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.
November was a dynamite month for job creation, with a record 94,000 jobs created, pushing the unemployment rate lower to 5.6%.
On October 1st the Canadian federal government announced that an update of NAFTA had been achieved and that trade negotiations with the U.S. and Mexico had concluded.
Uncertainty over the potential dislocation and chaos of a bad deal or a breakdown in talks is now no longer a major concern. So, what happened? What is the new deal? And what did Canada get out of it?
Details About The New NAFTA Deal – Now Called The USMA
Who Got The Better Deal – Trump or Canada?
The 1950s Real Estate Boom
The 1980s Toronto Real Estate Crash
Unemployment hasn’t been this low in over 40 years, having now hit 5.8% nationally. Ontario and BC lead Canada, with 5.4% and 5% unemployment respectively.
In this week’s blog, Tembo Financial will outline how interest rates are set in Canada and the United States.
Rate setting by the Bank of Canada (BOC) and the Federal Reserve (Fed), most impact Canadian and GTA real estate.
Further Rate Hikes Are Coming
The Bank of Canada to increased rates at its decision meeting on Wednesday, July 11th. The central bank increased its key rate to 1.5 per cent from 1.25 per cent.
The forces that favoured an increase in the cost of money outweighed those that supported continued loose money policies. The Canadian economy remains in very good shape. Inflation hasn’t reared its ugly head, household consumption is neither increasing recklessly nor falling precipitously. Growth and unemployment figures are very positive. Lack of price growth dynamism in the real estate markets, trade issues with the United States, and high levels of private and public debt are the key structural problems. Weighed against one another, the balance skews toward a rate hike.
Central Banks Around The World Are Adamant.
Central banks have begun and will continue a long term policy plan of ever higher rates, and more scrutiny on international banks and financial institutions. The Bank of Canada is no different. The key facts that most worry senior officials, politicians, and Central Bankers are the enormous levels of household and government debt, particularly mortgage debt. A generation of historically unprecedented record low interest rates has blown up large debt bubbles which elites are now desperate to deflate as carefully as possible.
Rates Hike To Negatively Impact Consumers
The likely hike will no doubt have a negative impact on consumers and on the real estate market. Banks are likely to raise their mortgage rates in response. The debt to disposable income ratio in Canada has hit a record of almost 175%, much higher than in the United States before the start of the Great Recession. A rate hike will be of no help to those looking for high prices for their real estate holdings. Debt to income ratios for the poorest Canadians are especially high. The lowest quintile of earners average a debt ratio of almost 350%. While higher rates will come at a cost, many believe they are absolutely necessary, and few doubt they are avoidable.
Bank of Canada holds its ground despite surging economy
Yesterday the Bank of Canada held firm and its very recent change in tone and policy by confirming it would hold its benchmark interest rate to 1%. The Bank increased rates twice in quick succession, once in July, as the housing market was searing hot in some parts of the country, and again in September, after a wide spate of government measures had by then significantly cooled prices and demand.
The Bank offered no hint as to when rates would be raised again and this week’s decision is the final rate decision for 2017.
We will have to wait until next year to wait and see for further hikes. Some market watchers were expecting a hike as strong economic activity, robust GDP growth, and very high employment growth were all recently reported.
The most recent employment numbers are off the charts, with 80,000 new jobs being created in the month of November – market expectation was 10,000 new jobs. Ontario generated the lion’s share of these jobs (44,000).
The national unemployment rate hit a 10-year low because of these gains, falling to 5.9%. in Quebec, unemployment has hit an all-time record. Unemployment should continue to fall as retailers add some more positions for the holiday surge before year end. Hourly wages are also up just under 3% nationally, an unusually big increase.
The best piece of news is that 37,400 manufacturing jobs were created. These are solidly middle-class, high paying, productive positions that Canada has generally underperformed in creating.
Usually, central banks respond to strong figures like these by raising rates in fear of higher inflation from more spending and more borrowing. The Bank of Canada is internationally recognized and renowned as being extremely focused and hawkish on meeting its inflation targets. The broader market expectation is that further rate hikes will be on the table early next year if wage, employment, and GDP growth continue their robust increases.
Labelled as the “lazy and entitled” generation, Millenials have seen their share of criticism. But revel in this – a recent study shows that millennials are better at saving than their parents, the baby boomers.
According to bankrate.com, 60 percent of 18 to 26-year-olds are planning ahead compared to just 25 percent of the older generation. Another study, conducted by Nerd Wallet, shows that millennial parents are putting away 10% of their annual income, compared to Gen X saving 8% and Boomers saving 5%. NerdWallet also found that only 7% of millennials surveyed were not saving for retirement. These numbers are most likely linked to the fact that Millenials had a front-row seat to the 2007 financial crisis. If millennials continue to save at this rate, Nerd Wallet say’s the will outsave previous generations
Regardless of the fact that Millenials are paying more bills than their parents, and facing a much higher cost of living, they still lead when it comes to savings and retirement plans. Given that most millennials have between 20 to 40 years before they retire – there is plenty of time for that money to grow. This is a very smart financial decision on their part.