Bank of Canada Sets Stage for July Rate Increase

STEVE HUEBLMAY 30, 2018
The Bank of Canada once again left interest rates unchanged today but dropped clues suggesting a strong chance of a hike at its next meeting in July.

In today’s announcement, the Bank of Canada noted that inflation has been close to its two per cent target and will likely be higher than forecast in the near term. It also referenced recent data points that show upside to the U.S. economic outlook, weighed by ongoing uncertainty about NAFTA negotiations and stresses in some emerging markets.

“Overall, developments since April further reinforce the governing council’s view that higher interest rates will be warranted to keep inflation near target,” the bank noted in its release. “Governing council will take a gradual approach to policy adjustments, guided by incoming data.”

Observers noted the tone of the BoC’s statement was more hawkish than previous announcements, including its omission of the line “some monetary policy accommodation will still be needed to keep inflation on target” and the word “cautious” in reference to future policy announcements. It also introduced the term “gradual” to describe the approach to policy adjustments.

“The statement was much more hawkish than the market anticipated, especially after the early week global financial market gyrations,” wrote BMO economist Benjamin Reitzes in a research note. “This is a clear warning shot that a July rate hike is a solid possibility.”

The market consensus is that two more hikes are still on the way this year, with BMO predicting those to come in July and October.

“While we may need a grammarian to distinguish between ‘cautious’ and ‘gradual,’ the message was nevertheless clear: get ready for another rate hike,” wrote TD bank senior economist Brian DePratto. “Gone are concerns about potential slack. This reinforces our view that as the economy continues to perform well into the middle of the year, the bank will have the confidence it needs to raise its policy interest rate at its next scheduled decision, this July.”

The rate hold through to at least July is at least a temporary reprieve for existing adjustable-rate mortgage holders who have already seen their monthly payments increase by about $35 per $100,000 of mortgage since the BoC started raising rates last July.

For new homebuyers, however, variable rates are still available at a discount (prime – 1.00%) as part of the big banks’ variable rate war that began earlier this month. However most of those offers, at least officially, will be ending by this Friday and June 4.

Despite steadily rising fixed mortgage rates over the past year, and recent increases to the big banks’ posted rates earlier this month, there are hopeful signs for fixed-rate shoppers that rates are about to pull back a little bit.

On Tuesday the market saw a sharp drop in 5-year fixed bond yields, which fell nearly 30 bps from their 7-year high reached two weeks ago. Since bond yields lead fixed mortgage rates, mortgage hunters are seeing fixed rates dropping slightly this week.

But as mortgage planner David Larock noted in his blog post this week, “To borrow a famous quote about stock prices, fixed mortgage rates tend to take the elevator when they go up and the stairs when they go down.”

The Latest in Mortgage News – House Prices Under the Microscope

STEVE HUEBLMAY 25, 2018
For homebuyers and homeowners alike, all eyes have been on the housing market in recent months waiting to see where house prices are eventually headed.

With house prices already cooling on average across the country, particularly in and around the Greater Toronto Area, some are speculating that the chill in the market could continue well into the second half of the year.

Signs of a Prolonged Housing Slump?
The Canadian Real Estate Association reported that
the average sale price in April declined by 11.3 per cent from its peak a year earlier to $495,000, while home sales were 13.9 per cent.

BMO Chief Economist Doug Porter noted that sales are now down 21.7 per cent in adjusted terms from the record high in December, just before the new mortgage stress test came into effect.

The lower home sales have resulted in a drop in listings, a sign that sellers are waiting for prices to pick up again before selling, according to Porter.

“Notably, the sag in April sales was accompanied by an even bigger pullback in new listings, in a sign that potential sellers are unimpressed with the prices on offer,” he wrote in a recent note.

Meanwhile, during its second-quarter earnings reporting, CIBC says it expects a drop in mortgage originations in the second half of the year due to the mortgage stress test that came into effect January 1.

“We expect there to be an origination decline in the 50 per cent range relative to the same period last year,” Canadian retail banking head Christina Kramer said in a statement.

Average Cost of Government Housing Policy is $113k, Report Says
“Restrictive” government housing policies have driven housing costs up an average of $113,000 across Canada.

That’s according to a recent C.D. Howe Institute report entitled “Through the Roof: The High Cost of Barriers to Building New Housing in Canadian Municipalities.”

The report says barriers to building more single-family housing supply have resulted in homebuyers paying an extra $229,000 per house between 2007 and 2016 in the eight most restrictive cities in Canada. That premium is about $113,000 for a house in the GTA, $113,000 on average across Canada, and a whopping $600,000 for the average house in Vancouver.

“Recent policies—such as taxes on foreign buyers or new federal mortgage rules—have focused on curtailing the demand for housing, instead of taking meaningful steps to increase the supply,” writes co-author Benjamin Dachis, adding that policies such as zoning rules, restrictions on developing agricultural land, and development charges directly influence both new and existing housing prices.

“A well-functioning housing market results in the market price of housing being close to the feasible cost of constructing it,” the report says.

Home Capital secures cheaper credit line from two Canadian banks
In other news, Home Capital announced last week that it had replaced its $2-billion emergency funding facility from Berkshire Hathaway Inc. with a $500-million standby line of credit from two unnamed Canadian banks.

The alternative mortgage lender confirmed the commitment to its subsidiary Home Trust for the two-year secured line of credit.

The terms of the deal stipulate that Home Capital will pay a 0.75-per-cent up-front commitment fee, a 0.6-per-cent annual standby charge on any unused funds and an interest rate on drawn funds equal to the Canadian benchmark rate plus 150 basis points.

Under the previous deal with Warren Buffet’s Berkshire Hathaway, which matures in June, Home Capital is paying Berkshire a 1-per-cent standby fee on the $2-billion credit line and would pay 9-per-cent interest were it to draw funds.

Home Capital CEO Yousry Bissada told shareholders that Home maintains a “very good relationship” with Berkshire. In an interview with the Globe and Mail he added that “Berkshire’s view was [the credit facility] is not their sweet spot, this is not an area of expertise for them.”