Are Further Rates Hikes Coming?

Another blog, another rate hike. The BOC (Bank of Canada) announced on Wednesday that its overnight rate would be increased from 1.50 to 1.75%

This is the fifth increase in rates in the last year and a half. As Tembo has repeatedly mentioned, a stable economy and good stats would lead to the BOC increasing rates – this is the signal they’ve been consistently sending for some time now. Rates are now back to where they were in late 2008, right before the last financial crisis.

Bank Of Canada Plays It Safe

The Bank made several comments and offered rationale for its decision. The conclusion of trade uncertainty with the United States and Mexico with the signing of the USMCA was cited. As was strong economic data (job growth, GDP growth, low unemployment). In the words of experts, with the economy in such decent shape, stimulus in the form of low interest rates is not needed. Increasing rates also serves the goals of policymakers in Ottawa and Toronto who want less credit available to heat the property markets. As we’ve mentioned in previous blogs, the Bank is following international counterparts in raising rates. 

What Does This New Hike Rates Mean For You?

We want to make two points in this blog in response to this increase. One, it will result in higher overall borrowing costs and it will make mortgages more expensive. And two, that rates are still extremely low. Even in the medium term, rates will be at historic lows. Please see the attached graphic from the Bank of Canada to see the objective picture of rate movements in the last 11 years. In addition, Tembo recommends its readers prepare their finances for higher borrowing costs.

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.

“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. 

Bank of Canada Hikes Rates

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.

 

 

The Bank of Canada Holds its Ground

The Bank of Canada was generally expected to raise its benchmark interest rate from 1.00 to 1.25 this week, but decided to hold its rate at 1.00. The Bank cited strong economic growth and the desire to moderate its pace of rate increases so consumers and the economy can better adjust to more expensive money. The Bank’s decision was met with interest as many expected it to stick to its aggressive rate hike pace. Many, however, believed the bank would hold off as surveys and media coverage showed that consumers were weary about the speed of interest rate increases and were worried about their ability to service the increased costs.

The immediate market reaction saw the dollar fall 0.65 cents and the TSX drop 60 points. Investors reported their view that the interest rate holding would lower economic growth for next year. Market watchers will take mixed views. Those in the real estate sector will cheer, as new taxes and stress test rules recently implemented will inevitably serve as a disincentive for builders to construct new homes and for buyers who are already under tremendous scrutiny from banks and insurers, especially first-time buyers.

The decision to hold shows that the Bank is concerned about excessively pressuring the real estate sector, given the new stress test rules will add cooling effects to an already lukewarm market at best. The Bank is likely to keep a close eye on inflation, GDP figures, and job numbers in the coming weeks and months before deciding to raise rates again in the next quarter. Fundamentally, the international trend is focused on raising rates, increasing the cost of capital, cooling consumption, and adding space and breathing room for central banks to decrease rates in any future economic challenges.

After the Rate Hikes

The Government of Canada is carefully examining the effects of two rapid Bank of Canada rate hikes on the economy, the real estate market, and consumers. The immediate impact of the hikes saw prime mortgage rates increase across the entire spectrum in Canada, with variable rate mortgage holders affected the most. The rate hikes will likely slow down economic momentum, cool the housing market, and encourage consumers to keep on eye on their borrowing and spending habits – which were the intentions of the rapid hikes to begin with.

The economic data to be released in the next few weeks will likely influence the Bank’s decision on rates in October. There is a strong expectation that the Bank will likely increase rates again, as its position has become very hawkish. If the economic and real estate data is exceedingly poor and falls flat of baseline expectations, the Bank is likely to send warmer signals to the market that it will take its time on rates and raise them in a more gradual way over the medium to long term.

Governments around the world are very sensitive to interest rates. Increases that are too fast and too significant can significantly dampen economic growth and can spawn considerable resentment and unpopularity amongst voters. One of the key indicators of a government losing an election is the trajectory of interest in the run up stages. Federal Finance Minister Bill Morneau did not appear to voice his intention or opinion to act further on cooling the housing market. Interest rates in Canada are set by the Bank of Canada, which is fully independent of the government and which has complete and total purview over monetary policy.

A New Market Emerges

Several forces have recently emerged to re-shape what was the most dynamic seller’s market in the history of southern Ontario. The first was the arrival of the summer season and a vast torrent of new government rules, initiatives, intervention and the famous 15% foreign buyer’s tax. The tax has succeeded in dissuading new foreign entrants into the housing market and has helped to reduce demand.

The second force is a surge of new listings that have increased the supply of homes. This increase is helping alleviate one of the great historical shortages of supply in our market but is also contributing to the cooling of prices. The listings surge will continuum for the short to medium term as new construction units and houses reach the market.

The third force has been the recent increase in interest rates announced on July 12th by the Bank of Canada, with another interest rate hike likely in October of this year. The hike will increase borrowing costs for businesses and consumers and will immediately make mortgages more expensive. The real, full impact of higher rates will be felt in the coming years as mortgages are renewed.

Individually, these forces would have had important but not necessarily market shifting impacts. But as they have been combined and implemented in quick succession, the market has balanced itself away from sellers in favour of buyers who for years, had been squeezed out of securing a home by relentless bids, low supply, and very high prices and price growth.

Realtors across the GTA and southern Ontario are reporting lower demand, falling prices, a marked reduction in open house attendance, fewer bidding wars, and fewer foreign buyers. Attractive houses can still be found selling for above listed prices and overall demand and market health remains robust. The new vibe is one of balance between sellers and buyers.