Today, the Bank of Canada showed once again that it is seriously concerned about inflation by raising its overnight benchmark rate to 1.50% – making Consumer Prime 3.70%
Says Mortgage Mark Herman, top Calgary Alberta Mortgage Broker.
Mid-March Commentary: Rates and Prices Trending Up Due to Inflation! and War!!
On March 2nd, 2022, the Bank of Canada made its most anticipated decision on interest rates since the pandemic began. After weeks of speculation and anticipation of an increase, central bankers finally pulled the trigger and moved their overnight rate higher.
For the 1st time since the pandemic began to hurt the economy in March 2020, the Bank raised its overnight benchmark rate by .25% and the knock-on effect is that borrowing costs for Canadians will rise modestly although by historical norms, remain low.
In its updated comments on the state of the economy, the Bank and singled out the unprovoked invasion of Ukraine by Russia as a “major new source of uncertainty” that will add to inflation “around the world,” and have negative impacts on confidence that could weigh on global growth.
Below are the other highlights…
Canadian economy and the housing market
- Economic growth in Canada was very strong in the fourth quarter of 2021 at 6.7%, which is stronger than the Bank’s previous projection and confirms its view that economic slack has been absorbed
- Both exports and imports have picked up, consistent with solid global demand
- In January 2022, the recovery in Canada’s labour market suffered a setback due to the Omicron variant, with temporary layoffs in service sectors and elevated employee absenteeism, however, the rebound from Omicron now appears to be “well in train”
- Household spending is proving resilient and should strengthen further with the lifting of public health restrictions
- Housing market activity is “more elevated,” adding further pressure to house prices
- First-quarter 2022 growth is “now looking more solid” than previously projected
Canadian inflation and the impact of the invasion of Ukraine
- CPI inflation is currently at 5.1%, as the BoC expected in January, and remains well above the Bank’s target range
- Price increases have become “more pervasive,” and measures of core inflation have all risen
- Poor harvests and higher transportation costs have pushed up food prices
- The invasion of Ukraine is putting further upward pressure on prices for both energy and food-related commodities
- Inflation is now expected to be higher in the near term than projected in January
- Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards
- The Bank will use its monetary policy tools to return inflation to the 2% target and “keep inflation expectations well-anchored”
- Global economic data has come in broadly in line with projections in the Bank’s January Monetary Policy Report
- Economies are emerging from the impact of the Omicron variant of COVID-19 more quickly than expected, although the virus continues to circulate, and the possibility of new variants remains a concern
- Demand is robust, particularly in the United States
- Global supply bottlenecks remain challenging, “although there are indications that some constraints have eased”
As the economy continues to expand and inflation pressures remain elevated, the Bank made a clear point of telling Canadians “To expect interest rates to rise further.”
The resulting quantitative tightening (which central bankers framed as “QT” rather than the previous term “QE” for quantitative easing) would complement increases in the Bank’s policy-setting interest rate. The timing and pace of further increases in the policy rate, and the start of QT, will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving a 2% inflation target.
BoC’s next scheduled policy announcement is April 13, 2022. We will update you following that announcement as always.
Rising rates: fixed or variable?
The Bank of Canada pulled the trigger on an interest rate increase, the first since October 2018 and the Bank has made it clear more increases are coming.
The upward move and the Bank’s messaging have rekindled the perennial mortgage debate: fixed or variable. The answer remains the perennial: it depends.
It depends on the borrower’s end goals, finances and their desire for stability. That last point, stability, is what leads most Canadian home buyers to opt for a 5-year, fixed-rate mortgage. But in purely financial terms – and saving money – variable-rate mortgages tend to be cheaper, and they do not have to be volatile.
In a rising rate environment, many borrowers worry about the cost of their debt going up. But right now, variable-rates are notably lower than fixed-rates and it will take several Bank of Canada increases to close the gap. In the meantime, that amounts to savings for the borrower.
Those savings – often hundreds of dollars a month – could be applied against principal. As rates rise the amount can be adjusted, thereby keeping total monthly payments the same and evening-out any volatility.
It should be remembered that fixed-rates are rising as well. They are tied to Government of Canada 5-year bond yields. Those yields have been increasing, and at least some of that is tied to increases in U.S. government bond yields. Canadian bonds tend to move in sync with American bonds, but those changes do not necessarily reflect the Canadian economy. In other words, the changes are not completely within our control.
A Few More Words on Russia Invading Ukraine
Markets were thrown into a tizzy. They plunged. But the frenzy was short lived. By the end of the day markets were back in the black.
Canada’s economic exposure to Russia and Ukraine is relatively small. Canada imported $1.2 billion from Russia in 2020; Russia imported roughly the same from Canada – less than a week’s worth of commercial traffic across the Ambassador Bridge.
The key factor in the conflict, for Canada, will likely be the price of oil, which has climbed past $100 a barrel. Rising oil prices and higher fuel costs have been a principal driver of inflation here, and inflation is the main concern of the Bank of Canada. It is currently running at 5.1%, a 30 year high, and the central bank is under growing pressure to bring it under control.
Oil is also an important part of Canada’s resource economy. Higher prices will likely lead to more production. Any embargo of Russian oil will create demand for Canadian product. That, in turn, would put more load onto Canada’s economic recovery, which is strong but hampered by pandemic labour shortages and supply-chain problems which, again, are adding to inflation pressures.
None the less, war creates uncertainty, and uncertainty triggers caution among central bankers. A recent Reuters poll of 25 economists suggests the Bank of Canada will go ahead with a quarter-point rate hike this week.
What is everyone doing with the money they saved during Covid?
- Eating out, travel, debt reduction and BUYING HOMES!
- Mortgage rates are low and home prices are close to 2005 levels!
Mortgage Mark Herman, Top Calgary Alberta Mortgage Broker
Latest Bank of Canada Survey:
As COVID-19 continues to be pushed down in Canada, consumer spending is expected to go up. The latest survey by the Bank of Canada suggests that will lead to an even greater demand for homes.
The Bank of Canada’s Survey of Consumer Expectations… indicates:
- 40% of respondents managed to save more money than usual during the pandemic.
- They expect to spend about 35% of those savings over the next 2 years on activities that have been restricted during the pandemic, such as dining out.
- Respondents plan to put 10% of their savings toward debt repayment and
- 10% toward a down payment on a home.
14% plan to buy a home soon, much of that was driven by renters, with 20% saying they want to get into the market.
80% of the respondents who have “worked from home” expect to continue with that and there is a consistent with the shift in demand for larger properties, away from city centres.
The Big-6 banks love your money, not your sparkling personality.
This article is old and still shows the same calculations.
We get calls on high payout penalties all the time. The answer is broker lenders have payouts that are about 30% as much as the Big-6 banks.
Mortgage Mark Herman, top Calgary mortgage broker.
With the latest developments the Bank of Canada (BoC) has clear path to reduce the Prime rate from 3.95 to probably 3.70%
The Bank of Canada is feeling the pressure to get back into the game with a rate reduction and one obstacle has now been removed.
The bank held its rate the same for an 8th straight meeting on October 30th.
At the same time it has clearly signaled it may not be able to hold that line much longer.
The bank pointed directly at trade conflicts (such as the U.S. – China tariff war) as the key cause of a global economic slowdown and around the world more than 35 other central banks have already cut rates in an effort to keep growth up.
The U.S. Federal Reserve has made three cuts in the past several months. That has boosted the strength of the Canadian dollar which makes the country’s exports more expensive on the world market which is unwelcome.
Great news that the Bank is not concerned that a drop in interest rates will trigger a renewed frenzy of debt-funded consumer spending. It is satisfied that the biggest component of household debt – mortgages – have been stabilized by the B-20 regulations. And another big obstruction has been removed. The federal election is over so the bank can operate without risking the appearance of political favoritism.
Fixed rates are still the way to go right now.
They are close to the all time 119-year lows right now.
Mortgage Mark Herman
The Big-5 banks do not love you, they love your money, and now they can “trap” you in their mortgages if you fail the Stress Test.
Highlights of the last post are below. The post from January is here: https://markherman.ca/how-the-big-5-banks-trap-you-in-their-mortgages/
The new mortgage rules – called the B20 – allow the banks to renew you at almost any rate they want – or at least not a competitive one – if your credit, income, or debts should mean you can’t change banks.
If your mortgage is at your main bank they can see:
- your pay and income going into your accounts
- debt balances on your credit report
- what your credit score is
- your debt payments
- your home/ rental addresses so they can accurately guess at your home value.
ALL THIS MEANS they can calculate if you can pass the new “Stress Test.”
If you can’t pass it then they know you can’t change banks, are you are now totally locked into them for your renewal. They can renew you at POSTED RATES … 5.34%, not actual discounted rates they offer everyone, today (June 2019) about 2.99%.
The GOOD NEWS is broker banks do not do any of this … so having your mortgage at your main bank only helps them “grind you” later on. …. so how convenient is having your mortgage at your bank now?
Highlights of the article link below are:
Canada’s biggest banks are tightening their grip … as new rules designed to cut out risky lending make it harder for borrowers to switch lenders … the country’s biggest five banks … are reporting higher rates of renewals by existing customers concerned they will not qualify for a mortgage with another bank.
“B-20 has created higher renewal rates for the big banks, driving volumes and goosing their growth rates,” said an analyst. “It’s had the unintended consequence of reducing competition.”
Royal Bank of Canada (RBC), said last month that mortgage renewal rates [are up …] due in part to the B-20 regulations.
Ron Butler said, “Even if they are up-to-date with their repayments, borrowers may find they don’t qualify with other lenders so they’re stuck with their bank at whatever rate it offers,” he said.
Senior Canadian bankers such as RBC … and TD … voiced their support for the new rules prior to their introduction, saying rising prices were a threat to Canada’s economy.
While analysts say RBC and TD are expected to benefit from higher-than-normal retention rates in 2019, not everyone is sure borrowers will benefit.
“The banks are becoming more sophisticated in targeting borrowers who would fail the stress test and they can charge them higher rates at renewal knowing they can’t move elsewhere,” Butler said.
Grandma always said, “The price is the price, but the details are the details!”
There are discounted and restricted mortgage rates out there but they do not share the details of their disadvantages up front with you.
- Restricted or Limited Products / Bait & Switch
People will not even sign a 3 year cell- phone contact any more but they will try to save $15 a month on a restricted mortgage; which could cost them $30,000 as a payout penalty – BUYER BEWARE is what the regulators say.
Brokers often advertise these products to get you to call them and then they switch you into a “regular product” if you are lucky – or you get a “restricted product” that you probably do not want if you know all the details.
Discount mortgages called “limited” or “restricted” and often have:
- No rate holds
- Only monthly payments
- Only 1 statement a year
- No on-line administration = call centre only
- Only 5/5 extra repayment option – most broker lenders are 15/15 + 2x or 20/20
- The 1st number is the % of the original mortgage amount you can repay every year without penalty
- The 2nd number is the increase in monthly payment in % you can do without penalty.
- The 2x = double the payment!
- And they use the bank payout penalty calculations – as below in the Dirty Trick – AND in addition to that penalty, a 3% fee of the entire mortgage balance added to the penalty!
- This could easily end up at $30,000.
The other main “Details” that are not often disclosed are:
To keep you from leaving the bank for a lower rate when you renew later, the banks register your mortgage as a collateral charge – which is the same as an “I owe you” / IOU for the home. Other banks will not take another banks IOU for a mortgage; which means:
- A lawyer will have to re-register your mortgage at land titles; $1000.
- An appraisal is needed as the registration is usually for more than the value of the home; $450
- This means on renewal you will not get the best rates because it will cost you about $1500 – $2500 to move banks – even after your term is over.
3. The “Dirty Trick” of how the banks calculate your payout penalty
- If you have to move or break your mortgage the payout calculation is usually way lower at a broker-only bank than any of the big banks. The big banks all calcualte the penatly the same way now – to their advantage, not yours.
To avoid these products, or to disucss what your personal situation may be, call us any time at 403-681-4376.
Mark Herman, Top Calgary, Alberta, mortgage broker for renewals, first time home buyers and home purchases.
Calgary top-rated market for overall real estate prospects
This is great news for buyers … you are buying a home and a great investment – not the case for other provinces.
As we have always been saying … Alberta’s in-bound migration and strong job market will support home prices.
Did you know that Alberta is short 25,000 jobs in the oil field right now? That is going to continue for the medium term! – Mark Herman
Strong economic and employment growth forecast
CALGARY – For the second year in a row, Calgary is the top-rated market in Canada for overall real estate prospects, according to a survey of industry experts.
Calgary kept the top spot with the highest ratings for prospects in three categories – investment, development and homebuilding, said the Emerging Trends in Real Estate report by PwC and the Urban Land Institute.
“The Calgary economy continues to post solid gains, despite the disruption caused by summer flooding,” said the report. “The energy industry, primarily oil, remains strong and will continue to benefit from economic growth around the world.
“Locally, energy and energy service companies have dominated office demand. Economic activity is being supported by growth in both the goods and services sectors. Manufacturing and construction will lead the goods sector, and personal services and transportation and warehousing are the key drivers on the service side.”
The report is based on a survey of over 1,000 industry experts including investors, fund managers, developers, property companies, lenders, brokers, advisers and consultants.
The ratings of other Canadian cities in order following Calgary are: Edmonton, Saskatoon, Vancouver, Toronto, Winnipeg, Ottawa, Halifax and Montreal.
The report said economic activity in Calgary is projected to grow at a 3.3 per cent rate in 2013 and a 3.4 per cent rate in 2014. Employment growth is expected to slow but remain good through the end of this year and into 2014, growing at 2.4 per cent and 2.8 per cent, respectively.
Many people do not get inspections for new condos but since it is one of the most expensive things you can buy, it is worth it. Read below for more info.
Many buyers think it’s unnecessary to hire a building inspector before purchasing a new condo. Prospective owners often assume a condo building and their unit of interest is fine and everything is to code and working properly. While this is usually the case, purchasers still need to protect themselves against those rare occasions where a problem exists.
A friend of mine, for example, moved into a newly constructed condo where someone had inadvertently dropped a piece of plywood down the chimney flu, blocking it off. When the new owner lit the fireplace, smoke backed up through the unit.
Although the condo corporation took care of the fireplace, the owner was responsible for the smoke cleanup. A pre-purchase inspection would likely have avoided this problem as the offending piece of wood was within view of a casual look up the chimney.
I have sold many condos where buyers think they do not require an inspection, but every condo should be inspected by a certified building inspector.
Remember: It’s a good idea to put a building inspection clause into your offer. And it’s important to find a building inspector who is familiar with condo inspections. He or she will be cognizant of the types of problems to look for and of condominium building codes and regulations.
“What does an inspector check in a new condo? Isn’t this a waste of time and money?” I am asked this all the time.
An inspector will make sure your hood fan exhaust is properly connected. He will ensure that the electrical system is to code, in working order and adequate to meet any special electrical requirements you might have. Windows will be inspected to see they are installed properly and to regulation. A good inspector will also check the common elements to see if any owners who moved in before you have inflicted damage to the halls or elevators.
Is the garage constructed to code with adequate drainage to prevent flooding, winter road-salt spalling and excessive humidity build-up? An inspector will check the drainage in the garage and your parking spot. You want to make sure when you open your trunk to take out your groceries you are not always standing in a puddle of water.
The inspector will check the condo’s exterior envelope to see if it has adequate drainage and if it will deter ice buildup. Since the balcony is both the exterior element in which you will spend the most time and is also a source of liability (e.g.: ice buildup or water-damaged tiles blowing down onto the cars below), it will be examined carefully for potential problems.
Inspectors will check the roof and any air conditioning units located there, the security gate to the garage and many other things you would not think to consider.
The biggest factors are plumbing, electrical, heating and wiring. These must be to code, meet regulations and be suitable to accommodate any special requirements you, the buyer, might have. To further emphasize, a recent inspection revealed an ice buildup problem that, if not caught by the inspection, would have cost the buyer, along with the condo corporation, $20,000 to correct.
Definitely not a nice housewarming present.
Arkadi Abramovitch of Artech Home Inspections told me recently that technology has changed a lot in the past few years and this has helped to ensure buyers have a positive buying experience. Arkadi, along with many inspectors today, uses infrared equipment to check for moisture buildup in or behind the walls or ceilings, which would not normally be visible.
Inspectors check the exhaust systems for bathroom ventilation fans and kitchen hood fans that have sometimes been blocked inadvertently. A memorable condo inspection Arkadi had was when he found two Tim Hortons cups in a kitchen ventilation exhaust system.
It’s better to find out before closing on your unit than to try to fix the issue (and be reimbursed) later. Ask the inspector specifically for his or her impressions of the common areas as they may or may not do this if they aren’t asked specifically.
By now, I hope you are sold on the need for a building inspection for a new condo and it should be evident that this applies even more to a resale condo.
When first considering a resale condo, it’s a good idea to ask residents (if you know any) about previous problems with the building. When you request a building inspection, ask the inspector to address specifically these areas. (Of course, you are going to have both your lawyer and your insurance agent review the status certificate before signing off on the purchase.)
On the flip side, I encourage sellers to get a pre-inspection before their property is listed for sale.
Marilyn Wilson has been selling real estate for more than 23 years and owns Marilyn Wilson Dream Properties Inc.
Brokerage in Ottawa, an Exclusive Affiliate of Christie’s International Real Estate. She can be reached through dreamproperties.com or follow her on Twitter @marilyn_wilson.