Spring Market Update

By Amit Puri, CPA, CA, BBA

We make no formal opinion on the state of affairs, instead strive to provide you our insight into key metrics and market drivers, to help you with your financial decisions for the future.

Bank of Canada (BoC) is expected to keep rates stable for the remainder of the year. There is possibility that the BoC could have a 25 bps (0.25%) increase if global macro economic changes arise that are outside the risk parameters of the BoC, but financial pundits predict rate rever- sals for the second half of the year. Let’s have the Variable vs. Fixed is the debate to have, and here it is: Fixed Mortgages have the benefits of a fixed-rate mortgage include, guaranteed monthly payment, with no decrease or increases in payments. Disadvantages of a fixed, the penalty is usually ten times higher than a variable rate mortgage, so if the penalty for a $1MM fixed mortgage can be upwards of $40,000, causing the mortgagee to be stuck with the lender and lack options.

\Variable Mortgages expected rate decreases by the BoC, payments will reduce in the coming year. Benefits of a variable-rate mortgage include 3-month penalty option so for a $1MM mortgage, penalty is approximately around $5,500. Reduction in rate leads to lower payments, and you are priced with the market.

Disadvantages, change in monthly payment and interest/principle split changes with rate rises causing trigger rates.

Other factors to consider with the banks. 70% of the banks profits from branch activities come from mortgage penalties. 60% of mortgages are broken prior to term. Variable rates have outperformed fixed rates on a 5-year weighted average in the last 73 out of 75 years (note that rates have had a steady decline for the past 30 years). Even with the current variable mortgage at a high, the expectation is a drop in rates, leading to lower payments in the near future. Variable rates will drop over the next 9-12 months, as inflation begins to recess in Q4 2023.

What is inflation, the rate of rise in prices, of goods and services, so things that you buy, cost more today.

Think of inflation like this, last year in December 2021, a salad was $12. In December 2022, the same salad is $18. In 8 months from now in December 2023, the salad will be $18.25, which means inflation year over year, is within the 2% limit (50 cents increase on $18 represents a 1.38%)

Inflation hit 5.2% in February 2023, down from 5.9% in January 2023, and overall, down from a high of 8.1% in June 2022.

Markets have changed, with home Sale listings for March 2023 are up 44.9%, with sellers returning to the market for this upcoming season. Q4 2022 had 148,835 mortgage deals, vs 279,683 in Q4 2021. Interest rates are expected to drop, which is directly tied with home buying and selling in Canada, which means the end to the slum in real estate is near. Rent prices are up 10%, with home ownership in jeopardy, hence the demand for the rental market will rise, causing more demand on properties in major areas like GTA, GVA, and Montreal. With an increase of interest rates of almost 300%, a recession has not officially started, showcasing the resilience of the market and reduced corporate profits and layoffs in 2023 are expected to trigger a recession in the coming quarters.

The Outlook for 2023, is that a recession watch has started and is one of the more googled terms these days but will be path dependent and will require two consecutive quarters with decreased Gross Domestic Product (GDP) to hit the definition thereof. We’ll see what the latest quantitative tightening by the BoC brings, recession or not. Stagflation is persistent high inflation combined with high unemployment and stagnant demand in a country's economy. Vancouver had a drop for 55% in home sales volumes for January 2023 and a 42.5% drop in March 2023, but home prices are linear and stable, and in some pockets of the city have risen 5% The Canadian Housing Bubble could burst (along with those experienced it other worldwide major cities), with 76% of homeowners concerned about rising interest rates. RBC is predicting a mild recession in mid 2023 and TD Bank is the most shorted bank stock in Canada. Mortgage rates have been revised upward to reflect the major shift in monetary policy and financial conditions over the last 12 months, with private mortgage origination is up 72% YoY, signalling a change in the market. Canada also saw a 10x job creation in January, from the expected 15,000, the result was 150,000 new jobs showing the economy holding strong.

Rates have changed also and the Bank of Canada (BoC) and Federal Reserve, for now, is alive and well, so far central banks have coordinated to bail out Credit Suisse's equity, the depositors on Silicon Valley Bank and SBNY, the real question is, how much pain will they allow, before they step in and bail out more entities. There has been limited pain in the Canadian housing market for now, but the time lag associated with rate hikes and impact on the ground can be 6-15 months, so we haven't seen nothing yet.

Investors have a new new tax-free home savings account began on April 1st for first time home buyers, allowing home buyers to save up to $40,000 tax free towards their home purchase. Ontario Government has increased rental increases to 2.5% (from the current 1.2%), meaning landlords can increase rent by 2.5% for 2023. CMHC states we need 3.5 MM new homes by 2030 to bring affordability back to Canada, and we are on track for 2.3 MM having a 1.2 MM shortfall.