Chad Moore Calgary Mortgage Broker

Hey Guys!

I wanted to summarize a couple of helpful bits of information related to interest rates that ultimately influence Calgary Real Estate …

1. U.S. and Canadian inflation data surprised the market.
2. Change in bond yields that swung fixed interest rates higher.
3. Anecdotal market trends I’m seeing. 

Inflation Data:  Reading jobs report tea leaves

When reading below, keep in mind the Bank of Canada’s mandate is an inflation target of 2%, with a somewhat acceptable range of 1-3%.  

The Consumer Price Index (CPI), which is Statistics Canada’s measure of price change in a “basket of goods” (I.E., inflation) decreased from 6.3% to 5.9% year-over-year in January.  

Inflation is trending lower!

I’m reading some economists dive deeper into this basket of goods and cite, “if this part of the price basket is removed, then inflation would be XX%“.  

Other economists are citing “the most recent 3-months inflation data annualized is much lower—somewhere in the 3.5% range“.  

What I want you to “hear” is that the general trend of inflation is moving lower in Canada.  But does this mean rate cuts later this year?  That seems like less of a possibility …

Why?

But Inflation Might Remain Sticky …

Employment, employment, employment.  Strong jobs growth numbers continue to surprise to the upside in Canada.  Surprise might be an understatement ..more like SHOCK to the upside.  

Job growth expectations were wildly below actual jobs numbers, which created this “shock”.  Why such the discrepancy though?  In short, Canada has been surging nonpermanent residents into our country to fill job vacancies.  With the economy re-opening job vacancies were at all time highs, which put inflationary pressure on the system because of the dreaded wage-price-spiral (employers would need to pay people more to hire them).  

One thought is these shocking jobs numbers are more “one off” versus a trend of ever growing employment.  Let’s see how willing our central bankers are to look through this data or if they jump the gun on more rate hikes. 

Another reason rate cuts might not come later his year is there also continues to be pre-loaded “cash on the sidelines” from pandemic savings.  When people are employed, and have savings, this helps keep spending elevated, and inflation a bit more sticky. 

Bank of Canada and U.S. Federal Reserve—divergent?

I’ve written this countless times now …”when the U.S. sneezes, Canada catches a cold“.  U.S. inflation increased by a small margin in the most recent data release.  The U.S. consumer is cashed-up and un-levered.  With that, more rate hikes are forecast by the Federal Reserve.  

Tiff Macklem, governor of the Bank of Canada, clearly signaled a “pause” in rate hikes, allowing time for previous hikes to be fully absorbed into Canada’s economy.  I can imagine how uncomfortable BoC office meetings might be if Canada is pausing rate hikes, while the U.S. Fed is charging higher.  Ouch.

Change In Bond Yields

Keeping the theme of exchanging economic germs …

In light of recent U.S. inflation data, 10 year Treasury yields shot higher, dragging Canada’s 5-year bond yields higher.  What does this mean?  Upward pressure on fixed interest rates.

The narrative of possible U.S. Fed and BoC rate cuts is shrinking, while the narrative of rates being “higher for longer” (duration) is sinking in.

Remember, movements of bond yields lead the direction of fixed interest rates.  Canada’s fixed interest rates peaked early December ’22, ground lower for several months, and are now hovering around their previous high.  Could this be the “new normal” for the foreseeable future?  

Find The Opportunity. 

What’s the opportunity?  I have a couple ideas, 1) Lock in a fixed rate to shield against upward pressure, but also ensure you can reduce the rate before close, 2) Shop around for renewal interest rates.  The rate offered 4 months before renewal might be dramatically different than market rates at your actual renewal deadline, 3) Consider a shorter term fixed Mortgage.  The thought is in 2-3 years the turbulence from exiting the pandemic will make way for more “normal” markets (I.E., lower rates).  Or rates could be higher—who knows?  I don’t.  But I get the thinking of shorter term Mortgages and their possible benefits. 

Anecdotal Market Trends

Competitive bids.

Despite high interest rates, low inventory still has some buyers writing offers in a competing situation.  This competition will garner some emotion for buyers to make their best offer (I.E., price, conditions, agreeable possession dates etc).  This does not necessarily mean multiple bids are all over list price.  

People coming to Calgary.

Housing arbitrage is still relevant and a real draw for people.  This simply means sell high and buy low.  It’s like the secret is out about Calgary …young vibrant City, clean water, fresh air, proximity to mountains, beautiful/rugged landscape …etc.  Then you add on the Real Estate advantages that are 1) low prices relative to wages, 2) no land transfer tax, and 3) no rent controls.

High rents create buyers. 

I’ve noticed several renters surface as interested home buyers because their rents are increasing to the point where making a Mortgage payment seems more economical to them.  

Conclusion:

I can’t help but be reminded of all the economic uncertainty out there.  Then I remind myself again, there is ALWAYS economic uncertainty out there. 

As of right now, the narrative of higher interest rates for longer seems to be a conservative thought process in future planning.  Could there even be a 0.25% rate hike before Summer?  Maybe.  

Calgary’s Real Estate market seems to be fairing as one of the most resilient in all of Canada.  We have stable oil and gas sector, growing tech and film industries, and affordable living that is attracting people from across the country.  Low inventory is helping stabilize prices. 

Ok, I hope this has been helpful.  Thank you for reading!

Chat soon,

Chad Moore

P.S.

I’m in the final stages of finalizing version 1.0 of my seller presentation.  This content is geared toward being valuable for people planning to sell and purchase 6-12 months out.  This project has taken significantly longer than I originally planned.  

P.P.S.

A lot of folks got excited about me doing squats, lol.  Well, this past weekend I made the mistake of doing a over-head barbell shoulder press.  Seems like I tweaked my lower back.  I know better and should have continued with seated dumbbell shoulder press.