Market Interest Rates are Rising Almost Everywhere.

Longer-Term Yields are Rising Despite Central Bank Inaction

While central banks hold overnight rates at record lows, anchoring short-term interest rates and the prime rate, mid-to-long-term government yields have been rising since early this month. As the chart below shows, the 5-year Government of Canada bond, upon which mortgage rates are generally tethered, are currently at 0.69%, up 27 basis points since January 29th. This is the highest 5-year yield since late-March 2020.  Canadian bond yields have increased more than in the US, perhaps due to the surge in commodity prices, most notably oil, which has climbed 16.9% in just the past month, taking the year-to-date gain to 27%.

Growing government debt arising from fiscal measures to cushion the blow of the pandemic and stimulate the economy has set the stage for higher government bond yields in much of the developed world.

Inflation concerns are mounting. In a rare move, yesterday Statistics Canada revised up its estimate of core inflation–unveiled only five days ago–from 1.5% to 1.77%. The result is an inflation picture that is more elevated than reported last week, at a time when investors are becoming more worried about global price pressures. The core CPI is the Bank of Canada’s preferred measure of underlying inflation, and it has rattled markets that it now appears to be running at nearly a 1.8% year-over-year pace.

While inflation is expected to accelerate in the coming months on higher energy costs, policymakers led by Governor Tiff Macklem see little immediate threat from rising prices, even with extraordinary levels of stimulus coursing through the economy. Despite a temporary pickup early this year, the Bank of Canada doesn’t anticipate inflation will sustainably return to its 2% target until 2023. Macklem speaks in Calgary later today, and he is likely to suggest that the Canadian economy is still far from an inflationary threshold.

Keep in mind that Canada’s economy has considerable slack with unemployment rising in recent months and the lockdown continuing for at least a couple more weeks in the GTA. Moreover, Canada has fallen far beyond other countries in the vaccine rollout.

The biggest vaccination campaign in history is currently underway. More than 209 million doses have been administered across 92 countries, according to data collected by Bloomberg News. The latest pace was roughly 6.24 million doses a day. Israel has administered more than 82 doses of vaccine per 100 people, the UK is at 27.5, and the US is at 19.3. Canada, on the other hand, has administered only 4.1 doses per 100 people, now ranking 43rd in the world (see chart below).

This slow start to the rollout likely portends a longer period of economic underperformance.

Bottom Line

Some upward pressure on fixed mortgage rates might be in store, although the Big Five Banks have yet to respond, and the qualifying rate remains at 4.79%, well above contract rates. Without any prospect of near-term tightening by the Bank of Canada, variable rate mortgage rates–typically tied to the prime rate–will remain stable. But mortgage rates have moved up at some of the non-bank lenders. No question, the economy’s trajectory and interest rates will be linked to the return to the ‘new normal’ following the pandemic. Good news on the pandemic front inevitably means higher mortgage rates in 2022-23–if not sooner.

-Dr. Sherry Cooper

Interest Rates & Commodity Prices Surge On Economic Rebound Optimism.

Canadian 5-Year Bond Yield Surges 

In an unprecedented move, bond yields are spiking around the world. Yields globally are now at levels last seen before the coronavirus spread worldwide. At the same time, commodity prices are surging, including energy, metals and minerals, agricultural products and lumber. The Biden administration’s $1.9 trillion stimulus package is has triggered fears that if the US economy returns to full employment too quickly, inflation might be the result.

Central banks have attempted to soothe markets, with European Central Bank chief economist Philip Lane saying the institution can buy bonds flexibly. Fed Chair Jerome Powell called the recent run-up in yields “a statement of confidence” in the economic outlook. Bank of Canada Governor Tiff Macklem told us earlier this week that it’s a long road to recovery for the Canadian economy. The Bank of Canada will continue to provide support every step of the way. Many Bay Street economists took this to mean that he reinforced the BoC’s commitment to keeping the policy rate at its effective lower bound of 25 bps until sometime in 2023.

These global developments have sideswiped Canada. On Tuesday, I warned that the 5-year government bond yield had risen 27 bps to 0.69% since the beginning of this month, shown in the first chart below. This morning, the rise has become exponential, hitting 1.00%, shown in the second chart.

Keep in mind that Canada’s economy has considerable slack with unemployment rising in recent months and the lockdown continuing for at least a couple more weeks in the GTA. Moreover, Canada has fallen far behind other countries in the vaccine rollout. But there is no denying that pent-up demand in Canada is high. Not only have home sales been breaking records, but auto sales and anything housing-related–such as Home Depot earning growth–have skyrocketed.

Savings rates are high, and the big banks have reported a surge in deposit growth as consumers squirrel away those savings. Remember, the Roaring Twenties was a response to the 1918 Pandemic, more than anything else.

The CRB commodity price index, shown below, is on a tear, and the gains are in every sector except gold and orange juice. That means that new home construction costs are also rising, as home sales remain well above listings.

Bottom Line

It’s time to lock-in mortgage rates. For those in the market, preapprovals are prudent. Rising rates will likely trigger more housing activity in the near-term as those thinking of buying might move off the sidelines, pushing prices higher over the first half of this year.

The surge in interest rates would undoubtedly stall or reverse if we see a third wave of new variant COVID cases in advance of a full rollout of the vaccines in Canada. However, there is enough monetary and fiscal stimulus in global markets, and oil prices are expected to continue to rally sufficiently that an ultimate rise in interest rates cannot be far off. This is indicated by the loonie moving to a near a 3-year high.

-Dr. Sherry Cooper

Latest in Mortgage News: BoC Sees Early Signs of Housing Overheating, but Will Keep Rates Low for Now

Fixed rates may be heading higher, but variable-rate holders can rest assured their rates won’t be going up just yet, at least according to Bank of Canada Governor Tiff Macklem.

During a speech on Canada’s labour market, Macklem said monetary policy will need to continue to provide stimulus for a “considerable period” because a complete economic recovery is “still a long way off.”

“We have committed to keeping our policy interest rate at the effective lower bound until economic slack is absorbed so that our inflation target is sustainably achieved,” he said, repeating a line often used during the Bank’s policy meetings. “And we have backed up this commitment with our program of large-scale government bond purchases.”

In statements released at past rate decision meetings, the Bank has repeated that it currently sees its policy rate at its “effective lower bound,” currently at 0.25%, and that it doesn’t foresee raising rates until 2023.

As for the Bank of Canada’s bond-buying program, which has helped keep fixed rates lower over the past year, watch for the BoC to further reduce its commitments in the coming months, says CIBC.

“The Bank has been pointing to its aversion to owning half or more of the outstanding stock of bonds due to the potential impacts on market functioning, and it would be on that path if it failed to slow its purchase plans,” noted Avery Shenfeld of CIBC Capital Markets. “Thus, come April, don’t be surprised to see a further reduction in bond purchases.”

BoC Keeping an Eye on Housing Market

Macklem also commented on growing signs of overheating in the country’s housing markets, but noted that while the Bank is watching the situation closely, the situation isn’t yet critical.

“We are starting to see some early signs of excess exuberance, but we’re a long way from where we were, say, in 2016, 2017 when things were really hot,” he said during the Q&A.

“What we get worried about is when we start to see extrapolative expectations, when we start to see people expecting the kind of unsustainable price rises we’ve seen recently go on indefinitely, and they’re basing their decision on those kinds of assumptions.”

…as Fixed Rates Continue to Rise

Earlier this week, we reported that a handful of lenders had started raising interest rates in response to surging bond yields. That handful is now a crowd.

Most lenders have been increasing their rates over the course of the week, and many brokers have been forced to follow their lead. On Friday, TD Bank became the first Big 6 bank to raise its 5-year fixed rates.

Canada’s 5-year bond yield shot up even higher on Thursday, closing at a near-12-month high of 0.95%, signalling yet more rate increases on the horizon.

Mortgage Professionals Canada Marks 13,000-Member Milestone

Canada’s national association of mortgage brokers, Mortgage Professionals Canada, announced that as of January 2021, its membership now comprises more than 13,000 members from across the country.

“An increased membership means we have a stronger representative voice with regulators and governments,” said MPC Board Chair Dong Lee in a video posted to social media.

MPC President and CEO Paul Taylor added the association will “continue to strive to increase our industry footprint, and we look forward to further growth and strength within our community.”

–Steve Huebl

Canadian Home Sales Hit An All-Time Record High in January.

Housing Continued to Surge in January

Today the Canadian Real Estate Association (CREA) released statistics showing national home sales hit another all-time high in January 2021. Canadian home sales increased 2.0% month-on-month (m-o-m) building on December’s 7.0% gain. On a year-over-year (y-o-y) basis, existing home sales surged 35.2%. As the chart below shows, January activity blew out all previous records for the month.

The seasonally adjusted activity was running at an annualized pace of 736,452 units in January, significantly above CREA’s current 2021 forecast for 583,635 home sales this year. Sales will be hard-pressed to maintain current activity levels in the busier months to come, absent a surge of much-needed new supply; However, that could materialize as current COVID-19 restrictions are increasingly eased and the weather starts to improve.

A mixed bag of gains led to the month-over-month increase in national sales activity from December to January, including Edmonton, the Greater Toronto Area (GTA), and Chilliwack B.C., Calgary, Montreal and Winnipeg. There was more of a pattern to the declines in January. Many of those were in Ontario markets, following predictions that sales in that part of the country might dip to start the year with so little inventory currently available and many of this year’s sellers likely to remain on the sidelines until spring.

Actual (not seasonally adjusted) sales activity posted a 35.2% y-o-y gain in January. In line with activity since last summer, it was a new record for January by a considerable margin. For the seventh straight month, sales activity was up in almost all Canadian housing markets compared to the same month the previous year. Among the 11 markets that posted year-over-year sales declines, nine were in Ontario, where supply is extremely limited at the moment.

CREA Chair Costa Poulopoulos said, “The two big challenges facing housing markets this year are the same ones we were facing last year – COVID and a lack of supply. It’s looking like our collective efforts to bring those COVID cases down over the last month and a half are working. With luck, some potential sellers who balked at wading into the market last year will feel more comfortable listing this year.”

New Listings

The dearth of new listings continues to be the biggest problem in the housing market. As we move into the spring market and continue to see fewer COVID cases, the likelihood is that new supply will emerge. But for now, the number of newly listed homes plunged 13.3% in January, led by double-digit declines in the GTA, Hamilton-Burlington, London and St. Thomas, Ottawa, Montreal, Quebec and Halifax Dartmouth.

With sales edging higher and new supply falling considerably in January, the national sales-to-new listings ratio tightened to 90.7% – the highest level on record for the measure by a significant margin. The previous monthly record was 81.5%, set 19 years ago. The long-term average for the national sales-to-new listings ratio is 54.3%.

Based on a comparison of sales-to-new listings ratio with long-term averages, only about 20% of all local markets were in balanced market territory in January, measured as being within one standard deviation of their long-term average. The other 80% were above long-term norms, in many cases well above. This was a record for the number of markets in seller’s market territory.

There were only 1.9 months of inventory on a national basis at the end of January 2021 – the lowest reading on record for this measure. At the local market level, some 35 Ontario markets were under one month of inventory at the end of January.

Low available supply is the reason property values will continue to go up. Strong demand pre-pandemic and the historic market rally since summer have cleaned up inventories in many parts of the country. Relative to the 10-year average, active listings had plummeted between 50% and 61% in Ontario, Quebec and most of Atlantic Canada, and 29% in BC by the late stages of 2020. And that’s despite a surge in downtown condo listings since spring in Canada’s largest cities. With so few options to choose from (outside downtown condos), buyers will continue to compete fiercely. Buyers in the Prairie Provinces, and Newfoundland and Labrador, however, will feel less pressure to outbid each other given supply isn’t quite as scarce in these markets.

Home Prices

Viewed from another angle, sellers enter 2021 holding a powerful hand when setting prices in most of Canada. We see this continuing during most of 2021. We expect provincial sales-to-new listings ratios—a reliable gauge of price pressure—to generally stay above the threshold (0.60) where sellers have historically yielded more pricing power. In several cases (including BC, Ontario and Quebec), ratios are well above the threshold, providing plenty of buffer against demand-supply conditions flipping in favour of buyers.

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose by 1.9% m-o-m in January 2021. Of the 40 markets now tracked by the index, prices were up on a m-o-m basis in 36.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 13.5% on a y-o-y basis in January – the biggest gain since June 2017.

The largest y-o-y gains – above 30% – were recorded in the Lakelands region of Ontario cottage country, Northumberland Hills, Quinte & District, Tillsonburg District and Woodstock-Ingersoll.

Y-o-y price increases in the 25-30% range were seen in Barrie, Niagara, Grey-Bruce Owen Sound, Huron Perth, Kawartha Lakes, London & St. Thomas, North Bay, Simcoe & District and Southern Georgian Bay.

Y-o-y price gains followed this in the range of 20-25% in Hamilton, Guelph, Oakville-Milton, Bancroft and Area, Brantford, Cambridge, Kitchener-Waterloo, Peterborough and the Kawarthas, Ottawa and Greater Moncton.

Prices were up 16.6% compared to last January in Montreal. Meanwhile, y-o-y price gains were in the 10-15% range on Vancouver Island, Chilliwack, the Okanagan Valley, Winnipeg, the GTA and Mississauga. Prices rose in the 5-10% range in Victoria, Greater Vancouver, Regina and Saskatoon. Home prices were up 2% and 2.2% in Calgary and Edmonton, respectively.

Bottom Line

The rollercoaster that was 2020 left Canada’s housing market more or less where it started the year: full of bidding wars, escalating prices and exasperated buyers unable to find a home they can afford. The pandemic changed some dynamics—it drove many buyers to the suburbs, exurbs and beyond, ground immigration to a virtual halt, triggered a downturn in big cities’ rental markets and caused households to build up their savings—but it didn’t dial down the market’s heat.

The marked shift in housing strength from urban centres–Toronto, Vancouver, Montreal–to perimeter cities is ongoing. For example, Toronto’s prices are up ‘only’ 11.9% y-o-y, but Barrie (+27%) and London (26%) have far outpaced these gains.

Condo price growth has slowed to just 3.1% y-o-y, or a record 14.3 percentage points below the price gains in single-detached homes. That’s by far the widest gap in 20 years and reflects the hunt for space and social distancing.

Housing starts (reported yesterday by CMHC) surged to 282,428 annualized units in January, the second-highest monthly posting since 1990. This figure could be distorted upward by the unseasonably mild January weather in much of the country. But the new high in starts is in line with record sales and solid building permits.

For policymakers, it doesn’t appear that there’s much interest in leaning against a sector that is helping to prop up the economy, especially with years of tightening mortgage rules already in place.

There appears to be little on the horizon to stop sales or prices from reaching new heights in 2021. Yet, cooling signs will emerge as the year progresses, which will come into fuller view next year. The foremost restraining factors will be a rise in new listings, waning pandemic-induced market churn, a modest creep-up in interest rates and an erosion of affordability. Call it a 2022 soft landing.

–Dr. Sherry Cooper

Canadian Home Prices Set New Record High in January. Should We Be Worried?

It should come as no surprise that home prices continued their upward trajectory in January, setting a new all-time record.

The average price reached $621,525, a 22.8% year-over-year (not seasonally adjusted) gain from a year earlier, reported the Canadian Real Estate Association (CREA).

Home sales were also up 35.2% compared to January 2019, to an annualized rate of 736,452–well above CREA’s 2021 forecast for 583,635 sales this year.

“The two big challenges facing housing markets this year are the same ones we were facing last year–COVID and a lack of supply,” said Costa Poulopoulos, Chair of CREA.

Here are some other key stats for the month:

• Newly listed homes were down 13.3% year-over-year.
• The national sales-to-new listings ratio tightened to 90.7%–the highest level on record for the measure by a “significant margin,” CREA reported. The previous record was 81.5%, set 19 years ago, and well above the long-term average of 54.3%.
• There were just 1.9 months of housing inventory in January, a new record low. This is how long it would take to liquidate current inventories at the current sales rate. In Ontario, there are now 35 markets with less than one month of housing inventory, up from 29 markets in December.

“The problem with this time of year is that the buyers and sellers that will in time define the Canadian housing story of 2021 are mostly all still waiting in the wings,” noted Shaun Cathcart, CREA’s Senior Economist.

“The best-case scenario would be if we see a lot of sellers who were gun-shy to engage in the market last year making a move this year,” he added. “A big surge in supply is what so many markets really need this year to get people into the homes they want, and to keep prices from accelerating any more than they already are.”

Here’s a look at some regional and local housing market results from January:

• Ontario: $796,884 (+26.7%)
• Quebec: $408,061 (+20.7%)
• B.C.: $843,830 (+15.9%)
• Alberta: $421,903 (+9.1%)
• Halifax-Dartmouth: $433,308 (+30.7%)
• Barrie & District: $637,500 (+27.6%)
• Ottawa: $555,200 (+22.3%)
• Greater Montreal Area: $434,000 (+16.7%)
• Greater Toronto Area: $927,700 (+11.9%)
• Winnipeg: $293,500 (+10.3)
• Victoria: $742,600 (+5.6%)
• Greater Vancouver Area: $1,056,600 (+5.5%)
• Edmonton: $320,800 (2.2%)
• Calgary: $420,000 (+2%)

Should We Be Worried?

“Rock-bottom interest rates, changing housing needs, high household savings and perhaps nervousness that accelerating prices will crush affordability down the road continued to fuel huge buyer interest,” wrote RBC Economics’ Robert Hogue, noting that the ongoing run-up in prices could bring calls for policy intervention.

“With prices rising more than 20% from a year ago in virtually every small southern Ontario market, parts of Quebec and Atlantic Canada—and most still on an accelerating path—affordability issues will soon confront many Canadian communities. Pressure will build on policy-makers to ‘do something about it’,” he said.

Yet, there’s also reason for them to take a hands-off approach, according to BMO’s Robert Kavcic.

“For policy-makers, it doesn’t appear that there’s much interest in leaning against an area of the economy that is actually strong at this time, especially with years of tightening mortgage rules already in place.”

A notable ongoing trend is the faster pace of price acceleration in communities surrounding large urban areas, Kavcic added.

“…almost all of the country is seeing housing market strength…That said, the shift in strength from big urban markets (i.e., Toronto, Montreal, Vancouver) to perimeter cities is ongoing,” he wrote, pointing to the 11.9% annual increase in Toronto prices vs. 27% in Barrie and 26% in London.

But this rapid rise in prices in outlying areas is also easily explained.

“If a household sells a typical house in Toronto to buy one in Barrie, they could offer 10% over asking and still only pay 66% of what they’re selling for,” he continued. “With very limited supply, it’s easy to see how a lot of new buyers entering a particular region can be insensitive to prices, and therefore push them up quickly.”

So, what can anxious homebuyers expect in the months ahead?

“We expect the dearth of supply—including in smaller markets—will soon restrain activity but keep the heat intense,” says Hogue.

Even the condo market is once again starting to see increased demand, wrote Rishi Sondhi of TD Economics.

“Also notable was that benchmark condo prices grew for the first time in several months in Toronto. Although supply remains elevated, conditions are becoming tighter than what we saw last fall. This suggests that further gains are in store.”