Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Canada’s Big Six banks have released their base case forecasts for real estate prices and only one of them expects prices to rise in the next year. RBC is the most optimistic, expecting prices to rise 2.6% to $732,300 by next year, followed by 5.1% compound annual growth for the next four years. National Bank is the second most optimistic, expecting prices to fall 9.6% over the next year. CIBC, Scotiabank and BMO all expect prices to fall, with BMO having the most bearish outlook, calling a 14.0% drop by next year.
Canadian regulators are sounding the alarm on private mortgages, as it experiences explosive growth. Traditionally these high interest mortgage loans are used by borrowers with less than stellar credit, and represent a small share of the market. That’s changed with Canada’s frothy real estate markets, with huge profit potential driving investors to turn to them for more leverage. It’s a problem that resembles the US before the Global Financial Crisis, which despite the narrative, found investors with prime or super prime credit scores going to subprime lenders for much more credit than would be granted by traditional lenders.
RBC, Canada’s largest bank, sees the end of the real estate correction on the horizon. They expect the market to pick up after inflation moderates in 2024, and interest rates begin to come down. However, they don’t anticipate a significant improvement in the near-term, with a slow recovery due to a lack of affordability. If you’re expecting rate cuts soon, you might be disappointed—no cuts are forecast until next year as of right now.
The Bank of Canada didn’t raise rates but that doesn’t mean they won’t be contributing to higher rates. Canada’s central bank emphasized they’ll continue quantitative tightening (QT), reducing credit liquidity. This helps to reverse the record credit stimulus they had injected into the market, helping to push borrowing costs higher. Since peaking in March 2021, they’ve used QT to reduce its balance sheet by roughly a third. A significant chunk of this occurred after this past January, partially responsible for the recent rise in yields.
The Bank of Canada is “conditionally” pausing hikes, but what exactly does that mean? According to BMO economists, the central bank is watching certain conditions—primarily GDP growth, or employment running too hot. US inflation is the big risk though, which isn’t decelerating as fast as expected. This can spark rate hikes in the US, forcing Canada to follow or face imported inflation via a weak loonie.