Another month, another record inflation print. Canada’s CPI inflation printed 8.1%, the highest level since January 1983. The silver lining is this was actually lower than market expectations of 8.4%, sending bond yields lower on the premise that inflation is likely peaking and a recession is becoming nearly inevitable if we aren’t in one already. The Canada 5 year bond which prices fixed rate mortgages continues to fall, dipping below 2.9% and now down nearly 50bps from the recent peak in June. Some lenders are slashing five year fixed rate mortgages, albeit somewhat marginally. The reality is that fixed rate mortgages are still too high to prevent a further correction in the nations housing market. It’s also worth noting that another increase in prime rates is due in September when the Bank of Canada hikes rates again. If the Bank moves rates up another 50bps as expected, it will trigger quite a few fixed payment variable mortgages, a product which accounts for 80% of all variable mortgages in circulation. I can assure you very few homeowners are prepared for a call from their bank in September asking them to increase their monthly payment or provide a lump sum of cash to get their amortization schedule back on track. It’s thus no surprise that housing forecasts are being revised lower. The team at RBC economics made headlines this past week, calling for a “historic” correction underway in the nations housing market. I typically don’t put much weight on forecasts as they really should be called guesses. However, it’s an important sentiment check when our largest bank calls for a 23% decline in home sales this year and 12% decline in the nationwide house price index from peak to trough by the second quarter of 2023. Just for context, RBC’s forecast would rank as the steepest correction of the past five national downturns. While 12% might sound low, remember this is measured using the national home price index, not average house prices in Toronto’s suburbs which have already blown through 12%. During the financial crisis of 2008-09, national home prices declined 9%. So far we are down 6.7% from peak, so if RBC’s guess is correct, we are about half way through this correction. Again, all very hypothetical but it’s fun to pontificate. Remember, US house prices crashed 19% on a national level from a peak in 2007 before ultimately bottoming in 2012, and it was much worse in certain areas. Keep this all in mind when you see numbers being forecasted left, right and center. At the end of the day nobody knows what’s going to happen, we are all guessing !! Here are a few things I feel quite confident about: 1. Mortgage rates are still too high and are hurting demand 2. More pain to come for variable mortgage holders 3. Central banks are always two steps behind Sock away some extra cash and enjoy your summer, we’ll have more clarity in the fall.
Three Things I’m Watching:
1. RBC is forecasting the largest decline in national house prices we’ve seen, with data going back to the 1980s. (Source: RBC Economics) 2. Variable mortgages account for 32% of all outstanding mortgage debt in Canada. (Source: Daniel De Melis) 3. Consumer confidence in Canada has tumbled to levels last seen during the depths of the pandemic. (Source: Bloomberg Nanos)