Protecting Yourself from Rental Scams

General Robyn McLean 17 Oct

Some great information from our friends at CMI, Canadian Mortgages Inc. 

Protecting Yourself from Rental Scams

The volume of online fraud incidents in Canada is rising quickly. In 2021, there were 67,970 reported victims who lost over $381 million dollars, according to the Canadian Anti-Fraud Centre. As of July 2022 that amount was already sitting at more than $284 million for this year.

One widely known fraud scenario is in rental scams, where someone looking to rent a home or apartment ends up giving money to a fraudster instead of a landlord, and is out both the cash and a place to live.

Spotting a rental scam

In a typical rental scam, a fraudster entices interest in a property with a highly attractive rental listing and a low price. The fraudster posts ads on popular sites like Kijiji or Facebook and uses photos to make the listing look authentic. They may pose as a landlord and claim to be unable to meet to show the place in person. After a few emails or text messages, they ask for a security deposit, followed by advance payment on future months’ rent in exchange for a discount. They often use high pressure tactics to secure the deal by saying that there is a high level of interest in the property. If the deal seems too good to be true and there is no attempt at tenant screening, alarm bells should go off.

The Canadian Anti-Fraud Centre classifies this type of scam as a merchandise or ‘non-delivery’ scam. In case after case, victims across Canada were looking to rent a home or apartment but fell victim instead. While this scam is not new, the incidence rate has increased significantly since the onset of the COVID-19 pandemic and social distancing, and further fuelled by the housing market surge of 2021. According to a recent report from Vancouver-based rental platform liv.rent, suspicious listings have tripled in the past year, and variations of the scam are emerging, as would-be renters try to protect themselves from previously known fraudulent tactics.

Steps to protecting yourself

An ounce of prevention is worth a pound of cure. Advise clients to take these steps, as recommended by Canada’s Competition Bureau, to ensure a rental listing is legitimate:

  • Go to the address and view the property yourself.
  • Use Google Maps to view the location and compare it with actual images of the rental property.
  • Research the address to ensure it is not a duplicate post.
  • Do a reverse image search to determine if the pictures used in the listing were used elsewhere.
  • Schedule a showing and meet the landlord in person.
  • If the rental is in a new development, contact the builder to confirm ownership.
  • Request and carefully review a copy of the lease.
  • Ask to speak with previous tenants.

 

Where to go for help

With all of this info at hand, your clients will be well equipped to navigate the rental market with confidence. If, despite their careful diligence, your client falls victim to a rental scam, this step-by-step resource will guide them through exactly what to do.

Whether you are conducting a vacation rental search, your university-age child is looking for a place to live away from home, or you are looking to rent while accumulating a down payment for a purchase, taking the time to follow these important steps will help to protect you and ensure a successful outcome.

The House of Rising Rates

General Robyn McLean 20 Sep

Some great insight from our friends at REW and an excellent video commentary by REW’s Simon Bray

House of the rising rates.

What inflation and rising interest rates mean for your mortgage.
By REW Editor Sep 14, 2022

You could define the last decade by a lot of things. The exact same superhero movie being released every six months, over and over again to the delight of audiences. The invasion of cyclists in tiny shorts into our coffee shops, breweries, and retinas. The digitalization of classic hardware like wristwatches, a product release that predictably prompted your dad to declare he’s “had a smartwatch for thirty years” while raising his Timex. And yes, from a financial perspective – low interest rates. Less sexy, more savings.

Canadians have had it good for a long time when it comes to interest rates. Sure, housing prices may be through the roof, but at the same time, interest rates have been hanging out in the basement like Eric, Fez, Jackie and Kelso. Watching TV and eating popcorn. Maybe prices and rates are…connected?

I’d like to speak to the manager.

You might be wondering who raises interest rates and why. The answer to the first part of that question is the Bank of Canada, which is responsible for setting monetary policies in this beautiful country. Why they would raise rates is a bit more complicated. But a glance at their website gives us a hint.
BoC

Hitting the high notes.

Right now, inflation is at historic highs. The Bank of Canada dropped its key rate to 0.25% during the pandemic and held rates there for nearly two years, all in an attempt to keep the economy buzzing during what the bank anticipated to be a hard time. Now, in an attempt to get inflation under control, and back between its target of 1 and 3 percent, the bank is raising rates. And relatively quickly, we should add.
rates

The idea here is that if rates rise and borrowing costs become more expensive, consumers will spend less and cool price hikes (inflation) across the country.

 

Driving the point home.

Interest rates directly affect mortgage rates, so it’s not a surprise that when rate hikes are anticipated or announced, people tend to immediately think of mortgages.

Higher rates mean that borrowing money is more expensive, whether you’re borrowing for car payments, student loans, or a mortgage. Applying for a new mortgage is going to cost you more when rates rise, or if you’re already in a variable-rate mortgage, more of your monthly payments will be heading towards paying off interest instead of principal.

If you’re in a fixed-rate mortgage when interest rates rise, your payments won’t change at all during the term of your mortgage. It’s only when your term expires that you’ll have to face the music.

To illustrate how interest rates affect your monthly and total payments, take a look at the video below. This is an example of what a 1% rate difference would look like on a $400 000 mortgage.

As you can see, a 1% increase can make a big difference, especially in markets like Vancouver where housing prices have just come off of all-time highs.

Executive decision.

If your mortgage is up or you’re just looking to enter the market, you’ve got a decision to make. Variable or fixed, variable or fixed, variable or fixed. It’s kept more people up at night than The Exorcist, especially during uncertain times like these.

The truth is that both variable and fixed mortgages have their own advantages and disadvantages, and which is right for you depends on your investment style, risk tolerance, and your general outlook on the market. We can’t tell you what to do, but speaking with your REW.money Advisor is a great place to start.
fixvsvar

Don’t panic.

It’s hard to predict what’s going to happen in the Canadian real estate market, which makes it the perfect time for bulls and bears to make extreme calls. RBC Assistant Chief Economist Robert Hogue says that resales will fall 23 percent this year and 15 percent next year, with the national benchmark home price falling 12 percent from its peak by the second quarter of 2023. This, just a few months after the Financial Post’s reporting on wealthy investors snapping up luxury condos at a rapid pace. Are things picking up, or slowing down?

No one knows where things are headed, but if we can give you one piece of advice, it’s this. Don’t panic. Home prices are falling, but likely not as much as they rose during the pandemic. Interest rates are rising, but it’s in the bank’s best interest to not make life too uncomfortable for Canadians, to prevent a situation where Canadians can’t make their mortgage, credit card, or car payments.

REW President Simon Bray recently spoke about the latest hike, what it means for the market, and why things aren’t as bad as you might think.

What the future holds.

There are a few things you can do if you think rates are going to climb higher.

  1. It’s easier said than done, but it must be noted that if you think rates are going up, paying down loans quickly is in your best interest.
  2. Homeseekers should aim to get preapproved for a mortgage sooner rather than later, so they can lock in a rate for the next few months.
  3. Educate yourself on variable vs. fixed-rate mortgages, and speak to an advisor to understand what a rate hike could do to a variable rate should you lock in today.

The main thing to understand when comparing fixed and variable rates is that switching to a fixed-rate mortgage can bring you stability since your rate is guaranteed not to change for the entire term of the mortgage. That said, it might not save you money in the long run. Variable rates are notably lower than fixed rates, and even with anticipated hikes, it’s hard to say whether variable rates will eventually jump higher than the current fixed rate offering.

Do your homework.

It’s all part of the adventure. Learn as much as you can about mortgages, terms, and rates to make an informed decision for you and your family. Finding a rate that brings down your monthly payments, even by a small amount, can add up to huge savings over the course of your mortgage. Take care of the pennies, and the pounds will take care of themselves.

WHAT EXACTLY IS THE MORTGAGE STRESS TEST?

General Robyn McLean 15 Sep

An excellent explanation of the Stress Test and why it’s important from our friends at Bridgewater Bank.

Look no further than the recent interest rate hikes to understand why the mortgage stress test is so important. It protects the clients and the lenders if interest rates rise, and it’s in everyone’s best interest for the homeowner to afford their mortgage payments.

We know mortgage brokers are between a rock and a hard place—you want to help your clients get the home they want, but you also want to ensure they can truly afford it. So, how do you have that conversation with your clients? Be straightforward.

WHAT EXACTLY IS THE MORTGAGE STRESS TEST?

The simple answer is that a mortgage stress test in Canada assesses whether a person applying for a new mortgage could still afford it if interest rates increase.

The stress test calculation is the higher of your interest rate plus 2% or the benchmark stress test rate of 5.25% (as of June 1, 2022), also referred to as the Bank of Canada’s qualifying rate. The Office of the Superintendent of Financial Institutions (OSFI) Guideline B-20 sets out expectations for residential mortgage underwriting in all federally-regulated financial institutions.

HOW DOES THE STRESS TEST HELP YOUR CLIENTS?

It comes down to this—it’s better to meet the stress test now than suffer the stress of losing their home later. Many Canadians carry debt, and as the cost of living rises, income is not always keeping pace.

All federally-regulated lenders use the B-20 stress test for new mortgages, alternative mortgages and mortgage renewals with a new lender (but are not applicable if they are renewing with their current lender).

B-20 stress test rules were designed to help guide your clients into a home they can afford. Simply put, the stress test ensures an additional 2% buffer to guard against inflation, and in 2022, we have seen this in real-life scenarios.

“Sound mortgage underwriting is critical for maintaining the stability of the financial system. This is especially true now when changing conditions such as potentially rising interest rates could make repaying mortgages more difficult in the future.”

– Peter Routledge, Superintendent, OSFI

Canadian Home Prices Fall Sharply in June

General Robyn McLean 15 Jul

Valuble insight into the recent changes affecting today’s real estate market fron Dr. Sherry Cooper, Chief Economist with Dominion Lending Centres. 

House Price Decline Accelerated in June

Statistics released today by the Canadian Real Estate Association (CREA) show that the slowdown that began in March in response to higher interest rates has broadened. Home sales recorded over Canadian MLS® Systems fell by 5.6% between May and June 2022, taking second-quarter sales down sharply (see chart below). The actual (not seasonally adjusted) number of transactions in June 2022 came in 23.9% below the record for that month set last year and is below its 10-year monthly moving average.

“Sales activity continues to slow in the face of rising interest rates and uncertainty,” said Jill Oudil, Chair of CREA. “The cost of borrowing has overtaken supply as the dominant factor affecting housing markets at the moment, but the supply issue has not gone away.”

The Bank of Canada’s shocking 100 basis point hike in the benchmark policy rate will accelerate the slowdown in the coming months. “One important feature of the market right now that isn’t getting enough attention is the difference in mortgage qualification criteria between fixed and variable, because while variable rates adjust in real-time, fixed rates have already priced in most of what the Bank of Canada is expected to do over the balance of 2022,” said Shaun Cathcart, CREA’s Senior Economist. “As such, it’s no surprise to see people piling into variable rate mortgages at record levels, but probably not for the reasons they may have chosen them in the past. It’s because the 200 basis points plus the contract rate element of the stress test has, just since April, become much more difficult to pass if you want a fixed-rate mortgage. A strict stress test made sense when rates were at a record-low, but policymakers may want to assess if it continues to meet its policy objectives now that fixed mortgage rates are back at more normal levels.”

New Listings

The number of newly listed homes climbed 4.1% month-over-month in June. The monthly increase was most influenced by a jump in new supply in Montreal, while new listings in the GTA and Greater Vancouver posted slight declines.

With sales down and new listings up in June, the sales-to-new listings ratio eased back to 51.7% – its lowest level since January 2015. It was also below the long-term average for the national sales-to-new listings ratio of 55.1%. Almost three-quarters of local markets were balanced markets based on the sales-to-new listings ratio being between one standard deviation above or below the long-term average in June 2022.

There were 3.1 months of inventory on a national basis at the end of June 2022, still historically low but slowly increasing from the tightest conditions recorded just six months ago. The long-term average for this measure is more than five months.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) edged down 1.9% on a month-over-month basis in June 2022.

Regionally, most of the monthly declines were seen in markets in Ontario. Home prices have also eased in parts of British Columbia, although the B.C. provincial totals have been propped up by mostly static prices in Greater Vancouver.

Prices continue to be more or less flat across the Prairies while only just now showing small signs of declines in Quebec.

On the East Coast, prices are mostly continuing to rise but appear to have stalled in Halifax-Dartmouth.

The non-seasonally adjusted Aggregate Composite MLS® HPI was still up by 14.9% on a year-over-year basis in June, although this was just half the near 30% record year-over-year increases logged in January and February (see chart and tables below for details by region).

Bottom Line

In many respects, today’s housing data trends are already outdated. It changed with the blockbuster rate hike a couple of days ago. Excess housing demand is essentially over, and we are heading into a more fragile period for resale volumes and prices. The national sales-to-new listings ratio fell to 51.7% in June, which is considered balanced, but it’s the lowest ratio since 2015 and is headed in a softer direction. Buyers’ markets are already evident, especially in some of the suburbs/exurbs in Ontario and parts of BC. These are the regions that posted extreme price gains last year. Others, such as cities in oil-rich Alberta and Atlantic Canada, are still holding in well.

With the Bank of Canada’s most recent tightening, qualifying rates are ratcheting up for both variable and fixed mortgage rates. Before the one percentage point rate hike, variable rate loans were qualifying at 5.25%, but now that has shifted to around 6%. Fixed-rate borrowers are qualifying at about 7%. The Canadian prime rate has surged this year, increasing variable mortgage rates by roughly 300 basis points. Robert Kavcic at BMO has calculated that “going from 1.5% to 4.5% on the same loan value would crank up the monthly variable-rate mortgage payment by almost 40%, making the current episode an even more abrupt shift than the late-1980s  after adjusting for income levels.”

Kavcic continues, “the vast majority of borrowers currently on variable-rate mortgages have fixed payment features, but even there, things are now getting dicey. For example, moving a variable rate up from 1.5% to 4% with a fixed payment would effectively increase the amortization from 25 years to 45 years. Another 50 basis-point rate hike in September would take that above 60 years—that is, many will reach the point where payments are no longer taking down the principal. Each mortgage will have its unique terms when payments start to move higher, but for those that caught the low in variable rates, we’ll probably be there soon. Of course, HELOC payments used to finance many multiple-property purchases are ratcheting up in real-time.”

There is also the risk that the federal financial institutions’ regulator, OSFI, will intervene to protect the big Chartered Banks from taking on too much risk rather than making it easier for borrowers to qualify or to carry variable-rate loans in this environment.

Moreover, mortgage renewals pose a problem as well. Fixed mortgage rates five years ago were roughly 3%. Resetting the mortgage at 4.5% will lead to a monthly payment increase of approximately 15%, all else equal.

With the latest move by the Bank of Canada, more potential buyers will believe that home prices are likely to fall, taking the FOMO factor out of the housing market. This removes the critical ingredient that drove prices up rapidly since the pandemic began.

Strategies to Sell in Today’s Market

General Robyn McLean 14 Jun

What to expect from a more balanced real estate market, from our friends at REW.

What are Balanced and Buyers’ Markets? 

A balanced market occurs when supply and demand are close to even. This is usually signaled by the sales-to-new-listings ratio (SNLR) which will land around 40-60%. In May, the SNLR in Toronto and the GTA was 39%, down -25% year-over-year. This falls just below balanced market territory, which could mean the market may favour buyers this summer.

A buyers’ market occurs when the supply of homes surpasses the number of active buyers. In this scenario, homes tend to sit longer and buyers have more negotiating power. This often causes downward pressure on home prices as well.

Strategies to Sell in Today’s Market

This change in the market does not mean that you won’t get a favourable price if you do decide to sell. However, it does mean that many sellers have to shift their strategy following years of having the upper hand in the real estate market.

Price Your Home Based on its Actual Value

In the past two years, many sellers were pricing their home under its market value to drive a bidding war. We are seeing fewer and fewer bidding wars, so the best strategy is to price your home based on its actual value. Your real estate agent should use your appraisal as well as recent comparables to determine your home’s current market value. Prices have fluctuated more significantly in certain areas and cities over the past few months, so the last 15-30 days of recently sold properties in your neighbourhood may be more representative of its current value versus the previous month or during this past winter.

Be Prepared for Conditions and Negotiations

Conditions are back and most sellers should expect to receive offers with conditions. Common conditions include home inspections, financing, and even sales that are conditional on the buyer selling their own property. There is always room to negotiate when conditions are on the table, but plan to work with your agent to decide what makes the most sense for your situation.

Plan for a Longer Listing Period

In the height of the pandemic, homes were selling practically overnight. In May 2022, the average listing days on market was 12 days. This is still quite low and only an increase of 9.1% year-over-year, but higher interest rates could lead to homes sitting on the market longer. More preparation to your home before hitting the market like decluttering, staging, small renovations and professional photos may make your home stand out versus your neighbour’s home that is also competing for a buyer.  Properly and professionally listing your home in a balanced or buyer’s market is essential when attempting to reduce the listing period.

Bank of Canada increases its benchmark interest rate to 1.50%

General Robyn McLean 1 Jun

Some valuable insight on today’s Bank of Canada rate hike from our friends at Fist National.

Bank of Canada increases its benchmark interest rate to 1.50%

Today, the Bank of Canada showed once again that it is seriously concerned about inflation by raising its overnight benchmark rate to 1.50%. This latest 50 basis point increase follows a similar-sized move in April and is considered the fastest rate hike cycle in over two decades.

With it, the Bank brings its policy rate closer to its pre-pandemic level. As a result, the Bank Rate rises to 1.75% and the deposit rate increases to 1.50%. The Bank is also continuing its policy of quantitative tightening and signalled that more rate hikes are likely.

In rationalizing its 3rd increase of 2022, the Bank cited several factors, most especially that “the risk of elevated inflation becoming entrenched has risen.” As a result, the BoC will use its monetary policy tools to return inflation to target and keep inflation expectations well anchored.

These are the highlights of today’s announcement.

Inflation at home and abroad

  • Largely driven by higher prices for food and energy, the Bank noted that CPI inflation reached 6.8% for the month of April, well above its forecast and “will likely move even higher in the near term before beginning to ease”
  • As “pervasive” input pressures feed through into consumer prices, inflation continues to broaden, with core measures of inflation ranging between 3.2% and 5.1%
  • Almost 70% of CPI categories now show inflation above 3%
  • The increase in global inflation is occurring as the global economy slows
  • The Russian invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions are all weighing on activity and boosting inflation
  • The war has increased uncertainty, is putting further upward pressure on prices for energy and agricultural commodities and “dampening the outlook, particularly in Europe”
  • U.S. labour market strength continues, with wage pressures intensifying, while private domestic U.S. demand remains robust despite the American economy “contracting in the first quarter of 2022”
  • Global financial conditions have tightened and markets have been volatile

Canadian economy and the housing market

  • Economic growth is strong and the economy is clearly “operating in excess demand,” a change in the language the Bank used in April when it said our economy was “moving into excess demand”
  • National accounts data for the first quarter of 2022 showed GDP growth of 3.1%, in line with the Bank’s April Monetary Policy Report projection
  • Job vacancies are elevated, companies are reporting widespread labour shortages, and wage growth has been “picking up and broadening across sectors”
  • Housing market activity is moderating from exceptionally high levels
  • With consumer spending in Canada remaining robust and exports anticipated to strengthen, growth in the second quarter is expected to be “solid”

Looking ahead

With inflation persisting well above target and “expected to move higher in the near term,” the Bank used today’s announcement to again forewarn that “interest rates will need to rise further.”

The pace of future increases in its policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation.

In case there was any doubt, the Bank’s message today was clear: it  is prepared to act more forcefully if needed to meet its commitment to achieve its 2% inflation target.

July 13, 2022 is the date of the BoC’s next scheduled policy announcement.

  • Jun 1, 2022
  • First National Financial LP

Canadian Inflation Beats Expectations

General Robyn McLean 19 May

Valueable insight from Dr. Sherry Cooper, Chief Economist at Dominion Lending.

Canadian Inflation Shows No Signs Of Abating
Inflation at 6.8% is unmitigated bad news. The Bank of Canada looks flat-footed again, having forecast that Inflation would be at least a full percentage point lower by now. What’s worse, inflation looks likely to rise again this month given the surge in gasoline prices from April to May.

Today’s report raises the urgency for policymakers to withdraw stimulus from the economy quickly. Look for another 50 bp rate hike on June 1 and again in July. Markets are pricing in an overnight rate as high as 3% by the end of the year. It is currently at 1%.

In April, Canadian consumer prices rose 6.8% y/y, up slightly from March’s 6.7% pace despite a slowdown in the pace of gasoline inflation. The April inflation rise was driven mainly by food and shelter prices. Excluding gasoline, the CPI rose 5.8% in April, after a 5.5% gain in March. This was the fastest pace since the introduction of the all-items excluding gasoline special aggregate in 1999.

Since late February, Russia’s invasion of Ukraine has boosted energy, commodity, and, most notably, food prices.

The Canadian economy’s strength has added to inflation pressure. The unemployment rate is at a record low. Average hourly wages rose 3.3% y/y last month. With prices rising faster than wages, Canadian families are experiencing reduced purchasing power.

In April, Canadians paid 9.7% more for food purchased from stores compared with April 2021. This rise, which exceeded 5% for the fifth month in a row, was the most significant increase since September 1981.In April, shelter costs rose 7.4% y/y, the fastest pace since June 1983, following a 6.8% increase in March. Higher prices for energy sources used to heat homes, such as natural gas (+22.2%) and fuel oil and other fuels (+64.4%), contributed to the rise.

Reflecting the dynamic Canadian housing market, homeowners’ replacement cost (+13.0%) is related to the price of new homes and other owned accommodation expenses (+17.2%), which include commissions on the sale of real estate; both rose sharply in April.

The mortgage interest cost Index (+0.2%) increased on a m/m basis for the first time since April 2020.

Rent prices increased in April (+4.5%) compared with the same month in 2021. The rent hike was mostly driven by price increases in Canada’s most populous provinces: Ontario (+5.3%), Quebec (+4.3%) and British Columbia (+6.4%).

While monthly, Inflation slowed in April (0.6%) compared to March (1.4%), the surge in gasoline price in May portends continued high Inflation in next month’s CPI report.
Bottom Line

Bloomberg News reported this morning that “The inflation surge has made the Bank of Canada a target of criticism, with some politicians accusing Macklem of moving too slowly. Immediately after the inflation data was published, Conservative leadership candidate Pierre Poilievre released a statement reiterating he plans to fire Macklem should he ever win power.”

The pressure is on for more rate hikes. Central banks all over the world are under similar pressure. Central bank tightening will slow demand, as we have seen already in the Canadian housing data for March and April. It does not address the supply disruptions that are the root cause of much of the inflation pressure.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

 

Holy Smokes! Canadian Inflation Spikes to 6.7% in March

General Robyn McLean 20 Apr

Today’s look at the most recent economic data that affects the housing market in Canada from Dr. Sherry Cooper, Chief Economist at Dominion Lending. 
StatsCanada today reported that consumer prices rose a whopping 6.7% year-over-year in March, a full percentage point above the 5.7% reading the month before. Market-driven interest rates shot up on the news as the prospects increase for another half-point rise in the overnight rate when the Bank of Canada meets again on June 1.

There is no sugar-coating this. Bonds were walloped as the Government of Canada two-year yield shot up to 2.6%, the 5-year yield rose to 2.75%, and the 10-year yield spiked above 2.825% immediately following the data release. The 5-year yield–so crucial for setting the 5-year fixed mortgage rate–has nearly quadrupled over the past year.

Inflationary pressure remained widespread in March, as prices rose across all eight major components. Prices increased against the backdrop of sustained price pressure in Canadian housing markets, substantial supply constraints and geopolitical conflict, which has affected energy, commodity, and agriculture markets. Further, employment continued to strengthen in March, as the unemployment rate fell to a record low. In March, average hourly wages for employees rose 3.4% y/y, raising the risk of wage-price spiralling.

Excluding gasoline, the Consumer Price Index (CPI) rose 5.5% year over year in March, the fastest pace since introducing the all-items excluding gasoline special aggregate in 1999, following a 4.7% gain in February.

The CPI rose 1.4% in March, following a 1.0% gain in February on a monthly basis. This was the largest increase since January 1991, when the goods and services tax was introduced. On a seasonally adjusted monthly basis, the CPI rose 0.9% in March, matching the most significant increase on record.

In March, gasoline prices rose 11.8% month over month, following a 6.9% increase in February. Global oil prices rose sharply in March because of supply uncertainty following Russia’s invasion of Ukraine. Higher crude oil prices pushed prices at the pump higher. Year over yeaconsumers paid 39.8% more for gasoline in March.

Month over month, prices for fuel oil and other fuels rose 19.9%, the second-largest increase on record after February 2000. On a year-over-year basis, prices for fuel oil and other fuels rose 61.0% in March.

Food prices continued to surge, as did the prices of durable goods such as automobiles and furniture. It cost considerably more for restaurants, hotel rooms and flights.

Goods inflation hit 9.2% in March, the highest since 1982. Services inflation rose to 4.3%, the highest since 2003.
Bottom Line

Bond markets sold off all over the world today. The yield curves flattened as shorter-term yields rose more than their longer-dated counterparts, reflective of the view that central banks will accelerate their tightening.

Today’s CPI report shows inflation pressures were more elevated than the Bank of Canada expected just last week when they hiked the policy rate by 50 basis points.

This could well mark the top of the surge in inflation, but the return to the 2% inflation target could be prolonged, particularly if inflation expectations become embedded. For this reason, Governor Macklem is likely to tighten aggressively once again on June 1, which will further dampen housing activity.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Jump In Bank of Canada Policy Rate

General Robyn McLean 13 Apr

Valuable insight on today’s Bank of Canada rate hike annoucement from Dr. Sherry Cooper, Chief Economist for Dominion Lending Centres. 
Bank of Canada Hikes Rates by 50 BPs, Signalling More To Come
The Governing Council of the Bank of Canada raised the overnight policy rate by a full 50 basis points for the first time in 22 years. This was a widely telegraphed action that will be followed by the US Federal Reserve next month. While the BoC was the first G-7 central bank to take such aggressive action, the Bank of New Zealand also hiked rates today by half a percentage point. Considering the surge in inflation and the strength of the Canadian economy, another jumbo rate hike may well be in the cards.

The Bank now realizes that inflation is coming, not just from supply disruptions but also from excessive demand. “In Canada, Growth is strong, and the economy is moving into excess demand. Labour markets are tight, and wage growth is back to its pre-pandemic pace and rising. Businesses increasingly report they are having difficulty meeting demand, and are able to pass on higher input costs by increasing prices.”

The Bank now says that “Growth looks to have been stronger in the first quarter than projected in January and is likely to pick up in the second quarter. Consumer spending is strengthening with the lifting of pandemic containment measures. Exports and business investment will continue to recover, supported by strong foreign demand and high commodity prices. Housing market activity, which has been exceptionally high, is expected to moderate”.

The Governing Council has, once again, revised up its inflation forecast. CPI inflation is now expected to average almost 6% in the first half of 2022 and remain well above the control range throughout this year. It is then expected to ease to about 2½% in the second half of 2023 and return to the 2% target in 2024. There is an increasing risk that expectations of elevated inflation could become entrenched.

With the economy moving into excess demand and inflation persisting well above target, the Governing Council judges that interest rates will need to rise further. The Bank is also ending reinvestment and will begin quantitative tightening (QT), effective April 25. Maturing Government of Canada bonds on the Bank’s balance sheet will no longer be replaced, and, as a result, the balance sheet size will decline over time. This will put further upward pressure on interest rates further out the yield curve.
Bottom Line

Traders are betting that the overnight rate will approach 3.0% one year from today. In today’s Monetary Policy Report (MPR), the Bank revised upward its estimate of the neutral overnight rate to a range of 2.0% to 3.0%–up 25 bps from their estimate one year ago. This is the Bank’s estimate of the overnight rate that is consistent with the noninflationary potential growth rate of the economy.

The rise in interest rates has already shown signs of slowing the Canadian housing market. The MPR states that “Resales are expected to soften somewhat in the second quarter as borrowing rates rise. Low levels of both builders’ inventories and existing homes for sale should support new construction and renovations in the near term”.

Bond yields have risen in anticipation of the Bank of Canada’s move taking the five-year fixed mortgage rate up to between 3.5% and 4%. This could be a pivotal time, as mortgage borrowers must qualify for loans at the maximum of 5.25% or 2 percentage points above the offered contract rate. We are now beyond the  2 ppts threshold, which reduces the buying power of many.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
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