As Economy Slows, Bank Of Canada Holds Off On Interest Rate Increase

Instead of raising rates again the BOC (Bank of Canada) decided to hold off. With oil prices still low and the national economy losing the consumption boost of the holidays, the bank decided to give the economy a breather. Rates remain at 1.75%, with inflation having fallen to 1.7%, under the BOC’s benchmark of 2%. 

Bank of Canada Governor Stephen Poloz

The BOC’s decision mirrors that of the Fed in the U.S., where Chairman Jerome Powell recently outlined that the U.S. Central Bank was ‘flexible’ and would also ease off on money tightening given recent stock market fluctuations. The BOC pause flies in the face of the past consistency of its rate rises. It’s also likely that there is growing pressure on the BOC from a wide variety of market sources, especially given recent negative real estate statistics.

Keep in mind that this is an election year in Canada.

Prime Minister Justin Trudeau

Politicians despise higher rates for obvious reasons. The BOC would be wise to include political considerations into its decision making, and stretching out the rate rise schedule would be helpful to Prime Minister Trudeau.
Overall, the pause will be beneficial to the real estate sector, especially given recent difficulties and poor stats. Political efforts to cool the market could easily shift to a desire to cushion the sector and strengthen it. Lower oil prices and weaker consumption will also reduce inflation, further pressuring the BOC to hold off on rate rises. To facilitate economic stimulus in the event of a hypothetical future recession, the BOC would ideally need to quickly cut rates by roughly 4%. This is the likely target long term. 

We Are Barely Into 2019 And The Stock Market Is Already Making Some Wild Moves

2018 ended with significant stock market turbulence around the world, especially in New York and Asia. Tembo made note of this in its final 2018 blogs and newsletter (you can sign up here). As we mentioned, significant drops in the DOW were reversed by announcements that major pension funds were pouring over $64 billion into stock buys, moving away from their positions on low yield bonds. 

Canadian Stockmarket Turbulence

Apple CEO Tim Cook’s Investor Letters Causes Stock Market Jitters

Even as this news drove up confidence, the market tumbled again when Apple Co. CEO Tim Cook released a brisk letter to shareholders that stunned Wall Street and which the media called a ‘bombshell.’ The letter outlined many positive overall trends for the firm but admitted its revenues and profits were to be negatively affected by ongoing economic disruption. Sales of new Iphone devices, especially in Greater China, did not meet expectations, and gross revenue would be over 5% lower than forecast.
Tim Cook Investor Letter
Apple’s reputation as a practically indestructible giant with an unrivalled brand and relentlessly improving financial performance was hurt badly by the letter. The company’s share price fell by 10%, equivalent to over $70 billion. As so many market participants, analysts, and traders have never experienced a bear market from a low interest rate boom that has lasted a decade, the tough news was not taken well. Markets negatively reacted to the news, with the letter solidifying growing perceptions that the global economy is undergoing significant structural changes.

Fed Tries To Calm Markets

This week some good data restored confidence. Another big boost to the markets came from Federal Reserve Chairman Jerome Powell, who commented that his central bank’s policy was ‘flexible’, essentially calming the market by saying the Fed would act if further market drops occurred. It’s Tembo’s belief that the Fed will cut rates quickly and print money to buy stocks if the stock or asset (real estate) market’s fell harshly – for better, or for worse. 

On Canada’s Wealth

There has been a fair amount of media coverage over the last few days from an interesting, recently released stat from StatsCan on Canadian net wealth. It seems we’re a lucky country – our net wealth has topped $11 trillion, and our economy produces goods and services worth near $2 trillion.

Toronto Banks
The $11 trillion net wealth number was not a surprise for experts, but what has piqued the interest of observers has been the real estate component of that huge net wealth figure. The value of real estate represents over 75% of our net wealth, or just under $8.8 trillion. 
Over the last decade, real estate rose from comprising roughly 62% of Canada’s net wealth to the aforementioned figure. Canadians are much more dependent on real estate for their wealth than Americans – in the US, real estate has generally held steady at just over 70% of net wealth. This statistic corresponds to the general macro-economic trend that has continued in Canada over the last decade, where low interest rates and government policies have leaned on real estate and construction to drive growth. Low interest rates, strong demand, and the inability of the private sector to consistently build enough housing has all acted as fuel to real estate prices, and thus equity and net wealth.

Canadians Are More Dependant On Housing For Their Wealth Than Ever Before

Most Canadians hold the view that inevitably over the long term, their home equity will continue to rise. Many baby boomers and older Canadians are depending on this (rising) equity to supplement their pensions for consumption in retirement and to pass resources on to their children and grandchildren. This belief in relentless home price increases should have been tempered given the turbulence the national real estate market experienced over the last year and a half. The stats show that we are more dependent on housing for our wealth than ever before in our history, and even more so than our real estate crazy neighbours to the south. What we must all remember is that so much of this wealth is based on debt, and that debt needs to be serviced through discipline. 

On 2018’s Final Real Estate Stats

For Tembo’s final blog of 2018, we want to leave you with some interesting GTA statistics. All of our predictions for 2019 were outlined in our final newsletter – many of which are beginning to look on point given big falls in the markets marking the end of 2018.

fireworks

Stress Tests Have Kicked In 

Some 100,000 Canadians have been locked out of the housing market because of federally imposed stress tests. Already stringently cautious banks were made even more particular in approving mortgages because of the impact of the federal government’s stress tests. These tests force families with lower than ideal deposits for home purchases to buy insurance to cover their investment and reduce risks.

Pensions Are Pumping Up Real Estate Holdings

Trusteed pension funds have boosted their holdings in real estate by 2.5% to almost $190 billion as 2018 closed. Despite seeming like a small percentage change, this represents billions in added investment. In our last blog and newsletter, we highlighted the importance of real estate to the nation’s wealth, and this stat shows the reliance on real estate to the nation’s trusteed pension funds. All sectors of the economy are all in on real estate, and expect dividends and returns from a continuously healthy real estate market. 

Global Markets Are Falling Fast

stock market crash

The DOW underwent its worst day of Christmas trading in history, dropping over 600 points (3%). The Fed’s decision to increase rates last week was to blame. In addition Wall Street was spooked by news that U.S. Treasury Secretary Steve Mnuchin made calls to the CEOs of America’s biggest banks without authorization from the President to check on their liquidity. This was viewed by many as an act of panic. The contagion quickly spread around the world, with some international headlines using the term ‘panic selling’, for the first time since 2007.

Toronto Home Prices Up In November

Prices for detached homes rose 3.5% to mark the end of 2018, even as listings and sales dropped slightly. We end 2018 with the average price of a detached home in Toronto now hitting some 788K. While listings declined slightly in November and early December, they were still 12% than in 2017. Home prices are still significantly lower from their summer 2017 record highs. 

On Oil Prices And A Cautious Bank Of Canada

2018 will end without an increase in interest rates. The Bank of Canada (BOC) announced on Wed. Dec. 5th that its benchmark rate of 1.75% would hold steady. The enthusiasm and confidence the BOC previously expressed about the overall state of the economy was gone in its most recent announcement.

Alberta crude oil

The continuing collapse in oil prices, record high mortgage and consumer debt, and slowing economic growth were the key factors the BOC cited as dead weights to the economy. In response to the lack of rate tightening, the loonie fell to stabilize to 75 cents. The BOC is especially pessimistic of the long term prospects of Canada’s energy sector.
The news will come as a sign of relief to the real estate sector and will result in a pause in the general trajectory of higher mortgage and interest rates seen over the last few months. Mixed real estate data underpins the need for more caution from the Bank. The fall in the exchange rate will also benefit manufacturers, especially those in southern Ontario and parts of Quebec. While static rates will help Western Canadian consumers and businesses, their pain is significant and cries for assistance and greater government intervention are being made by Alberta and Saskatchewan Premiers Rachel Notley and Scott Moe. 
Canadian crude oil is being priced at rates as low as $14 a barrel – even as U.S. crude has rarely ever sells for less than $50 a barrel. With existing Canadian pipelines at full capacity and oil shipped by train overloading rail networks, there is essentially no room to maneuver for exporters who can’t get their product to market efficiently. The Federal government’s plan to expand pipeline networks to B.C.’s coast have failed due to legal challenges and resistance from apprehensive and environmentally conscious First Nations groups. Pipelines planned to the east coast (Energy East) face considerable regulatory, financial, political, and social hurdles. The failure to properly export Canadian oil has been a recurring strategic economic challenge for many decades. 
Oil’s fundamental importance to the Canadian economy was highlighted in the value of the exchange rate from 2010 to late 2014, when Canadian oil sold for $80-100 a barrel. In those years, the Canadian dollar approached or met U.S. dollar parity – fuelling a boom in cross border shopping, and strong domestic and corporate leveraging. How times have changed.

Canadians Are Experience Record Low Unemployment Rates Across The Nation

November was a dynamite month for job creation, with a record 94,000 jobs created, pushing the unemployment rate lower to 5.6%.

two people working at computer
This is the lowest level of unemployment since records began in the mid 70s. Just under 90 thousands of the jobs are full time, and more than 78 thousand were created in the private sector – both are positive elements of the job growth. The strongest job gains were in Quebec and Alberta, with 14,000 new construction jobs created, 27,000 in ‘goods production’, and the rest in services, especially in professional, scientific, and technical services. 
November 2018 Canadian Unemployment Rate
While experts hailed the news as a big and very positive surprise, they also highlighted the fact that wage increases are beginning to lose momentum and to decline. The strength of the economy is boosting pressure on inflation, with the rate jumping to 2.4%. In its latest announcement, the Bank of Economy decided not to increase rates, but will likely adjust its approach in the new year if economic temperatures remain hot. While the economy is strong, rising interest rates and government intervention remain as anchors on the still generally healthy real estate market. 
These two factors have resulted in real estate dynamism in Canada’s biggest city lessening to the extent that the City of Toronto is worried it will lose up to $100 million in revenue from the land transfer tax. In recent years, the city government has become extremely dependent on the transfer tax to finance spending. Tembo will keep a close eye on economic indicators in the new year to see if these record trends continue. 
 

Bank of Canada’s Huge Announcement On Mortgage Bonds

On Friday, November 23rd at 10am, the Bank of Canada issued a ‘market notice’ announcement with big implications. For the first time, the Bank stated that it would begin making innovative additions to its balance sheet: the purchase of mortgage bonds, or mortgage backed securities.

The news was not announced in a press conference or a press release, but a sleepy ‘market notice’ at the bottom of the Bank’s media/press page on its website.

So, What Are Mortgage Bonds?

A mortgage bond, or mortgage backed security (MBS), is a financial product that is made up of many mortgages, let’s say 100 for example. These mortgages are usually issued at the same time, at the same mortgage rate, and generate interest (income for the purchaser). Buyers could be Canadian banks, foreign banks, and domestic and international investors. 
Mortgage backed securities were at the heart of the 2007-8 financial crash. The bonds were given the highest credit ratings, (what’s safer than a mortgage/house as an investment?) and were scooped up by clients all over the world. What buyers didn’t know was that many of these mortgages were poorly underwritten, and very risky. When foreclosures started kicking in the bonds went bust, and clients lost tons of money.

Why Is The Bank Of Canada Announcement So Significant? 

By now purchasing these bonds, the Bank of Canada is directly providing a powerful stimulus to the banking system and the real estate market. If Banks can now profitably sell mortgage bonds to the central bank, it is likely that their incentive to further increase mortgage debt will rise. This could have a negative impact of the quality of bank underwriting, and will provide a boon to housing prices by facilitating higher demand.
Tembo will keep an even closer eye on the Bank of Canada, this news signals that simply watching rates is not enough. This added central intervention into market brings more risk to Canada’s housing system. You heard it here first.

On Rent Control

In yesterday’s Fall Economic Statement, Ontario Treasurer Vic Fedeli outlined that new housing units and previously unoccupied rental units would be exempt from the Wynne government’s rent control reforms.

Caption: Ontario Finance Minister Vic Fedeli
The Fall Economic Statement is an outline of fiscal and policy changes and economic news a government seeks to outline before its budget, where overall fiscal policies and most spending plans are explained. 
The previous government under Premier Wynne implemented its ‘rent control’ reforms shortly before this year’s election which limited rent increases to 1.8% for 2018 and broadened tenant rights at the expense of landlords. Tenants and poverty groups applauded the reforms, while  landlords complained that the changes would make them more selective of tenants. Developers stated that rent control would redirect their attention to build units for sale, not rent, further augmenting southern Ontario’s housing and rental supply problem.
With vacancies at absolute rock bottom record lows, the competition for favourable rental housing space in downtown Toronto is relentless. Builders and renters are applauding the Ford Government’s dilution of rent control, saying it will result in more supply, but over the long term and not immediately. Poverty groups and tenant advocates say the move will cause rental costs to skyrocket and will result in evictions. While it is agreeable to have strong protections for tenants in place, rent control has been proven to restrict supply and reduce the quality of housing stock in most of the jurisdictions where it is implemented. 

October Was A Good Month For GTA Real Estate

Positive numbers marked the overall situation for GTA real estate. Both the detached and semi-detached home and condo markets saw positive figures. Condo prices rose 7.5% and semi-detached home prices were up 6.6%. The average selling price for a home rose past the $700K range where it has languished for roughly to hit $810K, This was the first significant increase in prices in over 3 months. 

The positive sale price increases highlight a recovery that is steadily building momentum. Analysts saw the figures as proof that the perennial forces of supply and demand were returning to their general positions in the GTA market. The supply of homes continues to be a significant factor impacting the market – with recent inventory showing a tightening of listings. The slowdown the market saw exacerbated this issue because many prospective sellers are waiting for prices to increase again before listing their homes.
The condo market continues to show its heft. Impressive price figures and demand has not been shaken by government intervention. Higher interest rates in the medium to long term may damage the health of the condo market but it continues to be seen as a haven for young professionals trying to get into the market affordably. The recovery continues. 

The Fed eases off on its tightening

Federal Reserve Chairman Jerome Powell did not signal another rate hike in its most recent announcement this week. The Board was unanimous in its support for the not raising rates. With the U.S. economy absorbing large stimulus through tax cuts, increased government spending, and still very low rates, economic activity and job growth is on the rise. This has strengthened the Fed’s longstanding argument that rates have to be increased.
Caption: U.S. President Donal Trump shaking hands with Fed Reserve Chairman, Jerome Powell at the White House
The big opponent to higher rates has been Donald Trump. Irritated at the propensity for these rate increases to dampen economic growth, the President has vocally attacked the Federal Reserve. He has argued that all of its actions have been ‘wrong.’ It’s a possibility that the Fed’s decision to hold off on rate increases could have been prompted by this language and a desire to placate the President, especially given the U.S. mid-term elections.
The results of these mid-terms has been mixed for the President. On the one hand, his party gained Senate seats and tightened up its control of the U.S.’s upper house. On the other hand, the Democrats won back control of the House, albeit not with the momentum many in the media had predicted. Many key gubernatorial races were also won by Republicans, particularly in the key states of Ohio and Florida. The next two years will be tumultuous and difficult, and the partisan divisions in America will only increase.

US Fed Is Eager To Raise Interest Rates

For this week’s blog, Tembo once again turns to one of our favourite topics, interest rates. Important news out of the United States once again requires unpacking for our readers.

US Federal Bank

“Trumponomics”

Under President Trump, the U.S. has pursued a ‘supply-side’ economic strategy. The government has increased spending, especially on the military, has lowered taxes, largely for big businesses and high income earners, and has pursued deregulation. All of these moves have acted as stimulants to the U.S. economy, and have lowered unemployment rates and increased growth.
GDP growth has shot passed 4% and official unemployment statistics are the lowest they’ve been in many decades. While few doubt the economy is being overstimulated, all of this positive news is fueling conservatism at the Federal Reserve. The practice of raising rates and ending the historically unprecedented period of ultra cheap began at the end of the Obama Administration. Now, with inflation beginning to pick up, wages, growing, and the economy considered ‘strong’, the Fed is even more eager to return rates to more historical averages. 

What Will Higher US Interest Rates Means For Canadians?

Fed Reserve Jerome Powell made it clear that the Fed will continue its unpopular push to raise rates with even more enthusiasm, a point that has been lambasted by Trump. What this will mean for Canadian homeowners and consumers in the short term is higher rates, as the Bank of Canada will be under huge pressure to match U.S. interest rate rises. Every Fed rate hike places downward pressure on the dollar and squeezes the purchasing power of Canadian firms and consumers. Tembo will keep a close eye on the Canadian economy and the Bank of Canada’s next moves.