DATE

Steve Saretsky -

Canadian banks reported quarterly earnings this past week. One thing was clear, loan loss provisions are increasing, albeit from very low levels. Banks are preparing for more turbulence ahead, as highlighted by comments from Canada’s largest bank, RBC. The bank says interest rate hikes may trigger higher monthly payments for 80,000 customers with variable rate mortgages. The increases will average about $200 per month. Public commentary from RBC adds to what we’ve been discussing in this newsletter for several months now. An aggressive Bank of Canada is poised to send shock waves to variable rate holders across the nation. Let’s unpack this a bit further. There are two types of variable mortgage products in Canada. A floating rate variable which increases monthly mortgage payments every time the Bank of Canada raises rates. Then we have fixed payment variable mortgages which keep monthly mortgage payments the same regardless of interest rate increases. Instead, as rates rise, these mortgages will reduce the amount of principal being paid down. If interest rates rise to a point where no principal is being paid down, these mortgages get triggered, and banks will prompt you to increase your monthly payments. We are now reaching that stage. The

Steve Saretsky -

https://www.youtube.com/watch?v=KSBiqaFMcHA

Steve Saretsky -

Continuing on the theme from last month, housing activity continues to slow as expected when the Bank of Canada raised interest rates by 100bps last month and instantly reduced borrowers purchasing power. Remember, over 50% of new mortgage applicants this year have been going with variable rate mortgages, in large part to dodge the pain of a higher mortgage stress test that accompanies fixed rate mortgages. The pain is not over yet, as we should see another rate hike from the Bank of Canada on September 07.

Steve Saretsky -

Inflation has likely peaked from a rate of change perspective, dropping to 7.6% year-over-year in July, down from 8.1% in June. However, we are far from out of the woods. What’s interesting here are the comments from Bank of Canada Governor, Tiff Macklem, immediately following the release. It’s not often you see the Bank of Canada issue an op-ed immediately following a CPI print. “As the central bank, it’s our job to control inflation and that means we need to cool things down. That’s why we have been raising interest rates since March. In July, we took the unusual step of raising the policy interest rate by a full percentage point, to 2.5 per cent. Increasing our policy rate raises borrowing costs across the economy — for things like personal loans, car loans, and mortgages. And when we increase the cost of borrowing, consumers tend to borrow and spend less and save more. We need to slow down spending to allow supply time to catch up with demand and take the steam out of inflation. One area of the economy where it is easy to see how this works is the housing market. With higher mortgage costs, housing activity has

Steve Saretsky -

https://www.youtube.com/watch?v=D2o6WobbzA4&list=PLOZmgBQcELMcCILSrDmXzrEDJr7dBkjpB&ab_channel=SteveSaretsky

Steve Saretsky -

Desjardins is joining a growing chorus of housing bears, calling for further price declines in the nations housing market this year. The bank is now calling for a 25% drop from peak to trough in the average sales price nationally. Keep in mind the average sales price is skewed predominantly by the GTA, and a change in the composition of sold houses. In other words, if fewer luxury homes are sold it will naturally lower the average sales price. Again, as we’ve talked about before, price predictions aren’t worth the paper they’re written on, what’s more important are the sentiment indicators. People are really negative about Real Estate, something we haven’t seen in a long time. Let’s not forget RBC’s recent call for the steepest correction in 40 years. It’s not hard to bump into a housing bear these days, everyone is on the same side of the boat. There’s no sake in being a contrarian for contrarians sake, it’s hard not to see prices falling further, rising interest rates, massive debts, hawkish central bank, etc, etc. But markets also tend to do the opposite of what everyone thinks. Remember the pandemic and the mortgage deferral cliff? Not prepared to call

Steve Saretsky -

https://www.youtube.com/watch?v=obKmZnc2Qg8&t=2699s&ab_channel=SteveSaretsky

Steve Saretsky -

As discussed last week, our early indicators pointed to Greater Vancouver home sales falling to a 22 year low in home sales for July. The Real Estate board has officially confirmed the precipitous decline. July sales were also 35% below the ten year average, and the typical price of a home is now down 4.5% as per the lagging home price index. In reality, prices are down anywhere from about 5-15% depending on the location and the product type. To put it simply, the more it went up during the pandemic, the more it is correcting now. Nature is healing. Things could be worse here, just look at Toronto. The GTA has recorded three consecutive months of home sales printing twenty year lows. The price of a typical home, as measured by the home price index, declined 3.9% last month. For anyone following along at home, house prices shedding 4% per month is far from normal, and is certainly not healthy despite the obvious overvaluation preceding the decline. Toronto area home prices are now down 13% from the peak, shedding $178,000 off the price of a typical home. It’s not hard to figure out what happens when Canada’s two largest

Steve Saretsky -

https://www.youtube.com/watch?v=R59gK6RmdPU

Steve Saretsky -

The worlds most important central bank, the US Federal Reserve, raised rates another 75bps this past week. The following day, second quarter GDP contracted 0.9%, marking the second straight quarter of contracting economic growth. While policy makers are not officially calling it a recession, we are arguably in one already. As highlighted by the always brilliant David Rosenberg, Back-to-back GDP contractions may not be the official definition of recession, but the reality is that whenever it’s happened in the past, the economy was in recession. Rosie added, “It hasn’t dawned on most people that the first-half GDP contraction reflected the inflation, equity market, and fiscal withdrawal shocks. The Fed-induced rate shock comes next. This recession is going to have legs.” Remember, monetary policy works on a lag, and research suggests it takes anywhere from nine months to two years to filter through the real economy. In real life, it feels much quicker than that. Surveys of consumer sentiment are already below the 2008 troughs and the University of Michigan survey of consumer sentiment recently took out its lows from the original Volcker era in 1980 — when gasoline was being rationed and unemployment hit 7.5% on its way to a pre-Covid

Join the Monday Newsletter

Every Monday morning you'll receive a short and entertaining round-up of news on the Vancouver & Canadian Real Estate markets.

"*" indicates required fields

The Canadian Economy

Steve Saretsky -

Canadian banks reported quarterly earnings this past week. One thing was clear, loan loss provisions are increasing, albeit from very low levels. Banks are preparing for more turbulence ahead, as highlighted by comments from Canada’s largest bank, RBC. The bank says interest rate hikes may trigger higher monthly payments for 80,000...

Steve Saretsky -

https://www.youtube.com/watch?v=KSBiqaFMcHA

Steve Saretsky -

Continuing on the theme from last month, housing activity continues to slow as expected when the Bank of Canada raised interest rates by 100bps last month and instantly reduced borrowers purchasing power. Remember, over 50% of new mortgage applicants this year have been going with variable rate mortgages, in large...

Steve Saretsky -

Inflation has likely peaked from a rate of change perspective, dropping to 7.6% year-over-year in July, down from 8.1% in June. However, we are far from out of the woods. What’s interesting here are the comments from Bank of Canada Governor, Tiff Macklem, immediately following the release. It’s not often...

Steve Saretsky -

https://www.youtube.com/watch?v=D2o6WobbzA4&list=PLOZmgBQcELMcCILSrDmXzrEDJr7dBkjpB&ab_channel=SteveSaretsky

Steve Saretsky -

Desjardins is joining a growing chorus of housing bears, calling for further price declines in the nations housing market this year. The bank is now calling for a 25% drop from peak to trough in the average sales price nationally. Keep in mind the average sales price is skewed predominantly by...

Steve Saretsky -

https://www.youtube.com/watch?v=obKmZnc2Qg8&t=2699s&ab_channel=SteveSaretsky

Steve Saretsky -

As discussed last week, our early indicators pointed to Greater Vancouver home sales falling to a 22 year low in home sales for July. The Real Estate board has officially confirmed the precipitous decline. July sales were also 35% below the ten year average, and the typical price of a...

Steve Saretsky -

https://www.youtube.com/watch?v=R59gK6RmdPU

Steve Saretsky -

The worlds most important central bank, the US Federal Reserve, raised rates another 75bps this past week. The following day, second quarter GDP contracted 0.9%, marking the second straight quarter of contracting economic growth. While policy makers are not officially calling it a recession, we are arguably in one already....

Get the Saretsky Report to your email every month

The Saretsky Report. December 2022