25 Nov

Residential Market Commentary – Inflation increase not likely to bother BoC

General

Posted by: Frank Fik

The October inflation report caused a minor commotion but it does not appear to have upset things enough to see the Bank of Canada change course.

Statistics Canada reports headline inflation, also known as the Consumer Price Index, rose to 2.0%, on a year-over-year basis, up from 1.6% in September.  An increase was expected, but the October bump was bigger than forecast.  Still, inflation remains in the central bank’s sweet spot.

It is now widely expected that the Bank of Canada’s next interest rate setting, in December, will see a quarter point cut, rather than another half point reduction.

Even with less aggressive action by the BoC there is evidence that the rate cuts are working.

Two key drivers of inflation – mortgage interest costs and rent inflation – were down in October and in September, retail sales rose for the fourth straight month, increasing by 0.4% over August.  Statistics Canada’s flash forecast for October is predicting a 0.7% increase.  That would boost third-quarter retail sales by nearly a full percentage point, reversing a significant contraction in the first half of this year.

A further spending increase can be expected if the prime minister’s proposed “GST Holiday” and $250-per-worker stimulus plan is implemented.  Some market watchers are concerned the scheme could be inflationary.  They say that could keep the BoC on a slower, rate cutting schedule.

Published by First National Financial LP

12 Nov

Residential Market Commentary – Trump and Canada’s economy

General

Posted by: Frank Fik

The re-election of Donald Trump as president of the United States will have economic and social repercussions in Canada.

There was an, almost, immediate reaction to the re-election in the bond market which drives fixed-rate mortgage pricing.  Yields jumped triggering rate increases by some lenders.

In the days after the election, the yield on 10-year U.S. treasury bills rose 14 basis-points to more than 4.4%.  Five-year Government of Canada bond yields climbed to 3.11%.  Some lenders responded with fixed-rate increases of 5 to 10 basis-points.

The high level of integration between Canada and America usually means a strong economy there is good here.  But there can be a downside.  A pro-growth agenda that includes more tax cuts and government spending would likely increase the U.S. national debt.  In turn the government would issue more bonds, which would depress bond prices and raise yields, putting upward pressure on fixed-rate mortgage costs in the U.S. and here.

One of the president-elect’s biggest campaign promises is seen as highly inflationary: a 10% tariff on virtually everything entering the U.S.  Earlier this year 16 Nobel Prize-winning economists signed a letter saying Trump’s proposals would “reignite” inflation, potentially pushing it back above 9.0%.  That would end rate cuts by the U.S. Federal Reserve and likely the Bank of Canada as well.

Threats of mass deportations, made by the incoming U.S. president, have triggered concerns about a surge in asylum seekers coming to Canada as this country struggles to adjust to higher immigration and population growth.

Published by First National Financial LP

4 Nov

Residential Market Commentary – How low will rates go?

General

Posted by: Frank Fik

The Bank of Canada’s larger-than-normal interest rate cut last month has a lot of market watchers looking for more of the same.  Most of the well-known economists are forecasting another 50 basis point cut at the setting in December.

That would drop the central bank’s trend setting Policy Rate to 3.25%, which many analysts see as the high end of the so-called neutral range for the rate.

Neutral rates are deemed to neither discourage nor encourage economic growth.  Right now, that range is commonly considered to run between 2.25% and 3.25%.

There are, however, some analysts who see the BoC dropping its Policy Rate to 2.0%, or less, by the middle of next year.  They see some lingering, troubling signals coming from the economy:

  • Lower than forecast growth in Gross Domestic Product, both this is year and next year
  • Higher than forecast unemployment
  • A continuing decline in inflation that falls below the BoC’s target range of 1.0% to 3.0%
  • On-going “excess supply” in the economy, which indicates more is being produced than consumed. That condition is expected to persist into 2026.

Analysts in the real estate market, especially commercial real estate, say there will need to be another 75 to 175 basis points in rate cuts to get construction and development going again.  That would drop the Bank rate to as low as 1.5%.

Published by First National Financial LP