Do you know why I start people off by understanding the fundamentals?

Ego.

Here’s what I mean…

Sometimes I don’t like to ask questions I think I should know the answer to.  I let things go, accelerating my ignorance.

It’s like I’m trying not to look bad.  

My personal philosophy is understanding basic fundamentals as a platform for furthering my knowledge.

I think basic terminology of Mortgage language is a fundamental.

And this brings me to today’s content ….

There are three policy categories that are influencing the Canadian Real Estate landscape:  

1.  Monetary policy.
2.  Fiscal policy.
2.  Macro-prudential policy.

Our Central Bankers are pulling policy leavers in two of these distinct vertices to navigate the ebbs-and-flow of our economy (as they think are best).

Our Government is at the helm of the third policy.

These changes trickle into directly affecting the value of your home and the cost of your Mortgage.

I think it is important for you to have a fundamental understanding of this vocabulary and policy direction.

Monetary Policy: Defined And Latest News.

Monetary policy are actions taken by our Central Bankers (Bank of Canada) aimed at achieving macroeconomic objectives like inflation, consumption, growth and liquidity in the market (our economy).

Simple examples of this are raising and lowering Canada’s central interest rate in anticipation of or in response to macroeconomic happenings.

You can see below how Monetary policy loosened in response the to recession of 2008.  Lowering interest rates provides liquidity to the market to help stimulate spending and borrowing.

And we can see today how Monetary policy is tightening in anticipation of growing economic expansion and higher inflation.

Latest News: Inflation Update.

Statistics Canada released the latest inflation numbers last Friday.  Here’s a brief summary for you:

Consumer Price Index (CPI): 2.4% (up 0.2% m/m).  This is Canada’s headline inflation number that measures price changes, over time, in a basket of goods.

Core Measures Of Inflation:  Some items in the CPI basket of goods are volatile with short term influence.  The BoC has three core measures of inflation that “look through” this data:

CPI Trim: 2.1% (up 0.1% m/m)

CPI Median: 2% (up 0.1% m/m)

CPI Common:  1.9% (unchanged m/m)

Fiscal Policy Defined

Fiscal policy is set by our Governments.  They determine spending and tax rates which result in economic stimulus.

One example of this is infrastructure spending.  A big initiative to build roads, rail, buildings etc stimulates our economy with materials being used and increasing employment of Canadians.

Another example of fiscal policy is tax cuts.  This puts more money in the hands of individuals who spend more in the economy.

This has been publicized by U.S President Donald Trump.  His fiscal policy is BOTH cutting corporate tax rates and increasing Government spending.

[Note: I’m not sure how this plays out long-term …taxes typically feed increased Government spending or a Government deficit will build rapidly. And that is happening in the U.S.]

Macro-prudential Policy:

Macro-prudential policy, related to Canada’s Real Estate market, is rules and regulations designed to limit the severity of market cycles.

Years ago Canada experienced loosening Mortgage qualifying criteria that resulted in easy access to credit.  I think this was a huge factor in the run up of Real Estate prices in Canada.

We saw maximum amortizations increase, high-ratio refinances, low qualifying interest rates, minimum down payment amounts decrease and simple income verification for Mortgage qualifying.

Today, we’re seeing decreasing maximum amortizations, lower loan-to-value refinance limits, higher minimum down payments (depending on property value), higher Mortgage qualifying interest rates and incredibly strict income qualifying.

I wrote you about the Mortgage stress test (here).

These are macro-prudential policy decisions, that in addition to monetary policy changes, help our Central Bankers navigate our economy.

Are More Policy Changes Coming? 

Yes.

The Bank of Canada has set the path for higher interest rates in Canada.

Our Key Lending Rate is currently at 1.75%.  The neutral interest rate, that is neither stimulative or restrictive, is between 2.50% and 3.50%.

More policy changes are forecast …BUT these future decisions are based on incoming data.

Some of our economic tailwinds are showing signs of slowing (depressing oil prices) with more Global economic headwinds prevailing (U.S & Chinese trade war).

The inflation targeting approach used to make decisions on monetary policy, adopted by the Bank of Canada in response to runaway inflation of the 1980’s, is also under scrutiny.

Discussion is happening as to whether the sole focus of targeting 2% inflation is a good enough monetary policy to navigate our new economy.

I’m not anticipating a reversal of any Mortgage rule changes in the near future (near = years).

We just finished a MAJOR rule change, rolled out in two parts beginning November 2016, that requires Mortgage applicants to overcome a Mortgage stress test.

Additionally, our Central Bankers have increased Canada’s key lending rate five times in the last 18 months.

I think the market is still adjusting.  And our Bankers know it.  Everyone stop.  Breathe.

Conclusion:

I hope this review of macroeconomic terms, related to Canadian Real Estate, is helpful in putting some big pieces of the economic puzzle together.

I think of monetary, fiscal and macro-prudential policy are like knobs on a stereo (it’s possible some readers don’t know what I’m referring to – wow).

Small adjustments can change the sound of the music.  Just like small adjustments to economic policy can change the results of our economy.

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I’m often cc’d on emails when people forward them to friends, family or colleagues.  Thank you.  I encourage this behavior :-).

Talk soon,
Chad Moore