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.

August 2023 Market Stats

In this article, we'll delve into the August 2023 real estate market statistics and explore the factors that influenced these trends. From increased borrowing expenses to ongoing economic uncertainty and decisions made by the Bank of Canada, we'll dissect the data to gain a better understanding of what's happening in the housing market. Let's start by examining the key highlights.

Home Sales Decline in August 2023

Increased borrowing expenses, ongoing economic uncertainty, decisions made by the Bank of Canada, and limited listing availability led to a decline in home sales in August 2023 when compared to the same month in 2022. During this period, the average selling price remained relatively stable. When considering monthly adjustments for seasonal factors, both sales and the average price experienced slight declines

Greater Toronto Area Statistics

In August 2023, REALTORS® in the Greater Toronto Area recorded 5,294 sales, marking a 5.2 percent decrease from August 2022. However, there was a positive development in new listings, which saw a 16.2 percent year-over-year increase, offering some relief in terms of supply. Nonetheless, when looking at year-to-date listings, there remains a significant decrease compared to the same period in the previous year. On a seasonally adjusted basis, sales showed a marginal one percent month-over-month decline when compared to July 2023, while new listings experienced a slight 1.3 percent increase compared to July.

Stability in Average Selling Prices

"During the summer, we witnessed more balanced market conditions compared to the tighter spring market. Consequently, selling prices remained relatively stable, hovering around last year's levels and showing a slight dip compared to July. The increase in interest rates, which resumed in May after a pause in the winter and early spring, necessitated adjustments from many buyers to meet higher monthly payment requirements. Notably, not all sellers chose to accept prices lower than their expectations, leading to a reduction in the number of sales," explained TRREB Chief Market Analyst Jason Mercer.

In terms of statistics, the MLS® Home Price Index Composite benchmark for August 2023 demonstrated a year-over-year increase of 2.5 percent. Similarly, the average selling price experienced an uptick, albeit a modest one, of less than one percent, reaching $1,082,496 over the same period. On a month-over-month, seasonally adjusted basis, the MLS® HPI Composite benchmark remained largely unchanged, while the average price declined by 1.6 percent.

Impact of Interest Rates on Affordability

"As higher interest rates have unquestionably affected affordability, the anticipation of increased taxes will additionally strain households' financial positions, particularly younger buyers who may have limited savings. As the City of Toronto deliberates raising the municipal land transfer tax (MLTT) rate for properties exceeding $3 million as a source of revenue, it should also contemplate offering support to first-time homebuyers grappling with the challenge of entering the market. Adjusting the tax rebate threshold to align with today's elevated home prices could be a viable solution," suggested TRREB CEO John DiMichele.

Tactics and Trends in Home Listings

On a side note - Over the past month, We’ve observed an increasing number of homes listed for sale at notably aggressive prices. In certain instances, sellers opt to list their homes with artificially low asking prices as a tactic to draw in multiple buyer offers. However, when the offer date arrives and they receive multiple offers, the sellers often reject all of them because none meet their price expectations. Subsequently, these sellers relist their homes at the desired price, resulting in their properties languishing on the market for weeks as buyers are unwilling to meet those price demands.

While some sellers are gradually reducing their asking prices, others are taking their homes off the market temporarily, with plans to relist them in September. Although this is a common approach among real estate agents during the summer months when buyer activity typically slows, it remains intriguing to see how effective this strategy will be this year, given potential shifts in the market beyond the usual seasonal patterns.

The Unique Challenges of 2023

The uniqueness of this year stems from a changing market influenced by today's significantly higher interest rates. Some buyers are hitting the pause button because they find it increasingly challenging to afford a home at the current interest rates, especially when undergoing stress testing for a mortgage at around 8%.

Source: Market Watch

For the latest updates and in-depth analysis of real estate trends, stay tuned to Market Watch.

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The State of the Canadian Economy in Q2 2023

In the latest data released by Statistics Canada (StatCan) this morning, the Canadian economy experienced stagnation during the second quarter of the year.

Key Economic Figures for Q2 2023

StatCan reports that the Canadian economy contracted by an annualized rate of 0.2% in Q2 2023, a figure significantly lower than the Bank of Canada's earlier prediction of 1.5% growth. Additionally, StatCan revised the growth rate for the first quarter, reducing it to an annualized rate of 2.6% from the previously reported 3.1%.

Factors Contributing to Second-Quarter Weakness

A significant contributing factor to this weakness was a 0.2% decline in output in June.

Impact of High Interest Rates and Housing Prices

As expected, given the prevailing high interest rates and housing prices, investment in the housing sector continued to decline in the second quarter, primarily due to reduced new construction activity.

Consumer Spending and Its Trends

Consumer spending showed a modest increase of 0.2%, but this was the smallest uptick since the pandemic lockdowns in Q2 2021. Furthermore, the growth in real household spending slowed to 0.1% in Q2, compared to 1.2% in the first quarter, reflecting the significant impact of inflation and higher borrowing costs.

Other Contributing Factors: Inventory and Exports

The data indicates that the second-quarter weakness can also be attributed to reduced inventory accumulation and a slower pace of growth in exports. Canada's exports of goods and services only increased by 0.1% in Q2, compared to a more substantial 2.5% increase in the first quarter.

Stability in July's GDP and the Rise in Inflation

Preliminary estimates suggest that the GDP for July remained relatively stable. In August, the country's inflation rate ticked higher as mortgage costs continued to rise for the fifth consecutive month, marking the most significant increase on record.

Anticipation for the Bank of Canada's Decision

Many Canadians are eagerly awaiting the Bank of Canada's (BoC) upcoming interest rate decision next week, especially after the BoC raised its key interest rate target by a quarter of a percentage point to 5% in July.

Impact of Higher Interest Rates and RBC's Insights

These latest statistics reveal that the effects of higher interest rates are beginning to have an impact, resulting in a cooling economy with reduced consumer spending – precisely the intended outcome of monetary policy. In response to the latest economic data released this morning, RBC Economics, in their Daily Economic Update, has indicated that these numbers are likely to strengthen the prevailing expectations that the Bank of Canada (BoC) will abstain from implementing another interest rate hike.

Analyzing RBC Economics' Perspective

The commentary in the update notes that the minor decline in the second quarter is not entirely unexpected, as previous early estimates of GDP have exhibited a tendency to be revised. Furthermore, there have been indications suggesting that the obstacles to economic growth resulting from elevated interest rates have been quietly accumulating beneath the surface.

The Path Forward for Interest Rates

RBC recognizes that the central bank is unlikely to overly emphasize a single data point and acknowledges that inflation remains persistently above the targeted levels. Nonetheless, a cooling economy may provide some relief for borrowers. The update contends that there is accumulating evidence that the delayed consequences of earlier interest rate hikes are starting to exert a more pronounced impact in moderating both GDP growth and labor markets. Consequently, this should lead to a gradual slowdown in inflationary pressures. The update further posits that policymakers will want to maintain the option of resuming rate hikes if necessary. However, if the unemployment rate continues to rise, as anticipated, a resumption of rate hikes may not be required.

Unveiling the Building Faster Fund: Premier Ford's $1.2 Billion Incentive Initiative for Housing Construction

In the midst of escalating criticism surrounding the Greenbelt land exchange, Premier Doug Ford has introduced an ambitious and far-reaching incentive initiative. Valued at a substantial $1.2 billion, the primary objective of this program is to incentivize municipalities to substantially ramp up their efforts in the realm of housing construction.

Premier Ford's Bold Initiative: Encouraging Municipalities to Boost Housing Construction

Unveiling the program, aptly named the "Building Faster Fund," Premier Doug Ford took the center stage during his address at the Association of Municipalities Conference in London on a Monday. He underlined that the central focus of this pioneering initiative is to provide substantial incentives to municipalities that successfully achieve their annual housing goals.

Addressing the Housing Challenge: Premier Ford Announces the Building Faster Fund

Premier Ford emphasized during his announcement that, while these housing targets will undoubtedly be ambitious, they will be thoughtfully grounded in the realm of realism.

Ontario's Housing Ambitions: Premier Ford's Commitment to Construct 1.5 Million New Homes by 2031

The Ontario Government's commitment to overseeing the construction of a staggering 1.5 million new homes within the province by the year 2031 is a well-established fact. This ambitious vision comes with a clear framework that allocates specific objectives to individual municipalities. However, the practical feasibility of realizing this goal has now come under intense scrutiny due to the inherent limitations posed by the current construction capacity.

Empowering Municipalities: The Funding Incentive for Housing Targets

Under this newly unveiled program, municipalities that successfully achieve 80% of their individual annual housing targets will be deemed eligible for funding. This funding eligibility will be allocated based on the proportionate contribution of each municipality to the overarching objective. Drawing a striking analogy, Premier Ford likened this qualification process to the world of academics, where those meeting or surpassing the prescribed standards would receive funding, while those falling short would not.

Achieving Housing Milestones: Municipality Successes and Funding Rewards

In addition to the baseline funding, municipalities that exceed their designated housing benchmarks will receive additional incentives. Premier Ford illustrated this with the example of Pickering, a municipality that is currently on track to significantly outperform provincial expectations, surpassing them by a remarkable margin of over 150%. If this trend persists, the city stands to gain access to more than $5 million in additional funding, as indicated by Premier Ford.

Strategic Funding: Disbursements and Infrastructure Investment for Housing

Beginning in the year 2024, the disbursement of funds will commence. Municipalities will have the flexibility to allocate these funds towards various housing-supporting infrastructure projects, encompassing activities such as site development, road construction, and the establishment of public utilities. These funds will also be directed towards other projects that can be swiftly implemented, all of which harmonize with the overarching objective of enhancing both housing and community development.

Equal Opportunity: Housing Initiatives for All Communities

It's important to note that the program has taken into consideration the concerns of smaller, rural municipalities that were not assigned specific provincial housing quotas. As a proactive measure, a dedicated portion of the program's funding, equivalent to 10% or an impressive $120 million, will be set aside to support housing initiatives within these communities.

Enhancing Mayoral Powers: An Extension of Authority for Housing Commitment

In a parallel announcement within the same speech, Premier Ford introduced an extension of the debated extensive mayoral authority to an additional 21 municipalities. However, this extension is contingent upon the pledge of these municipalities to adhere to the ambitious provincial housing objectives that have been set forth.

Auditor General's Report Fallout: Premier Ford's Response to Selection Process Critique

In recent times, the Ford administration has been grappling with the repercussions stemming from a critical report issued by the Auditor General. Released earlier this month, this comprehensive report meticulously outlined a selection process for Greenbelt lands that seemed to exhibit a distinct bias, favoring specific developers and landowners.

Bill 23 and Development Charges: Impacts on Ontario's Urban Landscape

In the closing months of the preceding year, the Ford administration ushered in Bill 23, widely known as the More Homes Built Faster Act. This legislative move resulted in the substantial reduction of development charges imposed by municipalities.

Mayoral Concerns and Property Tax Implications: Responding to the Reduction of Development Charges

Mayors representing the largest cities within Ontario have united in their appeal to Provincial authorities. Their collective call revolves around the reconsideration of the reduction in development charges. Many mayors are voicing concerns that the reduction in charges could potentially necessitate a corresponding increase in property taxes. Such a move would be critical to secure the requisite funding for pivotal infrastructure projects, including the creation of new roads and efficient sewage systems.

With the unveiling of the Building Faster Fund, the Ontario Government seeks to address the pressing need for accelerated housing construction. Amidst ongoing debates and challenges, this initiative not only aims to stimulate housing development but also to provide a framework for municipalities to achieve their housing targets while balancing the demands of sustainable growth.

Introduction:

In the realm of real estate, understanding the balance between supply and demand is crucial. One key metric that sheds light on this delicate equilibrium is the concept of "Inventory Months." In this comprehensive guide, we will delve into the significance of this metric, its calculation, and how it determines whether a market is in favor of buyers or sellers.

The Significance of Inventory Months:

Inventory Months, often referred to as "Months of Inventory," serves as a valuable supply metric that assesses the interplay between available homes for sale and their potential to be sold. By measuring this ratio, we gain insights into whether the real estate market is facing an abundance or scarcity of listings. This, in turn, provides a snapshot of the balance between demand and supply from an inventory standpoint.

Understanding Market Dynamics:

In economic terminology, the calculation of Inventory Months plays a pivotal role in identifying the market's status. An excess demand scenario arises when the quantity of homes sought by buyers exceeds the number available for sale at a given price point. This state, also known as a "shortage," translates to a seller's market in real estate, where sellers hold the advantage.

Conversely, an excess supply situation occurs when the quantity of homes demanded falls short of the available listings at a particular price. Termed a "surplus," this market state corresponds to a buyer's market in the real estate domain, granting buyers a stronger position in negotiations.

Calculating Inventory Months:

Calculating Inventory Months is a straightforward process that involves three steps:

1. Determine the total count of active listings from the preceding month.
2. Identify the total number of completed sales transactions for the same month.
3. Divide the number of active listings by the sales count to ascertain the remaining inventory in months.

Market Transition Thresholds:

A critical question often arises: At what point does a market shift from being buyer-oriented to seller-oriented, or vice versa? While this threshold varies from market to market, prevalent data suggests some general benchmarks. When Inventory Months is less than 4.0, sellers typically have the upper hand in pricing negotiations. Conversely, if the metric exceeds 6.0, buyers tend to have more negotiation leverage.

Real-Life Scenario: Canada's Market:

Currently, Canada's real estate market provides a tangible example of Inventory Months in action. With an inventory of 3.2 months, a slight increase from 3.1 in May and June, the market experiences growth of around 3.2%. However, this growth is outpaced by a 5.6% increase in newly listed properties. This dynamic underscores the challenge of maintaining equilibrium between supply and demand.

Conclusion:

Inventory Months stands as a vital metric that offers invaluable insights into the real estate market's health and dynamics. By grasping the concept, understanding its calculation, and interpreting the thresholds, both buyers and sellers can make informed decisions in navigating the ever-evolving real estate landscape. As demonstrated by Canada's market, the delicate balance between supply and demand underscores the need for continuous vigilance in assessing Inventory Months.

In July, Canada's Economic Landscape: Rising Inflation Rates and Market Dynamics

Canada's economic landscape experienced notable shifts in July, as rising inflation rates and dynamic market changes made their mark. This comprehensive analysis sheds light on key trends that shaped the economic scene, from surging mortgage costs to the impact of electricity and energy prices. Stay informed and gain valuable insights into these crucial economic fluctuations.

Introduction: Unveiling July's Economic Dynamics

July witnessed significant movements in Canada's economic indicators, with inflation rates taking center stage. This analysis delves into the intricate details of these shifts, highlighting the driving factors behind inflation and the influence of base-year effects on key sectors.

Surging Inflation Rates and Contributing Factors

Surging mortgage expenses and the upswing in gasoline prices were pivotal contributors to Canada's annual inflation rate increase. Statistics Canada's latest Consumer Price Index (CPI) reveals a rise from June's 2.8% to July's 3.3% year-over-year inflation rate. Notably, the mortgage cost index played a central role, surging remarkably by 30.6% annually. This surge was fueled by a growing number of Canadians opting to renew or initiate mortgages at higher rates. This surge follows a substantial 30.1% rise in June, marking the fifth consecutive month of record-breaking increases. Excluding mortgage interest costs, the headline CPI still demonstrated a noteworthy 2.4% rise in July.

Gasoline and Energy Prices: The Base-Year Effect

Gasoline and energy prices faced their own dynamics, influenced by the base-year effect. Despite a mere 0.9% monthly increase in July and a significant 12.9% yearly decrease, the substantial 9.2% drop in July 2022 no longer impacted the 12-month price trajectory. This shift exerted upward pressure on the year-over-year metric. Such nuances highlight the complexity of economic calculations and the factors driving them.

Electricity Prices: Base-Year Influence and Market Impacts

The base-year effect extended its influence to electricity prices as well. July saw an 11.7% annual surge in electricity costs, surpassing the 5.8% increase observed in June. A remarkable 127.8% increase in electricity prices within Alberta was a key driving force. The introduction of policy interventions in July 2022 led to a notable 24.4% monthly price reduction at that time. However, with these interventions ceasing, last year's price drop no longer affected the 12-month calculation. Similarly, natural gas prices experienced a 15.7% decline in July, a reversal from the 5.8% decrease in June. This shift was primarily attributed to a base-year effect in Ontario, where prices had risen by 22.6% on a monthly basis.

Energy and Grocery Prices: Emerging Trends

Overall, energy prices encountered an 8.2% reduction in July, following a 14.6% decrease in June. Grocery prices, although maintaining an elevated position, displayed a slower annual growth rate in July, rising by 8.5% compared to the 9.1% increase registered in June. This deceleration was largely influenced by the pricing of fresh fruit, which experienced a 4.1% annual rise in July, a notable drop from the 10.4% increase in June. On a monthly scale, prices experienced a significant decline of 6.5%, the largest drop since February 2008. This downturn was driven by a 40.9% fall in grape prices and a 1.8% decrease in orange prices.

Conclusion: Navigating Economic Changes

Stay informed about these dynamic market shifts as you navigate through evolving economic changes. Canada's economic landscape reflects the interplay of various factors, from inflation trends to the intricate impacts of base-year effects. By staying updated on these trends, you can gain valuable insights into the shifting economic terrain.