Canadian Economic Forecast – Nov- Mortgage related use
Bank of Canada holds its interest rate steady, publishes updated economic forecasts
On October 25th, the Bank of Canada announced that it would maintain its Canadian Prime Rate stays at 7.3% – stating that there is “growing evidence” that past interest rate increases are dampening economic activity and relieving price pressures.
This decision provides some comfort to borrowers who have seen their mortgage costs rise steadily since March of 2022. As for real relief – in the form of rate cuts – the Bank demurred, noting that its preferred measures of core inflation show “little downward momentum.” Consequently, the Bank said it is holding this policy rate and continuing its current policy of quantitative tightening.
We capture the Bank’s observations and its latest economic forecasts in the summary below.
Inflation facts and outlook
- In Canada, inflation measured by the Consumer Price Index (“CPI”) has been volatile in recent months: 2.8% in June, 4.0% in August, and 3.8% in September
- Higher interest rates are moderating inflation in many goods that people buy on credit, and this is spreading to services
- Food inflation is easing from very high rates; however, in addition to elevated mortgage interest costs, inflation in rent and other housing costs remains high
- Near-term inflation expectations and corporate pricing behavior are normalizing only gradually, and wages are still growing around 4% to 5%
- The Bank’s preferred measures of core inflation show little downward momentum
Canadian housing and economic performance
- There is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures
- Consumption has been subdued, with softer demand for housing, durable goods and many services
- Weaker demand and higher borrowing costs are weighing on business investment
- A surge in Canada’s population is easing labour market pressures in some sectors while adding to housing demand and consumption
- In the labour market, recent job gains have been below labour force growth and job vacancies have continued to ease; however, the labour market remains “on the tight side” and wage pressures persist
- Overall, a range of indicators suggest that supply and demand in the economy are now “approaching balance”
Global economic performance and outlook
- The global economy is slowing and growth is forecast to moderate further as past increases in policy interest rates and the recent surge in global bond yields weigh on demand
- The Bank projects global GDP growth of 2.9% this year, 2.3% in 2024 and 2.6% in 2025. While this outlook is little changed from the Bank’s July Monetary Policy Report, the composition has shifted, with the US economy proving stronger and economic activity in China weaker than expected
- Growth in the Euro area has “slowed further”
- Inflation has been easing in most economies, as supply bottlenecks resolve and weaker demand relieves price pressures but underlying inflation is persisting, meaning central banks must “continue to be vigilant”
- Oil prices are higher than the BoC assumed in July, and the war in Israel and Gaza is a new source of geopolitical uncertainty
Summary and Outlook
The BoC noted that after averaging 1% over the past year, economic growth is expected to remain “weak” for the next year before increasing in late 2024 and through 2025. Near-term weakness in growth reflects both the broadening impact of past increases in interest rates and slower foreign demand. The subsequent economic “pickup” will be driven by household spending as well as stronger exports and business investment in response to improving fore
ign demand. Spending by governments contributes materially to growth over the forecast horizon. Overall, the Bank expects the Canadian economy to grow by 1.2% this year, 0.9% in 2024 and 2.5% in 2025.
In the Bank’s October projection, CPI inflation is expected to average about 3.5% through the middle of next year before gradually easing to 2% in 2025. Inflation is expected to return to the Bank’s target about the same time as policymakers forecast in their July 2023 projection, “but the near-term path is higher because of energy prices and ongoing persistence in core inflation.”
As for what to expect going forward, the Bank had this to say about interest rates: “With clearer signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. However, Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed.”
The message is therefore clear: the Bank wants to see downward momentum in core inflation before it changes tack, and continues to be focused on the “balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour.”
Once again, the Bank ended its communique with a familiar phrase: it remains “resolute in its commitment to restoring price stability for Canadians.”
What’s next?
The Bank’s final (scheduled) interest rate announcement of 2023 takes place December 6th and we will follow immediately after with our next executive summary.
Persistent inflation leads the Bank of Canada to increase benchmark interest rate
UGH! The BoC whacks borrowers again.
Mark Herman, Top Calgary Alberta Mortgage Broker
Yesterday, the Bank of Canada increased its overnight interest rate to 5.00% (+0.25% from June) because of the “accumulation of evidence” that excess demand and elevated core inflation are both proving more persistent and after taking into account its “revised outlook for economic activity and inflation.”
This decision was not unexpected by analysts but is disconcerting – as is the Bank’s pledge to continue its policy of quantitative tightening.
To understand today’s decision and the Bank’s current thinking on inflation, interest rates and the economy, we highlight its latest observations below:
Inflation facts and outlook
- In Canada, Consumer Price Index (CPI) inflation eased to 3.4% in May, a “substantial and welcome drop from its peak of 8.1% last summer”
- While CPI inflation has come down largely as expected so far this year, the downward momentum has come more from lower energy prices, and less from an easing of “underlying inflation”
- With the large price increases of last year removed from the annual data, there will be less near-term “downward momentum” in CPI inflation
- Moreover, with three-month rates of core inflation running around 3.5% to 4% since last September, “underlying price pressures appear to be more persistent than anticipated”, an outcome that is reinforced by the Bank’s business surveys, which found businesses are “still increasing their prices more frequently than normal”
- Global inflation is easing, with lower energy prices and a decline in goods price inflation; however, robust demand and tight labour markets are causing persistent inflationary pressures in services
Canadian housing and economic performance
- Canada’s economy has been stronger than expected, with more momentum in demand
- Consumption growth was “surprisingly strong” at 5.8% in the first quarter
- While the Bank expects consumer spending to slow in response to the cumulative increase in interest rates, recent retail trade and other data suggest more persistent excess demand in the economy
- The housing market has seen some pickup
- New construction and real estate listings are lagging demand, which is adding pressure to prices
- In the labour market, there are signs of more availability of workers, but conditions remain tight, and wage growth has been around 4-5%
- Strong population growth from immigration is adding both demand and supply to the economy: newcomers are helping to ease the shortage of workers while also boosting consumer spending and adding to demand for housing
Global economic performance and outlook
- Economic growth has been stronger than expected, especially in the United States, where consumer and business spending has been “surprisingly” resilient
- After a surge in early 2023, China’s economic growth is softening, with slowing exports and ongoing weakness in its property sector
- Growth in the euro area is effectively stalled: while the service sector continues to grow, manufacturing is contracting
- Global financial conditions have tightened, with bond yields up in North America and Europe as major central banks signal further interest rate increases may be needed to combat inflation
- The Bank’s July Monetary Policy Report projects the global economy will grow by “around 2.8% this year and 2.4% in 2024, followed by 2.7% growth in 2025”
Summary and Outlook
As higher interest rates continue to work their way through the economy, the BoC expects economic growth to slow, averaging around 1% through the second half of 2023 and the first half of next year. This implies real GDP growth of 1.8% in 2023 and 1.2% in 2024. The Canadian economy will then move into “modest excess supply” early next year before growth picks up to 2.4% in 2025.
In its July Monetary Policy Report, the Bank noted that CPI inflation is forecast to “hover” around 3% for the next year before gradually declining to 2% in the middle of 2025. This is a slower return to target than was forecast in its January and April projections. As a result, the Bank’s Governing Council remains concerned that progress towards its 2% inflation target “could stall, jeopardizing the return to price stability.”
In terms of what Canadians can expect in the near term, the Bank had this to say: “Quantitative tightening is complementing the restrictive stance of monetary policy and normalizing the Bank’s balance sheet. Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the 2% inflation target. The Bank remains resolute in its commitment to restoring price stability for Canadians.”
Stay tuned
September 6th, 2023 is the Bank’s next scheduled policy rate announcement. Will there be 1x more increase?
Canadian economy running too hot, BoC increases Prime by .25%
Hot Economic growth leads the Bank of Canada to increase its benchmark interest rate
Today, the Bank of Canada increased its overnight interest rate to 4.75% (+0.25% from April) because of higher-than-expected growth in Canada’s economy in the first quarter and the view that monetary policy was not yet restrictive enough to bring inflation down to target.
Leading up to today’s announcement, many economists feared that the BoC would have no choice but to raise rates in the face of persistent inflation and recent GDP growth. Their fears were founded.
To understand the Bank’s thinking on this important topic, we highlight its latest observations below:
Inflation facts and outlook
- In Canada, Consumer Price Index (CPI) inflation “ticked up in April” to 4.4%, the first increase in 10 months, with prices for a broad range of goods and services coming in higher than expected
- Goods price inflation increased, despite lower energy costs
- Services price inflation remained elevated, reflecting strong demand and a tight labour market
- The Bank continues to expect CPI inflation to ease to around 3% in the summer, as lower energy prices “feed through” and last year’s large price gains “fall out” of the yearly data
- However, with three-month measures of core inflation running in the 3.50%-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target
Canadian housing and economic performance
- Canada’s economy was stronger than expected, with GDP growth of 3.1% in Q1 2023
- Consumption growth was “surprisingly strong and broad-based,” even after accounting for the boost from population gains
- Demand for services continued to rebound
- Spending on “interest-sensitive goods” increased and, more recently, “housing market activity has picked up”
- The labour market remains tight: higher immigration and participation rates are expanding the supply of workers but new workers have been quickly hired, reflecting continued strong demand for labour
- Overall, excess demand in the economy looks to be “more persistent” than anticipated
Global economic performance and outlook
- Globally, consumer price inflation is coming down, largely reflecting lower energy prices compared to a year ago, but underlying inflation remains stubbornly high
- While economic growth around the world is softening in the face of higher interest rates, major central banks are signalling that interest rates may have to rise further to restore price stability
- In the United States, the economy is slowing, although consumer spending remains surprisingly resilient and the labour market is still tight
- Economic growth has essentially stalled in Europe but upward pressure on core prices is persisting
- Growth in China is expected to slow after surging in the first quarter
- Financial conditions have tightened back to those seen before the bank failures in the United States and Switzerland
Summary and Outlook
The BoC said that based on the “accumulation of evidence,” its Governing Council decided to increase its policy interest rate, “reflecting our view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.”
The Bank says quantitative tightening is complementing the restrictive stance of monetary policy and normalizing the Bank’s balance sheet.
Going forward, the Bank said it will continue to assess the dynamics of core inflation and the outlook for CPI inflation with particular focus on “ evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving” its inflation target.
Once again, the Bank repeated its mantra that it “remains resolute in its commitment to restoring price stability for Canadians.”
Next up
With today’s announcement now behind us, a new round of speculation will begin in advance of the Bank’s next policy announcement on July 12th.
Odds of New Rates
Market odds now have a July 12 hike at a 61% probability, with potentially another increase by December.
Just 1 more Prime Rate increase would take the benchmark prime rate from 6.95% at the end of today to a nosebleed 7.20% (last seen in February 2001).
There may well be another Prime Rate increase on July. We have strategies to beat these rates so please call and we can sort out a situation that works for you.
BoC Holds Canadian Prime at 6.7% on April 12th – Good News!
Today, April 12, 2023, the Bank of Canada held its policy interest rate at 4.50%, a welcome outcome for borrowers after almost a year of constant increases, and a timely confidence-builder for the real estate industry as it enters the spring market.
The Bank also issued its latest Monetary Report with updated risk assessments and base-case projections for inflation.
We highlight the Bank’s latest observations below.
Inflation acts and outlook
- In Canada, the Consumer Price Index (CPI) inflation eased to 5.2% in February, and the Bank’s preferred measures of core inflation were just under 5%
- The Bank expects Canadian CPI inflation to “fall quickly” to around 3% in the middle of 2023 and then decline more gradually to the 2% target by the end of 2024
- Recent data is reinforcing Governing Council’s “confidence” that inflation will continue to decline in the next few months
- Similarly, in many countries, inflation is easing in the face of lower energy prices, normalizing global supply chains, and tighter monetary policy
- At the same time, labour markets remain “tight” and measures of core inflation in many advanced economies suggest persistent price pressures, especially for services
Canadian economic performance and outlook
- Domestic demand is still exceeding supply and the labour market remains tight
- Economic growth in the first quarter looks to be stronger than was projected in January, on a “bounce” in exports and solid consumption growth
- While the Bank’s Business Outlook Survey suggests acute labour shortages are starting to ease, wage growth remains elevated relative to productivity growth
- Strong population gains are adding to labour supply and supporting employment growth while also boosting aggregate consumption
- Softening foreign demand is expected to restrain exports and business investment
- Overall, GDP growth is projected to be weak through the remainder of this year before strengthening gradually next year, implying the Canadian economy will move into excess supply in the second half of this year
- The Bank now projects Canada’s economy will grow by 1.4% this year – an improvement over its last forecast of 1% growth – 1.3% in 2024 (a downgrade from its last forecast of 2% for 2024) and then pick up to 2.5% in 2025
Canadian housing market
- Housing market activity remains subdued
- As more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year
Global economic performance and outlook
- The Bank’s April Monetary Policy Report projects global growth of 2.6% in 2023 – an improvement over its last forecast of 2% offered in January – and then fall to 2.1% in 2024 (lower than it last forecast of 2.5%), and rise to 2.8% in 2025
- Recent global economic growth has been stronger than anticipated with performance in the United States and Europe surprising on the upside
- However, growth in those regions is expected to weaken as tighter monetary policy continues to feed through those economies
- In particular, US growth is expected to “slow considerably” in the coming months, with particular weakness in sectors that are important for Canadian exports
- Activity in China’s economy has rebounded, particularly in services
- Overall, commodity prices are close to their January levels
Outlook
While holding the line on interest rates, the Bank also noted in today’s announcement that it is continuing its policy of quantitative tightening and remains “resolute in its commitment to restoring price stability for Canadians.” There was nothing new in that statement. However, it also posited that getting inflation the rest of the way back to 2% “could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize.”
As it sets monetary policy going forward, the Bank’s Governing Council indicated that it will be “particularly focused” on these indicators, and the evolution of core inflation as it gauges the progress of returning CPI inflation back to its 2% target.
The Bank also said it continues to assess whether monetary policy is “sufficiently restrictive” to relieve price pressures and “remains prepared to raise the policy rate further if needed” to return inflation to its 2% target.
Next Announcement is …
We will have to wait until April 20th to get the next CPI reading to gauge progress in one of the Bank’s determining indicators and June 7th for the Bank’s next scheduled policy interest rate announcement.
Inflation is slowing and that is great news for Canadian home buyers
Mortgage Mark Herman, Top Calgary Alberta Mortgage Broker
Using Return-To-Work Income while on Maternity Leave to buy a home IS possible in Canada.
Using Return-To-Work Income while on Maternity Leave to buy a home IS possible in Canada.
Are you on maternity leave and trying to buy a home, but the bank will not use your income? This is a common reason home buyers find us on the internet or their realtors send them to us.
We CAN use your FULL RETURN TO WORK SALARY as qualifying income, if you have a “return to work date” that is less than 12 months away from your home purchase possession date.
Big-6 banks do not do this and we have no idea why. It frustrates everyone, and broker lenders have no issue with it.
Mortgage Mark Herman, Top-Best Calgary mortgage broker near me.
And while we are it – our lenders also use CCB – Canadian Child tax Benefit – for all children aged UNDER 16, when the mortgage starts.
Big-6 banks don’t use this … not sure why that is.
What else about Broker Lenders?
Broker lenders are all secure, and many are publicly traded, and all are audited by the same staff the investigate all of the Big-6 banks.
Broker lenders also have payout penalties that are 500% to 800% LESS than the way Big-6 banks do it. Here are the links for that specific data on my blog:
- General explanation: http://markherman.ca/payout-penalties-how-the-big-5-banks-get-you/
- Details of all the lenders and their specific math: http://markherman.ca/fixed-rate-mortgage-penalties-larger-than-ever/
Broker lenders ALWAYS renew you are best rates, while Big-6 banks know that 86% of mortgages that renew will take the 1st offer so they “bump the rate” on you. Then you have to call in/ go in to chisel them down.
- At broker lenders, they expect you to call us to check the rates and we would jump at the chance to move you to a different lender and get paid again … so you get best rates with broker banks.
There is lots more to … call to find out.
Mortgage Mark Herman, licensed in Alberta since 2004.
403-681-4376
Bank of Canada increases its benchmark interest rate to 4.50%
Today, the Bank of Canada increased its overnight benchmark interest rate 25 basis point to 4.50% from 4.25% in December. This is the eighth time since March 2022 that the Bank has tightened money supply to address inflation.
While the headline increase will certainly make news, it is the Bank’s accompanying commentary on its future moves that will capture the most attention. We summarize the Bank’s observations below, including its forward-looking comments on the potential for future rate increases.
Canadian inflation
- Inflation has declined from 8.1% in June to 6.3% in December, reflecting lower gasoline prices and, more recently, moderating prices for durable goods
- Despite this progress, Canadians are still “feeling the hardship” of high inflation in their essential household expenses, with persistent price increases for food and shelter
- Short-term inflation expectations remain elevated and while year-over-year measures of core inflation are still around 5%, 3-month measures have come down, suggesting that core inflation has “peaked”
Canadian economic and housing market performance
- The Bank estimates Canada’s economy grew by 3.6% in 2022, slightly stronger than was projected in the Bank’s Monetary Policy Report in October, however it projects that growth is expected to “stall through the middle of 2023,” picking up later in the year
- Canadian GDP growth of about 1% is forecast for 2023 and rising to about 2% in 2024, little changed from the Bank’s October outlook
- The economy remains in “excess demand” and the labour market remains “tight” with unemployment near historic lows and businesses reporting ongoing difficulty finding workers
- However, there is “growing evidence” that restrictive monetary policy is slowing activity especially household spending
- Consumption growth has moderated from the first half of 2022 and “housing market activity has declined substantially”
- As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment is expected to slow
- Weaker foreign demand will likely weigh on Canadian exports
- This overall slowdown in activity will allow supply to “catch up” with demand
Global economic performance and outlook
- The Bank estimates the global economy grew by about 3.5% in 2022, and will slow to about 2% in 2023 and 2.50% in 2024 — a projection that is slightly higher than the Bank’s forecast in October
- Global economic growth is slowing, although it is proving more resilient than was expected at the time of the Bank’s October Monetary Policy Report
- Global inflation remains high and broad-based although inflation is coming down in many countries, largely reflecting lower energy prices as well as improvements in global supply chains
- In the United States and Europe, economies are slowing but proving more resilient than was expected at the time of the Bank’s October Monetary Policy Report
- China’s abrupt lifting of pandemic restrictions has prompted an upward revision to the Bank’s growth forecast for China and “poses an upside risk to commodity prices”
- Russia’s war on Ukraine remains a significant source of uncertainty
- Financial conditions remain restrictive but have eased since October, and the Canadian dollar has been relatively stable against the US dollar
Outlook
Taking all of these factors into account, the Bank decided today’s policy rate increase was necessary and justified.
However, the Bank also offered this important piece of news: “If economic developments evolve broadly in line with (its) outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases.”
That sounds positive, but as is customary, the Bank also noted that it is prepared to increase the policy rate further if needed to return inflation to its 2% target. It also added the usual language that it “remains resolute in its commitment to restoring price stability for Canadians.”
Although the Bank did not say it, the bottom line is Canadians will have to wait and see what comes next.
Next touch point
March 8, 2023 is the Bank’s next scheduled policy interest rate announcement and we will be on hand to provide an executive summary the same day.
New Mortgage Rules 2023: Expanding the “Stress Test” to Everything?
This is from the Desk of Dr. Cooper, our Economist, and this data is 1 of the reason we are at Dominion Lending – to get this data.
Below is the details of the government expanding the STRESS TEST, or other mechanisms, to make it harder to buy a home.
OSFI Is Concerned About Federally Insured Lender Exposure to Mortgage Risk.
Late last week, the Office of the Superintendent for Financial Institutions (OSFI) announced it was concerned about the risks associated with the large and rising number of highly indebted borrowers, especially those with floating-rate mortgages, which stands at a record proportion of outstanding mortgage loans.
With the economy in danger of entering a recession and the Bank of Canada warning of potentially more rate hikes to counter persistent inflation, the housing market may face continued pressure in the coming months.
A record number of buyers used floating-rate debt for purchases during Canada’s pandemic-era real estate boom. Those borrowers may come under increasing strain if mortgage costs remain high. Job losses from an economic slowdown also would make it harder for people to keep up with loan payments and stay in their homes.
Superintendent of Financial Institutions Peter Routledge said a review of the country’s mortgage-underwriting rules that starts later this week would look beyond its current main measure — a stress test requiring borrowers to qualify for higher interest rates than what their banks are offering.
“The question in our minds is, is it sufficient?” Routledge said of the current stress test. “So we will look at a broader range of debt-serviceability tools, including debt-to-income constraints, debt-service constraints, as well as the current interest-rate stress test tool.”
The proposed rules—subject to public consultation—include loan-to-income and debt-to-income restrictions, new interest rate affordability stress tests and debt-service coverage restrictions.
Highly Indebted Borrowers
OSFI is particularly concerned about the rise in mortgage originations to households with a loan-to-income ratio of 450% or more, which the Bank of Canada has long asserted is the sector most at risk of delinquency and default. This risk has repeatedly been highlighted in the Bank’s financial risk analysis–the Governing Council’s Financial System Review. The latest report says, “Those with high debt are more vulnerable to a decline in income and will face more financial strain when they renew their mortgages at higher rates.”
This vulnerability relates to households’ ability to continue servicing their debt if incomes decline or interest rates rise without significantly reducing their consumption. The Bank staff estimate that the most highly indebted households have generally seen the smallest increases in liquid assets. At the same time, alongside higher house prices, many households have taken out sizable mortgages to purchase a house, adding to the already large share of highly indebted households.
The chart below shows that the average share of high loan-to-income borrowers before the pandemic was 23.8%. The average since the pandemic onset has risen to 33.7%.
Proposals for Comment
To date, mortgage delinquency rates at federally regulated financial institutions (FRFIs) are at a record low. The large FRFIs have worked closely with borrowers who have reached their trigger points. TD, CIBC, and BMO have allowed some negative amortizations until renewal. As a result, the proportion of their mortgages having remaining amortizations has risen sharply (see second chart below). Questions remain regarding how they will deal with this at renewal time. Will the new mortgage be amortized at 25 years at renewal, raising the monthly payments dramatically and increasing the risk of delinquency or default, especially among highly indebted households?
Earlier last week, CEOs of the Big 5 banks weighed in on vulnerable mortgage clients. None were quite as forthcoming as Scotiabank’s new President and CEO, Scott Thomson, who said the bank has about 20,000 borrowers that it considers “vulnerable.” These are borrowers with a high loan-to-value (LTV) mortgage, a low credit score, lower deposits in their checking accounts and those with home valuations that are susceptible to market conditions.
“So, as you think about the tail risk, we have about 20,000 vulnerable customers, which would be 2.5% [of the total portfolio],” he said Monday during the RBC Capital Markets Canadian Bank CEO Conference.
However, he added this represents a “manageable-type situation for us on mortgages.” Scotiabank’s floating-rate mortgages are not fixed payment. They adjust monthly payments every time the central bank changes the overnight rate.
According to Steve Huebl at Canadian Mortgage Trends, RBC President and CEO Dave McKay said that his bank is “keeping a watchful eye on its mortgage clients, turning to AI and various types of modelling to forecast clients’ cash flow.”
“We look at incomes, we look at the stress of inflation on expenses in a household, and we monitor cash flow to interest payments, as you would in any corporation,” McKay said during the conference. “We do that [for] every single consumer in our portfolio because over 80% of our clients have their core checking and core cash management with us.”
Looking at the bank’s variable-rate mortgage portfolio, which totals between $100 and $120 billion, McKay said the bank has been able to segment that group of clients, keeping tabs on when they reach their trigger rates and when they’ll be coming up for rate resets in the next several years.
Through modelling, the bank can then predict which clients with upcoming renewals “will or will not have a cash flow challenge” should the economy enter a moderate or severe recession, he said. “We have a pretty clear view of that.”
For clients who have difficulties making their payments, mortgage lenders have several options to try and assist borrowers before the situation progresses to the point of them needing to sell their homes.
“You have skip-a-payment deferrals, you have maturity extensions, whatever it happens to be, you have a lot of ways to work with that client,” McKay said.
In terms of clients with cash flow challenges in addition to a collateral problem, where the property sale wouldn’t cover their mortgage and could result in default, McKay said it’s a much smaller group but one the bank is actively monitoring.
“That bucket, I can tell you, is in the low single-digit percentages of our portfolio,” he said. “And that’s the bucket we’re managing”.
Bottom Line
To the extent these measures are implemented, further pressure on mortgage growth is likely. Mortgage brokers can access lenders not impacted by OSFI B-20 rule changes. More than ever, brokers could add value to borrowers turned away from the banks. In these uncertain times, existing and new clients need advice from a trained and caring professional.
Work Visa’s / Non-Canadians Can’t Buy Homes: 2023 New Rules
Prohibition on the Purchase of Residential Property by Non-Canadians Act.
Summary of New Rules, 2023:
Anyone with a work visa will have to have lived here for 3 of the past 4 years and have filed taxes during those years. Here are the RULES!
- Holds a valid work permit as defined in section 2 of the Immigration and Refugee Protection Regulations, or is otherwise authorized to work in Canada in accordance with section 186 of the Regulations;
- Has worked in Canada for a minimum continuous period of 3 years within the past 4 years, where the work meets the definition set out in s. 73(2) of the Regulations; and
- Has filed a Canadian income tax return for a minimum of 3 of the past 4 taxation years preceding the year in which the purchase is made.
Please also find below the Globe and Mail article that ran last week on December 1st.. I copied and pasted the whole article:
Ambiguity about Canada’s ban on foreign home buyers creating hiring headaches for businesses
Canada’s impending ban on foreigners purchasing residential real estate is complicating how businesses hire, promote and transfer immigrant workers because of an information vacuum about the final rules.
The Prohibition on the Purchase of Residential Property by Non-Canadians Act, passed by Parliament earlier this year, will restrict foreigners from buying homes in Canada starting next month. That ban will remain in place for two years – supposedly to curb investor speculation in the housing market.
Although the legislation will come into force on Jan. 1, 2023, the federal government still hasn’t released the final regulations outlining how the prohibition will work. Those details are essential because they will specify which non-Canadians, both individuals and corporations, will be exempt from the ban.
Our legislators, however, seem unaware that 2023 is less than 30 days away. But you can be damn sure the businesses and foreign workers who have to comply with the law are acutely aware of the problem.
“The regulations will be made available soon,” Claudie Chabot, a spokeswoman for the Canada Mortgage and Housing Corporation, wrote in an e-mail. (The national housing agency led the government’s consultation on the law.)
The sooner the better. Businesses and workers are being kept on hold.
The government’s consultation paper proposed that exemptions would only be given to temporary residents who hold a valid work permit and who’ve worked in Canada for a “minimum continuous period of three years within the past four years.” Additionally, those individuals would have to prove they filed Canadian income tax returns for at least three of the four years preceding their property purchase.
That potentially sets a high bar for skilled workers. Is Ottawa really planning to prohibit executives and other talent, who plan to move to Canada with their families, from buying a home until they’ve worked here for three years?
We don’t know because the government still hasn’t finalized the rules. It’s ridiculous.
“If I’m sitting in London, England, and I’m saying, ‘Well, gee, do I want to go to Canada? Do I really want to go through all of this aggravation?’ ” said Stephen Cryne, president and CEO of the Canadian Employee Relocation Council.
Known as CERC, the non-profit organization advocates for increased labour force mobility on behalf of companies in sectors including financial services, technology, natural resources and telecommunications.
As Mr. Cryne points out, top executives who work for companies such as banks, energy companies and manufacturers have plenty of choices about where they and their families choose to live in the world.
“I was speaking with one of our members,” he recounted. “They’re looking at bringing in several executives and their families from South Africa, and [because of the uncertainty around the new rules], they’re second-guessing saying, ‘We’re not sure.’ ”
That’s hardly a vote of confidence in Canada.
CERC is asking the federal government for a blanket exemption for any foreign national with a valid work permit who is living and residing in Canada. It’s a reasonable ask.
“Given Canada’s critical skills shortages, these requirements will place Canada in an uncompetitive position when compared to other countries where such restrictions on the purchase of residential property by foreign nationals may not exist,” CERC told the government in a submission.
The proposed rules are also creating headaches for U.S. relocation management companies that handle employee moves on behalf of Canadian corporations. Some of these American companies will purchase and resell an executive’s home to speed up a move. But as non-Canadians, they could be banned from conducting such property transactions for two years – further complicating the process of relocating employees.
Not only are businesses’ hiring and relocation plans getting gummed up, the regulatory uncertainty about the forthcoming ban also risks chasing away foreign direct investment. Our immigration backlog is already a frustration for foreign companies that want to hire more employees and expand their operations in Canada.
Worst of all, it’s not clear that a ban targeting foreign home buyers will actually prevent speculation in the real-estate market.
After all, non-residents only owned 3.1 per cent of residential property in British Columbia in 2020, according to Statistics Canada. In Ontario, that figure is only 2.2 per cent.
So why is the Liberal government pointing a finger at foreign buyers for pricing Canadians out of the housing market?
This is the problem with populist policies. They might make for good politics, but they often have undesirable consequences for businesses and consumers.
The government needs to clear up the confusion about its foreign-home-buyer ban – and fast.
If Ottawa’s goal is to admit nearly 1.5 million new immigrants to Canada by the end of 2025 to solve labour shortages, it shouldn’t be giving skilled workers reasons to think twice about moving here
Canadian Residential Mortgage Market: Inflation & Interest Rates: the Lead Characters for 2023
Summary:
- The Bank of Canada (BOC) increased interest rates 7 times in 2022. Exactly as expected 16 months ago.
- Inflation is at least 5.7%; and it needs to get down to 3%
- The BoC would rather over-tighten than under-tighten
- Normally it takes 18 to 24 months for interest rate increases to work their way into the economy and we are only about 10 months into this tightening cycle
These 4 painful data points mean Prime will increase from 6.45% to 6.70% on Jan 25th.
We now expect there to be at least 1 or 2 more o.25% increases to Prime before it is expected to hold for the rest of 2023, and then begin to decrease in 2024.
Mortgage Mark Herman, Top Calgary Alberta Mortgage Broker
DATA
A lot of the recent talk in financial and real estate circles has been centering on the possibility of a pause in the Bank of Canada’s aggressive interest rate increases. Some speculate that could happen at the next rate setting, later this month, on January 25th.
The Bank raised rates 7 times last year in an effort to rein-in galloping inflation. It does seem to be working, but there are some stubborn sticking points.
Headline inflation, known as the Consumer Price Index (CPI), has dropped. It was 8.1% in July and drifted down to 6.8% in November. However, the drop from October to November was a mere one-tenth of one percentage point and the Bank’s target rate remains significantly below that, at 2.0%.
As well, the BoC’s preferred inflation measure, Core Inflation (which strips out volatile components like food and fuel), actually increased. A simple averaging of the three components that the Bank uses to measure Core Inflation came in at nearly 5.7% in November, up from 5.3% in October.
Other factors that figure into the Bank’s plans include Gross Domestic Product and unemployment. Canada’s GDP continues to grow, albeit modestly, despite rising interest rates. It increased by 0.1%, month-over-month in November. Unemployment dipped 0.1% to 5.0% in December. Both of these tend to fuel higher wages which are a key driver of inflation.
The Bank of Canada, itself, remains firmly dedicated to battling back inflation. Governor Tiff Macklem has said he would rather over-tighten than under-tighten and run the risk of having high inflation linger and become entrenched.
The U.S. central bank has made it clear it plans more rate hikes. Given the integration of the Canadian and American economies, the Bank of Canada does have to pay attention to what its American counterpart does.
The BoC will have new economic data by the time it makes its January 25th announcement. The December numbers will provide a fresh look at how well the inflation fight is going.
Normally it takes 18 to 24 months for interest rate increases to work their way into the economy and we are only about 10 months into this tightening cycle. It is reasonable to expect another 25 basis-point increase on the 25th. Given the Bank’s apparent success so far it also seems reasonable to expect a pause sometime after that.
Looking ahead to a year from now some forecasters say we might start to hear talk of interest rate cuts, which would be welcome news. Cuts would allow the BoC to move toward its, long stated, goal of normalizing rates back into the neutral range of 2.5% to 3.5%. The Bank of Canada, and central banks around the world, have been trying to do that for more than a decade – since the ’08 – ’09 financial collapse.
Details of Canadian Economic & Housing Market Performance, as at Dec 7, 2022
Bank of Canada increased Consumer Prime to 6.45% – exactly as expected for the last 5 months. January 25th is the next BoC interest rate announcement & I hope it is a 0.25% increase and then holds there for all of 2023. We will see…
Mortgage Mark Herman, Best Calgary mortgage broker with a Master’s degree in Finance.
Today, the Bank of Canada increased its overnight benchmark interest rate 50 basis point to 4.25% from 3.75% in October. This is the 7th time this year that the Bank has addressed inflation and means the policy rate is now as high as it has been in 15 years.
We summarize the Bank’s observations below, including its forward-looking comments on the need/likelihood of future rate increases below:
Canadian inflation
- CPI inflation remained at 6.9% in October, with many of the goods and services Canadians regularly buy showing large price increases
- Measures of core inflation “remain around 5%”
- Three-month rates of change in core inflation have come down, “an early indicator that price pressures may be losing momentum”
Canadian Economic and housing market performance
- GDP growth in the third quarter was stronger than expected, and the economy continued to operate “in excess demand”
- The labor market remains “tight” with unemployment near historic lows
- While commodity exports have been strong, there is growing evidence that tighter monetary policy is restraining domestic demand: consumption moderated in the third quarter
- Housing market activity continues to decline
- Data since the October Monetary Policy Report supports the Bank’s outlook that growth will essentially stall” through the end of this year and the first half of 2023
Global inflation and economic performance
- Inflation around the world remains high and broadly based
- Global economic growth is slowing, although it is proving more resilient than was expected at the time of the Bank’s October Monetary Policy Report
- In the United States, the economy is weakening but consumption continues to be solid and the labor market remains “overheated”
- The gradual easing of global supply bottlenecks continues, although further progress could be disrupted by geopolitical events
Outlook
Although the Bank’s commentary noted that price pressures that are driving high inflation may be losing momentum, it went on to say that inflation is “still too high” and that short-term “inflation expectations remain elevated.” In the Bank’s view, the longer that Canadian consumers and businesses expect inflation to be above the Bank’s 2% target, “the greater the risk that elevated inflation becomes entrenched.”
Given these economic signals, the Bank’s Governing Council stated that it “will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.”
It concluded its statement with a familiar refrain: “We are resolute in our commitment to achieving the 2% inflation target and restoring price stability for Canadians.”
Analysts and commentators will seek to interpret those outlook comments for signs that the Bank has reached or believes it is close to reaching the terminal point in its current rate-hike cycle. For now, that remains a question of debate and speculation that will turn on future economic signals.
Next Touchpoint
January 25th is the next BoC interest rate announcement. I hope it is a 0.25% increase and then holds there for all of 2023. We will see…