain the policy rate at 5.00% and allow past interest rate increases to have their intended impact on the economy and alleviate price pressures. Alternatively, does the weight of evidence from various economic indicators suggest that further action is required to restore price stability?"

Conclusion

Canada's recent inflation figures have surprised economists, and all eyes are on the Bank of Canada's upcoming decision regarding interest rates. While inflation remains high, the signs of a weakening economy suggest that the BoC may opt to keep rates steady for the second consecutive month. However, there's a hint of caution in the air, as the central bank may adopt a more hawkish tone, keeping a close watch on inflation and the broader economic indicators. Stay tuned for the October 25 announcement to see how the BoC responds to these shifting economic dynamics.

Navigating the Greater Toronto Area Real Estate Market in a Shifting Landscape

When it comes to the real estate market in the Greater Toronto Area (GTA), there's a lot to consider. The impact of high borrowing costs, rising inflation, uncertainty regarding the Bank of Canada's future decisions, and slower economic growth have all played a role in shaping the GTA's real estate landscape. In this blog post, we'll explore the current state of the GTA real estate market, what the experts are saying, and how you can navigate this shifting environment.

The GTA's Real Estate Market in September 2023

In September 2023, the GTA real estate market faced some challenges, with home sales experiencing a 7.1% decline compared to September 2022. This dip was particularly noticeable in the sales of ground-oriented properties, including semi-detached houses and townhouses. Additionally, on a month-over-month seasonally-adjusted basis, sales saw a slight decrease.

Rising Listings and Prices

Despite the drop in sales, there was good news for potential buyers. New listings were up significantly compared to September 2022, which had seen an exceptionally low number of listings. Furthermore, the number of listings continued to trend upward on a month-over-month seasonally adjusted basis.

For those who are concerned about affordability, the MLS® Home Price Index (HPI) Composite benchmark showed a year-over-year increase of 2.4%. The average selling price also saw a three percent rise over the same period. On a month-over-month seasonally-adjusted basis, both the average selling price and the MLS® HPI Composite benchmark showed a minor decrease of less than one percent.

Short and Medium-Term Outlook

TRREB President Paul Baron provided insights into the short and medium-term outlook for the GTA housing market. While borrowing costs are expected to remain high until mid-2024, there's a consensus that they will gradually decrease afterward. This suggests that the second half of the following year could see a notable uptick in demand for ownership housing. Lower interest rates and a growing population are expected to drive this increase in buyers.

Challenges and Calls for Change

One noteworthy challenge is the affordability for first-time buyers. TRREB's annual consumer polling indicates that approximately half of prospective homebuyers in Toronto are first-time buyers each year. However, the average price of a condo apartment in Toronto now exceeds $700,000. Despite this, the first-time buyer exemption threshold for the City's upfront land transfer tax has remained at $400,000 for fifteen years.

TRREB CEO John DiMichele commended the Toronto City Council for requesting a report on a more appropriate exemption level. He stressed the importance of aligning housing and taxation policies to address the ongoing housing crisis.

Conclusion: Navigating the GTA Real Estate Market

As the GTA's real estate market faces various challenges, it's essential to stay informed and be aware of both short-term and long-term trends. While high borrowing costs and economic uncertainties pose challenges, there are opportunities for buyers, especially in the second half of 2024 when interest rates are expected to trend lower.

Moreover, advocacy for policy changes, like updating exemption thresholds to make housing more accessible, is crucial to ensuring a fair and balanced real estate market in the GTA. With all these factors in mind, prospective buyers and sellers should stay informed and consult with experts to make well-informed decisions in this ever-evolving market.

How Recent GDP Data Could Impact Mortgage Rates

We've just received the latest GDP data for both Canada and the United States, and in this blog post, we'll dive into how these figures might affect mortgage rates in the near term. Additionally, we'll explore the challenges posed by the mortgage stress test in Canada and the pressing issues facing Canadian mortgage borrowers.

Canadian GDP Sees Sluggish Performance

Last week, Statistics Canada confirmed that our Gross Domestic Product (GDP) displayed no growth in July, following a 0.2% decline in June. Moreover, the estimate for August indicated a meager 0.1% expansion in our economy. These statistics prompted adjustments in the bond futures market, leading to reduced expectations of another interest rate hike by the Bank of Canada (BoC) this year. This trend aligns with the market's sensitivity to economic data releases.

The sluggish momentum in our GDP growth underscores the impact of the BoC's previous interest rate hikes, which are now becoming discernible. It also suggests that the savings buffers created during the pandemic, enabling consumers to manage higher costs while maintaining spending, are gradually depleting.

However, it's essential to note that sluggish economic growth alone won't suffice to bring inflation back in line with the BoC's 2% target. The overarching theme is that we have a considerable distance to cover before reaching that objective.

Strong and Steady US GDP Growth

In stark contrast, recent data reveals that the United States achieved a year-over-year GDP growth rate of 2.1% in the second quarter. The US economy is currently operating at a significantly more robust pace compared to Canada, driven by two key factors:

1. Productivity Surge: Productivity in the United States has shown remarkable improvement since the pandemic began, whereas Canadian productivity has steadily declined during the same period. The significance of this measure, particularly over the long term, cannot be overstated.

2. Household Debt Discrepancy: During the 2008 Great Recession, US households substantially reduced their debt levels, while Canadian households continued to accumulate debt, as indicated in the chart. This divergence in household debt-to-GDP ratios suggests that the US consumer may be less sensitive to interest rate hikes, potentially causing the US Federal Reserve to maintain higher policy rates for a more extended period than the BoC. This scenario could have repercussions on Canadian fixed-mortgage rates.

Fixed vs. Variable Mortgage Rates

Fixed mortgage rates in Canada are heavily influenced by Government of Canada (GoC) bond yields, often moving in tandem with their US counterparts. This synchronization may keep Canadian fixed mortgage rates elevated, even amid a weakening domestic economy.

Conversely, variable mortgage rates in Canada are not subject to the same constraints. They adjust in line with the BoC's policy rate, providing a more accurate reflection of domestic economic conditions.

Reevaluating the Mortgage Stress Test

As our economy decelerates and our housing markets cool down, it's time to reconsider some established practices. One such practice under scrutiny is the 2% inflation target. Some argue that this target is arbitrary and that a slightly higher target, around 3%, might be more suitable in the future.

The mortgage stress test is another policy tool under scrutiny given the evolving circumstances. While it made sense to qualify borrowers at rates close to long-term averages when mortgage rates were exceptionally low, the situation has changed. Mortgage rates have climbed above historical averages, and the BoC's policy rate remains in restrictive territory. The question arises: Is it still appropriate to qualify borrowers at rates 2% higher than their already elevated current levels?

While an immediate change to the stress-test rate isn't advocated, policymakers must navigate the housing market's momentum to combat inflation. There's also the issue of excess leverage in certain regional markets that heated up during the pandemic. However, the debate about reducing or altering the stress test will likely intensify, perhaps sooner than anticipated.

An Unjustifiable Policy: Renewal Borrowers' Dilemma

A notable flaw in our banking regulator's mortgage rules is the requirement for renewing borrowers switching to a different lender at renewal. They must be requalified at today's stress-tested rates, unlike borrowers who renew with their existing lender.

Initially designed to prevent excessive competition among lenders for highly leveraged borrowers, this policy inadvertently traps many borrowers with their existing lenders. This often forces them to renew at inflated rates. Despite criticism, the regulator has yet to address this anti-competitive policy and its impact on borrowing costs.

With today's stress-test rates exceeding 8%, more borrowers are unable to access competitive rates. This should increase pressure on our regulator to rectify this issue.

In Conclusion

While the five-year GoC bond yield showed minimal changes recently, a mid-week surge in bond yields led to further increases in fixed mortgage rates. Predicting when fixed rates will stabilize is challenging due to the strong upward momentum in bond yields. Therefore, those seeking a mortgage are advised to secure the best available rate today, as even a seemingly less favorable pre-approval rate could become highly competitive in the near future.

Variable-rate discounts have remained unchanged, and although the consensus suggests the BoC may have completed its rate hikes for 2023, uncertainty persists. The bond futures market's volatility, coupled with forthcoming employment reports from both the US and Canada, could trigger additional rate fluctuations.