Threats to Canadian Economy!

Highlights:

1. Threats to Canadian Economy 
2. Mortgage Rate Blues
3. Has Housing Become an Inflation Risk? 
4. Slowing Momentum in the Real Estate Market  

Threats to Canadian Economy:

Canadian Economic Growth in 2023 and 2024 remained below the G20 average of 2.2% and 2.7% respectively. - 2023, expected 1.3% - 2024, forecast is 1.5% As fuel prices are going up, and commodity prices are almost going wild, the Canadian economy is expected to experience challenges in coming months. 

Export Development Canada (EDC) identified three major challenges facing Canadian companies. These are:

• Recession fears
• War in Ukraine
• Food insecurity.

Fuel on fire is India banning the export of rice, Saudi Arabia cutting oil production, cost of borrowing going up, all these factors are expected to have a negative impact on the Canadian Economy.

Reuters did a poll that suggests a sharp slowdown in economic growth in this quarter of 2023, as the economy is growing at 1.1%, down from 3.1% in the first three months of 2023, which is below BoC's estimate of 1.5%. We are already experiencing the impact of an aggressive tightening via the interest rates regime. Reuters sees a possible pause in further rise in interest rates. In my view, a rise in interest rate was expected in September, and any future rate hike depends on inflation and other economic indicators. It needs to be seen whether further rate hikes are going to help ease inflation or may result in damaging economic growth without reducing inflation to the targeted level of under 3%! Next policy decision is critical and will set the economic direction for the rest of 2023 and 2024. Housing market (buy side) is expected to continue its slow pace until we see the next pause in the rate hike, though we continue to see a rise in the rentals!

Mortgage Blues:

Infinity mortgages will impact homebuyers. Canadians are seeing amortization periods expanding to infinity, something that was never experienced before. Since March 2022, interest costs have significantly increased and borrowers with variable mortgages are now under severe pressure as their incomes do not match their expenses where the mortgage is contributing heavily towards their monthly outflows.

Similarly, for fixed mortgages, amortization periods have increased from usual 25 to 30 years to 70 years. Some Canadians are already paying zero amount towards their principal, therefore adding nothing into their home equity!

 “As many as one in five mortgage holders have seen their amortization periods stretch this year.” Said Randy Robinson, political economist and the director of the Canadian Centre for Policy Alternatives'.

 In November 2022, The Bank of Canada said that 13 percent of all mortgage holders in Canada were in that situation. Recently, the National Bank and Desjardins said that number is around 17 per cent. Randy thinks that "based on how they're calculating it, I think the number is actually more like 20 per cent now."

Randy also said that, “my estimate is that there must be at least a half a million households in Canada who are facing this problem where… they're not reducing the principal at all,".

Has Housing Become an Inflation Risk?

Canadians are over-leveraged!

That is the truth. We spend more than what we earn. Housing Mortgage is one of the biggest debts most Canadians carry. Phillip Colmar, Managing Partner and Global Strategist MRB Partners recently said, "If the housing market falls, it might put Canada into a deeper recession!"

There is no doubt that Canada housing prices have increased considerably during the period of lowest interest rates, during which people took advantage of lower interest rates and invested in real estate at higher prices. Increasing interest rates have already impacted those who were on variable mortgages. Soon fixed mortgages will be for renewals, which will result in higher cash flow - an alarming situation which will put a lot of families in the challenging situation.

If the housing market falls, will it help prospective buyers who have been sitting on the sidelines due to high prices?

Some argue in favor of this, but the real estate market is not only driven by numbers, sentiments play a major role too. In the case of a grim economic situation, buyers may still prefer to see the bottom of the real estate market, but it is not easy to find the silver lining even if real estate becomes more affordable compared to the last few years of price levels.

Too complicated to paint a picture now as to what transpires in coming months.

Better Dwelling report quoted BMO: “New home prices continued their disinflationary march in July, pointing to further cooling in this component of shelter costs for the August CPI report.” Whereas new home prices may bounce back, that means pushing inflation up!

Slow Momentum in the Housing Market:

We did not do well anyways, low inventory, fewer buyers, and uncertainty dominated the housing market. Lower inventory kept rents going up, and reached a point where rents are now becoming unaffordable!  

Subsequently, rate hikes negatively impacted the housing market which was expecting a breather this summer.

According to RBC’s recent report, “Property values are still generally appreciating at a vigorous clip at this stage though the pace eased noticeably in July. The MLS Home Price Index rose 1.1% m/m, down from an average 1.9% rate in the previous three months. We expect price gains to continue moderating in the months ahead as better balance between demand and supply reduces upward pricing pressure, and higher interest rates trim buyers’ purchasing budgets.”

TRREB data compiled by Alex (elexan) there is an increase in the inventory as compared to the 1st September target sales.

At the same time, we saw fewer buyers in the market. For the GTA market, WOWA . ca, updated data suggests the following: "Toronto home prices fell in July 2023 after consecutive rate hikes by the Bank of Canada in June and July 2023. This has caused the average home price in the Greater Toronto Area (GTA) housing market to fall to $1,118,374, a sharp 5% decrease from last month. While Toronto home prices have fallen sharply by 5% in one month, they still remain 4% higher year-over-year, compared to July 2022’s average home price of $1,074,754."

Though BoC have opted not to increase interest rates in September, be cautious, inflation is hovering above 3% and with the recent increase in fuel prices and higher trend in rents and other costs!