Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Canada’s largest bank is warning investors that the country’s economic output is slowing. RBC expects next week’s official Q2 2023 GDP growth data to show a sharp deceleration in growth. Weak consumer spending, low investment, and rising inflation are just a few of the reasons. If GDP remains resilient in growth, the Bank of Canada may take action and raise rates further. This is the economic equivalent of a Mexican standoff—everyone survives, but no one wins.
RBC’s economics team came out swingin’ this week, dropping another anger-inducing analysis. The bank found that Millennials are much worse off than previous generations at this age. More debt, fewer assets, and a much lower homeownership rate are a few of the issues they face. It may not register as much of an issue with Boomers, who more than make up for the lost wealth. However, older households need to consume less, leading to slowing economic growth. The result is an economy with amplified risk in the event of downturn, impacting everyone.
Mortgage borrowers ended their fling with variable rates, but aren’t ready for a long-term relationship. Traditionally, 5-year fixed rate mortgages are the most popular product in Canada. That changed after rate cuts in 2020, when variable rates took the top spot. Rising rates have led to the return of fixed rates, representing a record 95% of originations in June. This time 3 and 4 year terms lead the market, and 5-year fixed rates are almost as unpopular as variable ones. Borrowers don’t want exposure to rising rates, but also don’t want to miss out on potential rate cuts.
Pay attention to housing if you’re watching interest rates, explained BMO Capital Markets. Over the past year, new home prices have helped to push the headline inflation readings lower. It appears that momentum is now reversing, which will drive inflation higher soon. The central bank has expressed concerns about sticky inflation, and warned it will act if it needs to. Rising new home prices may prove that interest rates aren’t high enough to slow growth.
Canadian mortgage credit hit a new record, but the growth rate was unusually low for the segment. In fact, it’s rarely ever this low and rarely remains at this level for a considerable time. The reason is policymakers usually drop various levels of stimulus to reignite growth. Elevated inflation and post-pandemic market distortions make stimulus seem a little reckless. Though there’s no shortage of examples where policymakers use reckless tools out of self-interest.