Housing Market Could Be Poised For A Spring Rebound

Latest News Michelle Cabral 7 Apr

Posted on March 15, 2023

HOUSING MARKET COULD BE POISED FOR A SPRING REBOUND

The Canadian Real Estate Association says home sales in February bounced 2.3% from the previous month. Homeowners and buyers were comforted by the guidance from the Bank of Canada that it would likely pause rate hikes for the first time in a year.

The Canadian aggregate benchmark home price dropped 1.1% in February, the smallest month-to-month decline of rapid interest rate increases in the past year. The unprecedented surge in the overnight policy rate,  from a mere 25 bps to 450 bps, has not only slowed housing–the most interest-sensitive of all spending–but has now destabilized global financial markets.

In the past week, three significant US regional financial institutions have failed, causing the Fed, the Federal Deposit Insurance Corporation and the Treasury to take dramatic action to assure customers that all money in both insured and uninsured deposits would be refunded and the Fed would provide a financial backstop to all financial institutions.

Stocks plunged on Monday as the flight to the safe haven of Treasuries and other government bonds drove shorter-term interest rates down by unprecedented amounts. With the US government’s reassurance that the failures would be ring-fenced, markets moderately reversed some of Monday’s movements.

But today, another bogeyman, Credit Suisse, rocked markets again, taking bank stocks and interest rates down even further. All it took was a few stern words from Credit Suisse Group AG’s biggest shareholder on Wednesday to spark a selloff that spread like wildfire across global markets.

Credit Suisse’s shares plummeted 24% in the biggest one-day selloff on record. Its bonds fell to levels that signal deep financial distress, with securities due in 2026 dropping 20 cents to 67.5 cents on the dollar in New York. That puts their yield over 20 percentage points above US Treasuries.

For global investors still, on edge after the rapid-fire collapse of three regional US banks, the growing Credit Suisse crisis provided a new reason to sell risky assets and pile into the safety of government bonds. This kind of volatility unearths all the investors’ and institutions’ missteps. Panic selling is never a good thing, and traders are scrambling to safety, which means government bond yields plunge, gold prices surge, and households typically freeze all discretionary spending and significant investments. This, alone, can trigger a recession, even when labour markets are exceptionally tight and job vacancies are unusually high.

Canadian bank stocks have been sideswiped despite their much tighter regulatory supervision. Fears of contagion and recession persist. Job #1 for the central banks is to calm markets, putting inflation fighting on the back burner until fears have ceased.

Larry Fink, CEO of Blackrock, reminded us yesterday that previous cycles of rapid interest rate tightening “led to spectacular financial flameouts” like the bankruptcy of Orange County, Calif., in 1994, he wrote, and the savings and loan crisis of the 1980s and ’90s. “We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the US regional banking sector (akin to the S.&L. crisis) with more seizures and shutdowns coming,” he said.

So it is against that backdrop that we discuss Canadian housing. The past year’s surge in borrowing costs triggered one of the record’s fastest declines in Canadian home prices. Sales were up in February, the markets tightened, and the month-over-month price decline slowed.

New Listings

The number of newly listed homes dropped 7.9% month-over-month in February, led by double-digit declines in several large markets, particularly in Ontario.

With new listings falling considerably and sales increasing in February, the sales-to-new listings ratio jumped to 58.4%, the tightest since last April. The long-term average for this measure is 55.1%.

There were 4.1 months of inventory on a national basis at the end of February 2023, down from 4.2 months at the end of January. It was the first time the measure had shown any sign of tightening since the fall of 2021. It’s also a whole month below its long-term average.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) was down 1.1% month-over-month in February 2023, only about half the decline recorded the month before and the smallest month-over-month drop since last March.

The Aggregate Composite MLS® HPI sits 15.8% below its peak in February 2022.

Looking across the country, prices are down from peak levels by more than they are nationally in most parts of Ontario and a few parts of British Columbia and down by less elsewhere. While prices have softened to some degree almost everywhere, Calgary, Regina, Saskatoon, and St. John’s stand out as markets where home prices are barely off their peaks. Prices began to stabilize last fall in the Maritimes. Some markets in Ontario seem to be doing the same now.

The table below shows the decline in MLS-HPI benchmark home prices in Canada and selected cities since prices peaked a year ago when the Bank of Canada began hiking interest rates. More details follow in the second table below. The most significant price dips are in the GTA, Ottawa, and the GVA, where the price gains were spectacular during the Covid-shutdown.

Despite these significant declines, prices remain roughly 28% above pre-pandemic levels.

Bottom Line
Last month I wrote, “The Bank of Canada has promised to pause rate hikes assuming inflation continues to abate. We will not see any action in March. But the road to 2% inflation will be a bumpy one. I see no likelihood of rate cuts this year, and we might see further rate increases. Markets are pricing in additional tightening moves by the Fed.

There is no guarantee that interest rates in Canada have peaked. We will be closely monitoring the labour market and consumer spending.”

Given the past week’s events, all bets are off regarding central bank policy until and unless market volatility abates and fears of a global financial crisis diminish dramatically. Although the overnight policy rates have not changed, market-driven interest rates have fallen precipitously, which implies the markets fear recession and uncontrolled mayhem. As I said earlier, job #1 for the Fed and other central banks now is to calm these fears. Until that happens, inflation-fighting is not even a close second. I hope it happens soon because what is happening now is not good for anyone.

Judging from experience, this could ultimately be a monumental buying opportunity for the stocks of all the well-managed financial institutions out there. But beware, markets are impossible to time, and being too early can be as painful as missing out.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

The Bank of Canada Holds Rates Steady Even As the Fed Promises to Push Higher

Latest News Michelle Cabral 11 Mar

As expected, the central bank held the overnight rate at 4.5%, ending, for now, the eight consecutive rate increases over the past year. The Bank is also continuing its policy of quantitative tightening. This is the first pause among major central banks.

Economic growth ground to a halt in the fourth quarter of 2022, lower than the Bank projected. “With consumption, government spending and net exports all increasing, the weaker-than-expected GDP was largely because of a sizeable slowdown in inventory investment.” The surge in interest rates has markedly slowed housing activity. “Restrictive monetary policy continues to weigh on household spending, and business investment has weakened alongside slowing domestic and foreign demand.”

In contrast, the labour market remains very tight. “Employment growth has been surprisingly strong, the unemployment rate remains near historic lows, and job vacancies are elevated.” Wages continue to grow at 4%-to-5%, while productivity has declined.

“Inflation eased to 5.9% in January, reflecting lower price increases for energy, durable goods and some services. Price increases for food and shelter remain high, causing continued hardship for Canadians.” With weak economic growth for the next few quarters, the Bank of Canada expects pressure in product and labour markets to ease. The central bank believes this should moderate wage growth and increase competitive pressures, making it more difficult for businesses to pass on higher costs to consumers.

In sum, the statement suggests the Bank of Canada sees the economy evolving as expected in its January forecasts. “Overall, the latest data remains in line with the Bank’s expectation that CPI inflation will come down to around 3% in the middle of this year,” policymakers said.

However, year-over-year measures of core inflation ticked down to about 5%, and 3-month measures are around 3½%. Both will need to come down further, as will short-term inflation expectations, to return inflation to the 2% target.

Today’s press release says, “Governing Council will continue to assess economic developments and the impact of past interest rate increases and is prepared to increase the policy rate further if needed to return inflation to the 2% target. The Bank remains resolute in its commitment to restoring price stability for Canadians.”
Most economists believe the Bank of Canada will hold the overnight rate at 4.5% for the remainder of this year and begin cutting interest rates in 2024. A few even think that rate cuts will begin late this year.

In Congressional testimony yesterday and today, Federal Reserve Chair Jerome Powell said that the Fed might need to hike interest rates to higher levels and leave them there longer than the market expects. Today’s news of the Bank of Canada pause triggered a further dip in the Canadian dollar (see charts below).

Fed officials next meet on March 21-22, when they will update quarterly economic forecasts. In December, they saw rates peaking around 5.1% this year. Investors upped their bets that the Fed could raise interest rates by 50 basis points when it gathers later this month instead of continuing the quarter-point pace from the previous meeting. They also saw the Fed taking rates higher, projecting that the Fed’s policy benchmark will peak at around 5.6% this year.
Bottom Line

The widening divergence between the Bank of Canada and the Fed will trigger further declines in the Canadian dollar. This, in and of itself, raises the Canadian prices of commodities and imports from the US. This ups the ante for the Bank of Canada.

The Bank is scheduled to make its next announcement on the policy rate on April 12, just days before OSFI announces its next move to tighten mortgage-related regulations on federally supervised financial institutions.

To be sure, the Canadian economy is more interest-rate sensitive than the US.  Nevertheless, as Powell said, “Inflation is coming down, but it’s very high. Some part of the high inflation that we are experiencing is very likely related to a very tight labour market.”

If that is true for the US, it is likely true for Canada. I do not expect any rate cuts in Canada this year, and the jury is still out on whether the peak policy rate this cycle will be 4.5%.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Reverse mortgages are booming amid Canada’s turbulent rate environment

General Michelle Cabral 30 Jan

 

High rates haven’t stopped Canadians from tapping their home equity by way of reverse mortgages.

HomeEquity Bank, the country’s largest reverse mortgage provider through its CHIP product, says demand was up 30% in 2022 compared to the previous year. It saw total reverse mortgage originations top $1 billion for the second year in a row, adding that a “key strength” of its strategy has been its broker distribution network.

Reverse mortgages allow senior homeowners 55 and older to extract the equity they’ve built up in their home, either by way of tax-free lump-sum or monthly payments.

HomeEquity Bank says Canadians are looking at their homes as a way to pay for retirement without the need to sell.

“Canadians have traditionally focused on the dollar value of their home, but now I believe people are starting to see the value their home provides as they look to manage their finances in retirement,” Steven Ranson, President and CEO of HomeEquity Bank, said in a statement.

Equitable Bank, the country’s other mainstream provider of reverse mortgages through its Flex product suite, is also seeing a surge in demand, confirms Jackie Uy Ham Lee, Vice President of Growth Businesses and Personal Banking Lending.

“Our best estimate is 25% to 30% growth in the market year-over-year,” she told CMT. “There is really substantial interest in the product, and uptake of the product, and we hope that will continue.”

Unlike a traditional mortgage, a reverse mortgage allows senior homeowners to borrow money against the value of their home. They are structured so that seniors can never owe more than their home is worth, and the debt is typically repaid once the house is sold or the homeowner passes away.

This type of mortgage isn’t an option for anyone who doesn’t already have significant equity already since they’re typically limited to a maximum of 55% of the home’s value. But for homeowners who do, a reverse mortgage can bridge the gap between fixed income benefits like the Canada Pension Plan or Old Age Security and the rising cost of living.

“That gap is meaningful,” Uy Ham Lee says. “They’re going to have to figure out how to close that gap, which may include downsizing their home, looking for alternative financial solutions, or changing their lifestyle. So, the reverse mortgage product is a great one for seniors, and we think that is part of what’s driving its popularity.”

Lingering concerns about reverse mortgages

But reverse mortgages aren’t necessarily for everyone, especially with average reverse mortgage interest rates averaging between 7% and 9% currently. In the absence of home price appreciation, that can quickly deplete a portion of equity in the property.

Uy Ham Lee says some still remain wary of reverse mortgages, but notes Canadian reverse mortgage borrowers enjoy many more protections compared to south of the border.

One of those protections is the negative equity guarantee, a rule that means a borrower will never owe more than the value of their home when it was assessed. This is standard for Canadian reverse mortgages. Another difference, Uy Ham Lee says, is that Canadian loan-to-value ratios tend to be lower than American ones, which better preserves equity.

“I think that the Canadian product is unique and has these customer protections built in,” Uy Ham Lee says. “When potential borrowers learn more about the nuances of the Canadian product, they start to understand that it is different than in the U.S. and is a really viable solution that they should know more about.”

It is also worth noting that interest rates on reverse mortgages are higher than traditional mortgages by about 1.5 to 2 percentage points. However, payments are never required until the homeowner moves or passes away. The borrower simply has to keep paying their property taxes and maintain the property.

“A lot of room for growth”

While reverse mortgages aren’t for everyone, they can be a crucial financial solution for many seniors who are increasingly turning to them.

Ben McCabe, founder and CEO of Bloom Financial, a Toronto-based reverse mortgage provider that launched in 2021, says these products are less rate-sensitive than their traditional counterparts.

They also cater specifically to seniors, the fastest-growing population demographic in Canada at the moment, and one that is placing a high degree of importance on the ability to age in place.

According to a study conducted last year by HomeEquity Bank, 9 in 10 Canadians said they want to be able to live out their retirement years in the comfort of their home.

“I think there’s a lot of room for growth,” McCabe says of the reverse mortgage market, “as more and more Canadians realize this is a potential solution for them.”

BoC’s Macklem: More interest rate hikes are “warranted”

Latest News Michelle Cabral 17 Oct

 

Having already raised interest rates by 300 basis points this year, the Bank of Canada’s Tiff Macklem confirmed on Thursday that additional rate hikes (plural form) are “warranted.”

In a prepared speech delivered at the Halifax Chamber of Commerce, Macklem said the Bank has yet to see clear evidence that underlying—or “core”—inflation is coming down.

“When combined with still-elevated near-term inflation expectations, the clear implication is that further interest rate increases are warranted,” he said. “Simply put, there is more to be done.”

Additionally, he said labour conditions remain “very tight,” wage growth is rising, and the economy remains in excess demand. “We will need additional information before we consider moving to a more finely balanced decision-by-decision approach,” he said.

Observers took the comments as hawkish and a signal that the Bank isn’t likely to pivot to a more dovish stance at its upcoming rate meeting on October 26 as some had expected.

“There had been a narrative offered in the market that October’s hike would be one more and done with a coming dovish pivot,” wrote Scotiabank economist Derek Holt. “That narrative got flushed today.”

“With less than three weeks to go before the next decision on October 26…the Governor is clearly not thinking that the October communications will involve a dovish pivot versus a largely preset path to keep hiking thereafter,” he added.

 

A terminal rate of at least 4% is growing more likely

With the benchmark lending rate currently at 3.25%, there are growing expectations that the Bank of Canada’s terminal rate for this tightening cycle will be 4%, if not higher.

“If the BoC hikes 50+ [bps] this month and is signalling the plural form of rate hikes still lies ahead, then markets are probably correct in pricing a terminal rate over 4%,” Holt wrote.

Bond markets are currently pricing in equal odds of a 25-bps or 50-bps rate hike later this month, but Macklem’s comments could start to tip the scale towards the latter.

“The hawkish nature of this speech affirms our expectations that another large move (i.e., greater than 25 bps) on October 26 looks to be in the offing,” noted economists from National Bank of Canada. “The tone here would presumably be consistent with continued tightening in December, where we see the policy rate at no less than 4%.”

Earlier this week, the Organisation for Economic Co-operation and Development (OECD) released its latest economic outlook, where it forecasts the Bank of Canada’s benchmark rate to reach 4.5% in 2023.

“Further policy rate increases are needed in most major advanced economies to ensure that forward-looking measures of real interest rates become positive and inflation pressures are reduced durably,” the report reads. “This is likely to involve a period of below-trend growth to help lower resource pressures.”

 

Steve Huebl
Steve Huebl is a graduate of Ryerson University’s School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.