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Bank of Canada Governor, Tiff Macklem, delivered some final comments this week at a keynote speech in BC. He didn’t mince words following the fastest rate hiking cycle in recent history. “There’s no question that if you bought a house near the peak, you took a variable rate mortgage with a high loan to income ratio you’re really feeling the squeeze of higher interest rates.” No doubt. Here’s our real life example to refresh your memory. 1. $500,000 mortgage, 25 year amortization, 1.5% mortgage rate = $2000/month $500,0000 mortgage, 25 year amortization, 5.5% mortgage rate = $3052/ month 2. $1,000,000 mortgage, 25 year amortization, 1.5% mortgage rate = $3997/ month $1,000,0000 mortgage, 25 year amortization, 5.5% mortgage rate = $6104/ month “Look, the housing market was unsustainably hot for the last couple of years, part of getting the economy into better balance is getting the housing market in better balance.” Macklem concluded. Have no fear, the housing market is definitely in better balance, at least if you’re a buyer. National housing figures released last week paint a rather drastic turn of events in the nations housing market. Home sales fell 39% year-over-year in November. The 30,135 sales reported across the

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To no surprise, the Bank of Canada raised rates again this past week. Another 50bps. Interest rates are now up a whopping 400bps since this tightening cycle began in March. According to Macquarie Research, this is the sharpest calendar year of rate hikes on record going back to 1936. The most common rebuttal you see circulating online is that rates are still low from a historical basis. While that may be true it is an irrelevant point if you’re not also considering the levels of debt. I often hear people comparing todays rate hiking cycle to that of the 1980s. The Bank of Canada had rates as high as 18% in 1981 so we have a lot more room to go! Except household debt to GDP levels were also around 50% in the early 80’s, today household debt to GDP sits at nearly 110%. Source: Acorn Macro, Richard Dias You could also buy a single family house on one income at roughly two to three times your annual salary in the 1980’s. Today that is obviously not the case. The recent 400bps move in interest rates is blowing up highly indebted household balance sheets. Let’s look at a few examples.

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Lots to unpack this week so let’s dive in. Sales figures for the month of November are making for more negative headlines, as they probably should. There is little optimism in the latest data. Greater Vancouver home sales were down 53% on a year-over-year basis. Over the past two decades there have only been two slower months of November (2008 and 2018). Prices are still trickling lower, despite inventory levels remaining surprisingly low. It’s a similar story in the GTA, home sales fell 54% from last year, and were the lowest since November 2008. A four hundred basis point rise in mortgage rates is going about as well as one would expect, and we’re about to get another Bank of Canada rate hike this Wednesday. The good news is this is probably the end of the line for the Bank of Canada, at least that’s my view. Macklem will seal the deal with another 25bps and bring this rate hike cycle to a close at 4%. A survey of Bloomberg economists seem to think the same, suggesting Governor Tiff Macklem can comfortably leave their benchmark rate as much as 100 basis points lower than the Fed. I’m not going to

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Last week we highlighted some recent data from Desjardins which noted that nearly every borrower who took out a fixed payment variable rate mortgage during the pandemic now owes more in interest than their original fixed payment. Trigger rates galore. It appears the Bank of Canada is finally coming around to the same conclusion. In a research paper released this past week, the Bank of Canada noted that about 50% of all variable-rate mortgages with fixed payments (not just pandemic borrowers) have reached their trigger rate. This represents about 13% of all mortgages outstanding. Let’s not forget that 13% figure does not include variable rate mortgages with FLOATING payments. At the end of the day it is very simple, you can not raise borrowing costs by 400bps in less than a year on top of a highly indebted household sector without experiencing significant financial stress. There’s a reason the Bank of Canada has been increasingly mentioning financial stability concerns in recent months. Don’t be surprised to see a smaller 25bps rate hike at the December 07 announcement. In a recent poll from Nanos Research, 47% of households say their finances have worsened over the past year. This is the highest

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As we expected and discussed in last months report, the Bank of Canada raised interest rates another 50bps in October. Markets were pricing in a 75bps rate hike but the Bank of Canada failed to deliver, citing growing concerns around financial stability. It’s the first time in awhile they have flagged financial stability concerns, which suggests we are likely near the end of this rate hiking cycle. Still, the damage is already done. Prime rate now sits at 5.95%, meaning nearly all variable rate mortgages are now north of 5.5% and closing in on 6% when we get our next (and perhaps final??) rate hike in December. Short term fixed rates are now north of 6% in many cases, particularly for renewals where borrowers have less flexibility in changing lenders. Just for curiosity sake, I called one of the big banks the other day to inquire about converting a variable rate mortgage to a two year fixed rate mortgage and I was quoted 6.14%. This was the best rate they could offer. Suffice to say, mortgage rates of 6% are hard to stomach and the market is not digesting it well at all.

No bottom yet. Data published by CREA last week showed national house prices slid lower in the month of October, dropping 1.2% month-over-month. The national home price index is now down 15% since peaking in March earlier this year, the steepest correction on record since the index was created in 2005. Just for comparison sake, the previous record was a 9% peak to trough decline in 2008-09. The index measures the price of a “typical home” in Canada. In other words, the typical home across Canada has declined by $132,900 this year. Of course all Real Estate markets are hyper-local, and the declines are not spread out evenly. However, other than Calgary, most major metros are enduring a real correction. Source: RBC We should not underestimate the ramifications of a 15% price correction to the national home price index. Real Estate transactions and mortgage volumes have been slashed nearly in half. It is survival of the fittest now. The industry is going to go through a significant restructuring after a blistering hot bull market sowed the seeds of its own demise. Two things got my attention this week: Properly, a tech startup/ real estate brokerage has announced significant job cuts.