This week we want to expand on the recent Bank of Canada decision to hold its key overnight rate unchanged at 1.25%. Last Friday the Consumer Price Index (a measure of economic inflation) missed expectations by 0.10%. This means the Canadian economy isn’t growing as quickly as analysts expected it would. The announcement of lower than expected CPI has reduced the odds of a rate increase by the Bank of Canada on May 30th to 38.90%. There was a 50 / 50 chance of a rate hike previously.
Increased likelihood of inflation for Canadians
On a related note, the Bank of Canada Governor Poloz spoke in Whitehorse this week and released updated debt figures. Our debt has reached $1.5 Trillion in Mortgages and $500 Billion of consumer debt. The sheer size of our outstanding debt and its associated risks will endure for a while. Mr. Poloz went on to describe how he and the BoC are caught between a rock and a hard place. Inflation is returning to the Canadian economy through the increased cost of goods and wage pressure created by low unemployment figures.
This means the BoC will eventually need to raise short term interest rates which will be painful given the large burden of debt and may create the recession the bank is trying to avoid. If the bank doesn’t raise interest rates, it risks the likelihood of inflation and increased debt which it equally needs to avoid. On a positive note, Mr. Poloz is confident the Canadian economy can positively navigate these challenges. This is why he and others are taking a data driven approach and are being cautious before announcing any increase in the overnight rate.
With global economic expansion continuing albeit at a slower pace, bond yields have continued to rise. The US economy continues to grow and with the most recent announcement of full employment (4.1%). Their economy is continuing to push bond yields higher. Canada has been caught in the drag of higher US Bond yields with TD Bank, RBC, and CIBC increasing their 5 year posted rates last week. Its likely that BMO and Scotia will follow suit. With increases to the 5 year posted rates, the Bank of Canada Benchmark qualifying rate will increase.
This is where we see monetary policy doing some of the work for the BOC. Higher bond yields have raised interest rates by 3/4% since last summer slowing the Canadian housing sector. With the Benchmark Qualifying rate set to increase soon, more potential home buyers will be sidelined by to the higher qualifying rate.
Qualifying for a mortgage is more difficult and rents are still increasing in Vancouver
Looking at the Greater Vancouver Real Estate Board’s April stats, we see a return to a balanced market. Listings are increasing and sales-to-active listing ratios are decreasing. It’s no surprise that condos and townhouses continue to dominate the sales activity with upward price pressure noted. Similar to the Bank of Canada, potential buyers face their own ‘between rock and a hard place’ challenges. Renting is no bargain with record low vacancy and rising rents. And, monetary policy has made qualifying significantly harder as the government grapples with record levels of debt and tries to create stability for the long term.
Is now a good time to buy a home?
With slower sales, we’re being asked more often if its a good time to buy.
The answer depends on the specifics of each buyer. On a macro level demand for housing in Greater Vancouver remains strong. A healthy economy, continued population growth, and favourable interest rates make buying for those who qualify an excellent option in comparison to renting.
With the return of inflation we expect prices in the well-traded strata and single-family segment at $1.5M and below to continue holding value and increase over time due to strong demand. The softer high-end single family and luxury strata segment are seeing slightly lower prices. As such, we see a good opportunity for move-up buyers trading on their equity.
We also see opportunity in the underserved rental market. Rental mortgage qualifications are very tough and governments have intervened with vacancy and speculation taxes. Unfortunately, these measures will take years to convert to new rental units to meet demand. For well-qualified investors there’s an opportunity to acquire a conservatively financed rental unit to help meet strong demand.
Curious about opportunities or have questions about your own mortgage? You can contact Team RRP below