Interest Rate Update
As much as the media and market commentators call Wednesday’s June 7th interest rate hike of .25% to a Bank Rate of 4.75% a surprise, we have been calling for a 25-50b basis point increase in interest rates for the later part of this year. (See our articles Jan 24, Mar 7 or April 10). And it doesn’t stop there.
Prime Rate could get to 7.25% or 7.50%, currently at 6.95%, before the hikes are over and we don’t see interest rate decreases until mid-2024. With Canada’s GDP Growth of 3.1% annualized in Q1 and inflation ticking back up to 4.4% vs. 4.3% in April (which is still double the inflation target of the Bank of Canada of 2%), there is plenty of inflation in our Canadian Economy with shelter costs up, groceries up 9.1% and gas prices up 6.3% in April.
Also worth noting, we have several farmers as clients and they report although we have not seen a drought to date, two weeks without rain could bring this on in Canada and the northern US. Seeding for farmers has just concluded and rain in the coming weeks will be imperative. In Europe, the drought is concerning for both corn and wheat prices. With over 400 wildfires in Canada, our forestation and cities are very dry coming off winter with low precipitation.
There will be a further .25% in July or September if inflation persists. Benjamin Tal of CIBC suggests a pause in July with a hike in September. The clear message is to expect rate increases until inflation is under control. To date that means within a target rate of 2% and the B of C could very well overshoot with interest rate hikes as many economic indicators are lagging indicators.
The True Cost of Your Mortgage
This week 5-year bonds have peaked at 3.75% up from 2.68% just a few months ago. As a result, we have seen fixed rates pop 25 to 35 basis points.
Mortgage Refinances were down 32% in 2022 due to increases in interest costs, the uncertainty of qualifying based on the Stress Test and falling home values according to a recent CMHC report. Many borrowers with variable interest rates and renewing mortgages are dealing with increased mortgage payments of 40%. Inflation in April had shelter costs contributing heavily with mortgage interest costs up 28.5% and rent up 6.1% annualized with the average rent in Canada reaching $2,014 with many locations reporting much higher rents according to rentals.ca. In fact, rents in Toronto and Vancouver are up 41% and 47% respectively since 2012.
The Bank of Canada says it has growing concerns about the ability of households to service their debt – particularly with mortgage holders facing payments of up to 40% at renewal. In 2022, 46% of mortgage holders had to adjust their household budget because of interest rate increases.
Adding to the cost of a mortgage, banks are tightening their credit standards amid financial sector turmoil. Lending slowdown will weigh on USA, Canadian and Euro GDP Growth
Current Interest Rates as of June 11, 2023:
|Purpose||1 Year||2 Year||3 Year||5 Year|
|Refinance with Prime Lenders||5.99%||5.85%||5.64%||5.44%|
*Please contact us for how this affects your mortgage payments
Housing Trends in the Second Quarter of 2023
There remains a lack of inventory and both sellers and buyers are having trouble adjusting, with sellers expecting 2021/22 prices and buyers looking for 2017/18 prices.
All of our New Home Buyers in 2023 have had gifted down payments. In 2022, 27% of homebuyers received a gift to assist with their downpayment. And for those aged 18 to 24, the percentage rises to 43%.
TREB and CREA are reporting Toronto’s real estate recovery was in full swing in May.
A mainstay of New Canadians and Indigenous families the 2021 Census show 986,400 Canadian Households had more than one generation living in their property. This is an increase of 45% from the 2016 Census and accounts for 7% of all homes in Canada. The accessory dwelling is starting to replace the classic in-law suite.
As pointed out in our last blog of April 10 Canadians are now living 10 years longer which is one of many contributions to our housing demand. Canadians are required to be innovative in creating housing solutions because the government is falling short of filling this demand.
We foresee investment opportunities for 2023/24 will come from the purchase of homes with properties large enough for ADU (Accessory Dwelling Units) where the property will be approved by the municipality for an ADU. We believe households will access second mortgages and lines of credit to their first mortgage renewal date to finance the building of these Garden or Laneway homes referred to as ADUs.
Recession – Will We or Won’t We!
We are not certain Canada will see a recession, however, there are growing factors to consider.
Adding to the cost of a mortgage, banks are tightening their credit standards amid financial sector turmoil. A lending slowdown will weigh on USA, Canadian and Euro GDP Growth.
On Friday past, Canada’s jobless rose to 5.2% with a reduction in jobs of 17 300 in contrast to an expected 23,000 gains. Labour shortages in Canada are edging lower as shown by Statistics Canada and Indeed.
When will the Housing Crisis be Over?
Recently a person asked me this question and it gave me pause. In our Blog and Real Estate Trends Article of April 10 we spoke of Canadians living 11 years longer than they did in the 1970s – to an average of 83 years. The youngest Baby Boomer today is 57 years old and if that boomer lives until 83, then this housing crisis will end in 26 years from now when most Boomers will have passed on or will be living in a nonexistent Seniors or Long-Term Care Facility. The current Canadian birth rate is 1.5 births per woman. It is hard to believe that immigration or this birth rate will keep the current demand for houses in thirty years from now that we are seeing today.
Dr. David K. Foot, Professor Emeritus of Economics, and renowned demographer at the University of Toronto, contends that demographics explains two-thirds of everything — whether the subject is real estate or education, health, recreation, leisure, and social and global trends.
Gerard Buckley and our Team of Mortgage Professionals at Buckley Mortgage Broker – Mortgage Wellness can assist you with your Mortgage Options including helping to determine the true cost of your mortgage.
Our team offers decades of experience in assisting clients with financial needs. We provide creative solutions to debt and financing problems with access to more than 70 lenders. Ready to take control of your finances? Give us a call or send us an email today.