On Wednesday of this week the Bank of Canada increased their overnight rate by 100 basis points, which took many by a bit of a surprise as most economists were expecting an increase of 75 bps. This brings the central bank’s policy rate to 2.5%.I am not an economist and nor are most people posting on social media either, however everyone likes to pretend! I will give you my perspective based on what we know.The consumer price index (inflation) is at a 40 year high of 7.7%. This remains a great concern to the Bank of Canada, and quite honestly to each of us as we go to the grocery store or pull up at the pumps. The target rate for inflation is 2%. The Governor of the Bank of Canada has made it very clear that they will continue to use monetary policy through adjusting the overnight rate to help control and reduce inflation. No surprise to any of us, this quantitative tightening began in March with the first-rate increase and will most likely continue to gradually reduce the Bank of Canada’s balance sheet and put upward pressure on bond yields and therefore driving up mortgage rates. This latest change in the overnight rate will bring prime rates to 4.70%; and we know the Governor would like to see prime to be between 4.75%-5.25%. Based on the economists that we have heard from, they believe that we will see the overnight rate increase to around 3.25% by the end of 2022. However, with that comes the risk of a recession or in other words an economic decline by the GDP over two successive quarters. The Bank of Canada will need to continue to monitor to be careful to avoid putting the economy into a recession, something that CMHC is predicting will happen by the end of 2022.Inflation is driven by the imbalance between supply and demand as we know, most of this because of us coming out of the pandemic however then you add on top of this the Russia-Ukraine war that continues having an impact on food and gas prices.As a result of key overnight rate increases, we have seen a price softening in house prices across Canada, however we can all agree that house prices were skyrocketing overnight throughout the pandemic and as we were coming out of it. The supply issue continues to be one of the largest issues we face in Canada as it relates to the housing market. So, with low rates, the demand for those houses is even greater driving and up the price. In the chart below from CREA we continue to see the average prices for homes in Canada increasing based on historical data. We may have seen house prices drop 10-13% over the last couple of months, however in most cities we still experienced a price appreciation YOY.
With the increase in rates, it has slowed the housing market and has moved the sales to listing ratio closer to a balanced market which is not a bad thing. At a recent housing outlook conference I attended, one economist said to get housing supply issue in Canada to a point where the other G7 countries are, we would need to build 1.8 million units over night, and over the next ten years that issue translates to 3.5 million. The federal government continues to have very aggressive immigration targets, also putting increased demand for housing, whether it be single family or rental units. Therefore, supply will continue to be an issue for us in Canada, which translates into continued price appreciation, maybe just not at the pace we saw in the last few months.So is now a good time to buy? It’s always a good time to buy – the housing market can be a great long term investment for many Canadians. Has it gotten more expensive? Yes, but it continues to be a great investment because of the appreciation in value that they can expect to see.Some people have said “oh, I have lost $150,000 on the value of my home”; the reality is, you only lost $150,000 if you sold your home today compared to a few months ago and walked away with the money in your jeans. However, you have to live somewhere, so if you are turning around and purchasing another home it is likely that home has also dropped in value as well. Providing you are buying and selling in the same market conditions it helps to balance out that drop in “perceived value”.I have been asked the question over the last few days, “what should we be saying to our clients?”. I have been very impressed to see so many social media posts to your client base, inviting them to contact you should they have any questions, and I know many of you are proactively reaching out to your clients as well. You are absolutely doing the right thing. As a mortgage professional you can help reassure and address the credit needs of your clients, so I encourage you to continue to do what you are doing. Similar to when the pandemic started, we found the best thing to do was to reach out to our clients, now is another opportunity to do so. As a client, I know I would appreciate the call from my credit and investment professional.In closing, I know we are in turbulent times, and possibly it will get a little worse before it gets better however in times like this, the need for a mortgage professional is that much greater. Continue to seize the opportunity.Best regards,W. Mark SquirePresident & Chief Operating Officer
