Higher rates weren’t enough to kill Canada’s economy—they only made it angry. The Bank of Canada (BoC) surprised the market with a rate hike last week, and BMO doesn’t think it was the last one. Canada’s economy is running so hot, the market now expects at least two more rate hikes. It’ll almost certainly lead to higher mortgage rates, which will throttle demand for housing at these prices. That’s not just a coincidence.
Canada’s Key Interest Rate Is The Highest Since 2001
Canada saw its key interest get an unexpected hike last week. The BoC raised the overnight rate 25 basis points to 4.75%—the highest level since 2001, back when rates were being cut to deal with the tech bubble bursting. It was such a surprise, it also helped send the Government 5 year bond over 20 basis points higher.
“The market was pricing only 50% odds of a hike ahead of the latest decision, contributing to the sharp bond market move,” Benjamin Reitzes, Canadian Rates & Macro Strategists.
Adding, “Another 25 bp hike in July appears likely in our view given the BoC’s hawkish tone and limited data points until that meeting.”
Canada Expected To Get At Least Two More Rate Hikes
Canada’s stronger-than-expected economy is behind rising expectations for the overnight rate. Rising rates were supposed to throttle demand for goods, but there’s been few signs its cooling the economy. Core inflation remains elevated, employment is near a record, and GDP is rising at a rate that would rival the best of times. A rising overnight rate had little impact on the country, with the exception in the number of doomsday pieces in the news.
In fact, the economy is running so hot that the market sees hikes beyond the July move. “The market agrees with our view and is pricing another 35-40 bps in tightening by year-end,” said Reitzes.
Canadian Mortgages Are About To Get More Expensive
A higher overnight rate is bad news for mortgage borrowers looking for more leverage. “As of late Wednesday afternoon, Canada 2-year yields surged over 20 bps to around 4.60%, the highest level in 16 years,” he notes.
“With 5-year yields also popping about 20 bps higher, mortgage rates could soon climb as well. That would dampen building momentum in housing, something the BoC probably won’t mind seeing.”
Are not the federal policies, i.e. high government debt, extraordinary high immigration, and the encouragement of non productive borrowing for housing and condo construction counter to the Bank of Canada’s policy of slowing the economy to curb inflation. Not sure how this going to end but growth in housing in BC’s lower mainland is now totally out of hand. BC now has a housing construction, warehousing economy, and a few big megaprojects (Skytrain, bridge project, and pipelines) and this kind of economy cannot provide the excess capital to pay for our infrastructure deficit in health care, education, and public transportation
YAY!!
They really do want most of us to lose our homes. UNBELIEVABLE!
“However, multiple sections in the documents obtained by Global News about the CDIC’s assessment of risks to Canada’s banking sector were redacted under provisions citing potential economic harm to the country.”
https://globalnews.ca/news/9749090/cdic-silicon-valley-bank-collapse-atip/
Hot economy?
Conservatives obviously blame the Liberals for the economic pain Canadians are feeling from sky high prices for everything on top of ever increasing monthly rent/mortgage payments.
Joe Renter and Jane Mortgager in 416/905 will eat it up
Is there any data about the use of rental units for money laundering? In Los Angeles, it is forbidden to gather such data which is kind of an admission that it is happening. The other indicator that these empty rental units are being used to launder money is the lack of any stiff reporting requirements. However, even if the government wanted to gather data, it would not be easy.
Here’s the newest scam, which may not occur in Canada. Money launder either buys property or simply rents an apartment in one of the new complexes. In the old money laundering schemes, launderers bought property and wait for the price to increase and then sell. Renting made no sense. Under the new scheme, renting makes sense since buying individual rental units is not possible while buying condos involves inquisitive HOA’s.
This new form of money laundering relies on lawyers and accountants to manufacture fact legal and financial trails. The launder only needs one apartment, but there are reasons he may want to replicate the pattern with several apartments. He has various bank accounts pay his phony landlord companies rent. His unit may have 10 different renters, but he uses 10 different banks for his deposits. BofA does not check with US Bank to see of they are both getting rental deposits for 5757 Hollywood Blvd #508. The bank never goes to the apartment to see if it’s occupied.
It seems, but not possible to prove since the city collects no data and one has to live here and be familiar with the neighborhoods, that in the beginning money launderers did not have multiple renters per unit and thus they were supporting the densification of Los Angeles. LA has enough empty units to provide 7 apartments to each homeless person. Since the launderers realize that they can run tens of pretend renters through each apartment, their demand for more construction has dropped.
My guess is that the main factor which limits the number of pretend renters per unit is the number of banks. It’s possible that someone will notice if unit 508 appears more than once. If the launder invents apartments like renting out units on the 7th floor of a 3 story complex, it becomes more complex for the attorneys and accountants to maintain the charade.
The big unknown is the impact money launderers will have on the excessive construction in Los Angeles when they seen no economic reason to buy or rent the excess construction?
Don’t forget air bnbs, I’ve seen listings for 10k a night for a standard condo apartment. The amount of financial shenanigan is out of the world.
The Canadian economy is hardly running super hot. We just saw the first increase in the unemployment rate since August 2022, and it was by 0.2 percentage points, in spite of a drop in the participation rate from 65.6% to 65.5% of the labour force. Our labour force productivity has been tanking since its 2022Q1 peak. The most recent 2023Q1 drop was also the worst, at -0.6%. The strong GDP growth in 2023Q1 is largely due to strong population growth. Based on growth in the LFS population, GDP per capita probably grew at an annualized rate by 1.0%, a far cry from the 3.1% growth in real GDP. While this may have ended the technical real GDP per capita recession Canada suffered in 2022H2, real GDP per capita still hasn’t recovered to its peak level in 2019Q2. The average Canadian is worse off now than he was before the end of Justin Trudeau’s first term.
Core inflation may seem persistently high but the core measures in our operational guide are unreliable anyway. None of them explicitly exclude mortgage interest cost, which had a 12-month percent change of 28.5% in April. This is why the operational guide is at 4.5% (and the CPI-common series is actually at 5.7%!), while the previous operational guide, CPIX, which excludes mortgage interest cost, is only at 4.1%. The Trudeau government and the Bank of Canada had a chance to correct the mess they made at the time of the 2016 renewal agreement, when they dropped CPIX as the operational guide. With the 2021 renewal agreement they could simply have reversed that move, bringing back CPIX as the operational guide. Otherwise they could have excluded mortgage interest cost from all the series making up the new operational guide. They did nothing. Going forward, economic analysts outside of the Bank of Canada should only look to the CPIX to judge what is happening to core inflation, at least as long as the inflation rate for the mortgage interest cost index remains so elevated.
Maybe everyone should just buy vans and convert them into closet apartments?
Trudeau’s Canada sucks.
The article states that “employment is near a record, and GDP is rising at a rate that would rival the best of times”. Aren’t those good things? Why would BoC raise interest rates if employment and GDP are up?