Better Balance
Better Balance
Happy Monday Morning!
Bank of Canada Governor, Tiff Macklem, delivered some final comments this week at a keynote speech in BC. He didn’t mince words following the fastest rate hiking cycle in recent history.
“There’s no question that if you bought a house near the peak, you took a variable rate mortgage with a high loan to income ratio you’re really feeling the squeeze of higher interest rates.”
No doubt. Here’s our real life example to refresh your memory.
1. $500,000 mortgage, 25 year amortization, 1.5% mortgage rate = $2000/month
$500,0000 mortgage, 25 year amortization, 5.5% mortgage rate = $3052/ month
2. $1,000,000 mortgage, 25 year amortization, 1.5% mortgage rate = $3997/ month
$1,000,0000 mortgage, 25 year amortization, 5.5% mortgage rate = $6104/ month
“Look, the housing market was unsustainably hot for the last couple of years, part of getting the economy into better balance is getting the housing market in better balance.” Macklem concluded.
Have no fear, the housing market is definitely in better balance, at least if you’re a buyer. National housing figures released last week paint a rather drastic turn of events in the nations housing market. Home sales fell 39% year-over-year in November. The 30,135 sales reported across the entire MLS system are the lowest for the month of November in over a decade. You’d have to go all the way back to November 2008 during the depths of the financial crisis for lower sales volumes.
It’s no wonder the Bank of Canada is finally talking about a pause, having shifted to a wait and see approach on future rate hikes. Regardless, even a pause does not prevent further downwards pressure on housing.
The MLS home price index dropped another 1.4% month over month in November, bringing the total decline to 16.4% since peaking in March. This is the sharpest correction since the index was created in 2005.
What’s even more interesting is that this 16% drawdown has happened at a time when new listings remain low. With the one exception of 2019, November 2022 saw the fewest new listings in 17 years!! There is still only 4.2 months of inventory on a national basis, we are only now back to pre-pandemic levels.
This is undoubtedly supporting further price declines in the market, at least for now. The next test comes in the spring when, seasonally, new listings increase.
It’s worth noting that while national house prices are down 16% from the peak, and 4% on a year-over-year basis, the declines vary by city.
Calgary +9.7%
Montreal +1.1%
Vancouver -0.5%
Ottawa -0.7%
Toronto -5.3%
In other news, OSFI confirmed what we suspected last week. At their annual December 15 meeting, the banking regulator confirmed the mortgage stress test is here to stay, at least until they can conduct a further review of mortgage underwriting standards.
In January, OSFI says it will launch a consultation to review its B-20 mortgage underwriting guidelines. This could “take months, not weeks,” it said on a media call.
“This review will include the MQR (minimum qualifying rate), which forms part of B-20, but will also progressively include other mortgage underwriting standards,” the regulator noted. “We expect to leave the MQR at its current rate pending the outcome of the review, although the economic environment could result in a more immediate change.”
The economic environment they’re referring to is a continued deterioration in the housing market, which the bond market is certainly signalling with the 100bps yield curve inversion.
The Canada 5 year bond yield, which has historically tracked the 5 year fixed rate mortgage continues to fall, now hovering around 2.9%. This brings us back to levels last seen in early May when the 5 year fixed mortgage was hovering in the low 4’s. Perhaps a sign of things to come. We shall see.
Lots more to discuss in the New Year. This will be the last edition of the year, see you all in 2022. Happy Holidays!
"This will be the last edition of the year, see you all in 2022."
You might want to start practicing typing "2023"!
BTW, I followed your work before substack... Have a good holiday!
I'm glad to see you focus on homeowner carrying costs, in assessing "affordability" (and therefore demand for homes) We know the price sensitivity at different prices depends on carrying costs.
Mortgage rates are just a convenient (and incomplete) proxy measure of carrying costs.
The bubble was the purposeful creation of the Bank of Canada and other Central Banks and surely encouraged by the Federal Govt. policy of prosperity by stimulating demand by increasing the number of consumers (ignoring supply like the poor economic thinkers they are).
Now that the Bank of Canada will try to keep rates at what is still at historically low/medium, with the FED and ECB continuing to raise, the Loonie is bound to continue to decline, increasing non-mortgage home carrying costs, even higher. Of course this is helped along by a Govt. that value signals by raising the price of energy, giving a pervasive boost to inflation. Even offsetting higher taxes with helicopter money just increases demand and prices. Good economic policy is never allowed to intrude on repeated opportunities to redistribute money gained by borrowing from the future.
Starting and maintaining a household and filling a new home with furniture, in Canada, these days requires loads of cash or a healthy income to pay outrageous credit card bills. The C$ has declined by almost 10% this year, increasing prices in Canada. But that is just the most visible; Canadian prices have led to increased the HST being paid, on prices that were marked up due to higher transportation costs (partly caused by Govt. policy) and more the opportunity to raise prices to generate more profit and being able to blame it on "costs".
There is no free lunch when the Bank of Canada, wearing its clown shoes, stomps around trying to manipulate the economy. Intervention has multiple negative consequences that tempt the Govt. to intervene and distort things even more.
Is this any way to run a circus?
Bottom line is that it is not just high mortgage service costs that makes it difficult for families to own homes. It is the generally high (and getting higher) prices (compared to the US and elsewhere) that reduce family disposable income.