Weekly Digest

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August 23rd, 2023

Inflation Rebounds in July

Inflation was projected to rebound thanks largely to base effects for comparisons. The inflation numbers ticked back up to 3.30% (above the 3.20% projection). Surging oil prices have not helped the BoC’s uphill climb to the 2% inflation target.

As more time passes, more mortgages will continue to renew at higher rates, and any excess savings will be exhausted. This should weaken demand going into the latter half of the year. Major companies such as Canadian Tire are already reporting decreased sales from discretionary spending.

The biggest CPI booster (again) was mortgage interest costs. They soared a record 31% thanks to continued rate increases and mortgage renewals. CPI is running just 2.3% year over year without mortgage interest, food and energy.

What Happens Next With Rates?

Were looking at three possible scenarios;

• Rates continue to run high, despite expectations and economic reports.
• Black swan event causes central banks in the US/Canada to slash rates. Historically, this is how many rate hike cycles end.
• Rates hold (or increase moderately) and flatline in 6-18 months time. This is the most likely scenario that markets are pricing in.

Records Lows for Variable Term Originations

95% of all mortgages arranged in June were fixed rate terms, according to a recent National Bank report. This number 18-24 months ago was leaning heavy towards to variable terms at 57% and 43% fixed. Why is this occurring?

1. Variable rates are sitting about 0.6%-0.80% higher than fixed rate terms

2. While waiting for eventual rate cuts in 2024, short term fixed rates come out ahead when looking to implied future rates

3. There is still uncertainty if the Bank of Canada is done cutting rates

4. Variable rates penalties (3 months of interest) have increased substantially due to high interest costs

5. It is harder to qualify for a variable rate mortgage at this time (as the rate is higher) and therefore, stress testing is higher

6. Trigger rates (and negative amortizations) have dominated the headlines lately at major banks such as TD and RBC

Residential Real Estate Lenders

In most of the country, sales fell, listings increased, inventory increased, and the sales-to-listings ratio dropped. The national average price has dropped 5.7% month over month. There have been only five drops more significant than that since 1980. It’s a sign that the Bank of Canada is still the dominating force in Canada’s real estate.

Multiple mortgage finance companies have reported roughly 50% year-over-year drop offs in mortgage volume. Average mortgage duration is also down as borrowers shift to shorter terms, thus pressuring loan margins.

Below is the drop off to Bank of Nova Scotia’s and TD Bank’s volumes. TD has taken a large share of the broker channel market this year, as Scotiabank was not competitive.

Current Interest Rates

CONVENTIONAL

• 5 year fixed, 30 yr amortization – 6.04%

• 3 year fixed, 30 yr amortization – 6.39%

• 5 year variable, 30 yr amortization – Prime – 0.40% = 6.80%

• 5 year fixed, 25 yr amortization – 5.94%

• 3 year fixed, 25 yr amortization – 6.29%

• 5 year variable, 25 yr amortization – Prime – 0.50% = 6.70%

INSURED

• 5 year fixed, 25 yr amortization – 5.64%

• 4 year fixed, 25 yr amortization – 5.74%

• 3 year fixed, 25 yr amortization – 6.19%

• 5 year variable, 25 yr amortization – Prime – .90% = 6.30%

Fast Facts

• 30% – That’s how much cocoa prices have jumped in the past 12 months, hitting a 46-year high as key producers Ivory Coast and Ghana face adverse weather conditions.

• $25,000 – That’s the reward offered to anyone who finds at least a kilogram of a meteorite that fell near the Maine-Canada border this year.

• 3,500,000 – That’s the number of people who lost their “dollar millionaire” status globally last year as high inflation and currency declines against the U.S. dollar dented people’s net worth.