Weekly Digest — May 29th, 2023

Rates Surge

Here we go again. Lenders are dealing with a dramatic increase in their funding costs. This has spiked mortgage rates on all fixed rate terms.

Yields are increasing due to various factors including;

• Fear of further central bank tightening due to inflation report (more on that below)

• The impending June 1st “Debt Limit” discussions in the US.

• An investor sell off of short term T-bills which is driving up the 4 year swap rate

Rates in the “4%’s” are all but gone, and we have lost all deep discounts on short term fixed rates.

Inflation Rises in April

The inflation numbers jumped in April to 4.40%. This was mainly driven by a 6.30% increase in fuel/gasoline costs along with mortgage interest costs. The markets were predicting a small increase, (closer to 0.1% – 0.3%) instead of the 0.70% that occurred. Mortgage interest costs are up a staggering 28% year over year as more home owners continue to renew their mortgage terms in 2023. Rental inflation is also up 6%.

The chances of an additional rate hike jumped, but still under 50% (depending on who you ask). We know the path to the 2% target would not be easy, and this further affirms that it is also not a straight line down.

As real estate demand continues to surge, we will see an upward trend to the inflation numbers. Higher rates, more mortgage demand and more real estate transactions will lead to higher mortgage interest costs; therefore, will stall the inflation target.  

Scotiabank economist Derek Holt does a great analysis in his recent article here;

“There is a highly compelling case for returning with a hike at the June meeting and if not then July’s odds go up. I would assign high market probability to a June hike with info to this point.”

On the contrary, a recent economic update from RBC stated; “The BoC is expected to stay on the sideline for the remainder of the year.”

Inflation history is listed below.

Home Price Index

CREA data is at odds with the Bank of Canada. The most recent data points do not seam to reflect a 400 basis point hike to the Prime Rate that has occurred over the last 12 months.

• Home sales are up almost 12%

• National average price is up over 4%

• Supply is at a 20 year low

• Months of inventory continues to decline in Ontario and we are currently under 2

• Toronto Median Prices are up 13%

Higher mortgages rates are no match for inventory shortages and the general sentiment from many buyers is that the bottom has come and gone. With population growth continuing to surge, home buyers have grown accustomed to higher rates. The general sentiment for our clients is, “we need a house”.

Will this continue with the lack of rate discounts from lenders?

Current Interest Rates

CONVENTIONAL

• 5 year fixed, 30 yr amortization – 5.04%

• 3 year fixed, 30 yr amortization – 5.14%

• 5 year variable, 30 yr amortization – Prime – 0.60% = 6.10%

• 5 year fixed, 25 yr amortization – 4.99%

• 3 year fixed, 25 yr amortization – 5.09%

• 5 year variable, 25 yr amortization – Prime – 0.70% = 6.00%

INSURED

• 5 year fixed, 25 yr amortization – 4.94%

• 4 year fixed, 25 yr amortization – 5.04%

• 3 year fixed, 25 yr amortization – 5.14%

• 5 year variable, 25 yr amortization – Prime – .90% = 5.80%

Fast Facts

• 6 – That’s how many Empire State buildings could fit into New York City’s current empty office space. While the advent of remote work has left many office landlords struggling