Chad Moore Calgary Mortgage Broker

This article might be of interest to you IF you are …

1.  Renewing your Mortgage.
2. Considering refinancing your Mortgage.
3. Purchasing/selling a home in 6-12 months.
4. Are in a variable rate Mortgage.

In light of recent interest rate hikes, Mortgage rule changes, tariff talk, and trade uncertainty; I thought pulling this data into one post would be beneficial for you.

Bank Of Canada Interest Rate Announcement:

Below are some Italic snippets from the BoC’s announcement decision with my comments below …

Global growth remains solid and broad-based. In the United States, new government spending and previously-announced tax cuts are anticipated to boost growth in 2018 and 2019. However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks.

US Government tax cuts have created an appealing business environment for corporations.  The reality for Canada, this might continue to lure more business away from Canada.  Recently, several Drilling Rigs have moved to set up shop in West Texas.

Amidst the uncertainty of potential tariffs and NAFTA renegotiation, the BoC has adopted a “wait-and-see” mindset.  I am finding Calgaryians are adopting a similar mindset again during this time of uncertainty.

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“In the fourth quarter, GDP growth was slower than expected, largely due to higher imports, while exports made only a partial recovery from their third-quarter decline. The gain in imports mainly reflected stronger business investment, which adds to the economy’s capacity.”

The two rate hikes in July and September 2017 raised the Loonie relative to the US dollar.  This compressed Canada’s export market to the US because many items became much more expensive.  BoC Governor Stephen Poloz has made reference to all three of Canada’s rate hikes taking 12-18 months to fully work through our economy.  Raising the Loonie relative to the US dollar, with future rate hikes, is a concern for the BoC because of the economic headwinds it creates for our export/manufacturing sectors.

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Strong housing data in late 2017, and softer data at the beginning of this year, indicate some pulling forward of demand ahead of new mortgage guidelines and other policy measures. It will take some time to fully assess the impact of these, as well as recently announced provincial measures, on housing demand and prices. 

I think the announcement of the sixth round of Mortgage rule changes (all effectively tightening Mortgage qualifying FYI) pulled buyer demand forward.  This might be contributing to Calgary’s 20% decline in February sales and GTA’s decline of 35%.

Again, the BoC has additional cause for pause to allow this recent, and significant, Mortgage rule change to work it’s way through our system Real Estate ecosystem.  Real Estate economic spinoff is a significant contributor to our National GDP.

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More broadly, the Bank continues to monitor the economy’s sensitivity to higher interest rates. Notably, household credit growth has decelerated for three consecutive months. The implications of the recent federal budget for the outlook for growth and inflation will be incorporated in the Bank’s April projection.

What I find interesting about this comment is 65% of Canada’s GDP is driven by consumer spending.  Increasing interest rates might continue to steer people into high interest debt pay down which might trickle into less consumer spending, lowering our GDP.

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Inflation is running close to the 2 per cent target and the Bank’s core measures of inflation have edged up, consistent with an economy operating near capacity. Wage growth has firmed, but remains lower than would be typical in an economy with no labour market slack. Inflation is fluctuating because of temporary factors related to gasoline, electricity, and minimum wages.

The BoC’s inflation target is between 1-3%.  Canada’s inflation has been around the 2% mark recently.  The Bank is anticipating some near term fluctuation to inflation but I think will be patient at future interest rate decision points before using inflation as a main reason for hiking.  I think wage growth (or lack thereof) is still a mystery to the BoC, relevant to where our economy is compared with Canada’s economy in past recovery cycles.  One theory is access to remote workers for cheaper money increases global competition for services.  Side note: I hire workers on www.fiverr.com and www.upwork.com regularly.

Trump’s Tariff Talk:

More uncertainty is certain.  NAFTA negotiations and a tariff on steel is now tabled by Trump’s administration.  Clearly, this wouldn’t be good for the Canadian economy.  Our two economies are heavily integrated with Canada being the largest exporter of steel to the US.

One thing I would like to remind people about, Trump is a master marketer and negotiator.  This out-of-the-blue tariff announcement might have been designed to draw the media away from other important issues in Washington?  Just imagine the media circus, fueled by Trump’s Twitter account, once NAFTA negotiations begin!

I think this tariff talk was a factor in the BoC’s decision to hold interest rates at 1.25%.  Canada’s bond market also fell in the business days after Trump’s initial tariff announcement.

Conclusion:

I think there is reason for the Bank of Canada to pause before making another rate hike:

• Inflation is at an acceptable level.  Canada’s inflation might swing up or down, due to fluctuating data (gasoline, food prices), but should continue to remain at about 2% for the near term.  Unless there is a change in employment data.
• Employment wages remain flat.  Wage growth is not at a level to exert upward pressure on inflation.  In fact, the Bank of Canada is confused as to why wage growth is not further along, as previous economic recovery cycles might suggest it should be.
• Real Estate market uncertainty.  Three interest rate hikes and a significant Mortgage rule change might have pulled buyer demand forward.  This is resulting in some uncertainty in price direction, fueled by lower sales volumes in Toronto, Vancouver and Calgary.  Stephen Poloz, Governor of the Bank of Canada, has been on record stating the timeline to completely see these new changes work through our economy could be over 12 months.
• Trade uncertainty.  Steel tariff threats and NAFTA renegotiations are looming in the market place creating uncertainty of Canada’s economic future.  Our economy could be facing headwind due to factors outside of our control.  I think the BoC does not want to add to this with pre-mature tightening of our economy.
• The Loonie’s impact on trade.  BoC rate hikes create upward pressure on the Canadian currency, relative to the US dollar.  This puts down pressure on Canadian exports, lowering our Gross Domestic Product (GDP).

The further and longer there is market uncertainty, I think the longer the BoC will pause.  Could this create a scenario where future rate hikes are clustered closer together?  Possibly.  Could this market uncertainty be timed with the BoC’s decision to hold interest rates flat for a period of time?  Possibly.

If you have an variable rate Mortgage, continue to stay close to these discussion points in future blog posts and in the media.

Connect with me if you are:

• Buying or selling a home.
• Renewing your Mortgage.
• Refinancing your Mortgage for a number of reasons
  • Debt consolidation.
  • Separation/divorce.
  • Home improvement.
  • Inheritance.
  • Other Real Estate needs.

Thank you and talk soon,

Chad Moore