Dear reader,
The Bank of Canada (BoC) announced this morning (April 10th ) that they are maintaining their target for the overnight rate at 5.0%. Economists and market analysts widely anticipated this decision. The press release, however, confirms that rate hikes are no longer a possibility and that a rate cut for June is now a possibility. During the press conference the Governor of the bank, Tiff Macklem, said ‘’ June rate cuts are in the realm of possibility’’. They are now considering the economy is in an “Excess Supply”. The next meeting of the BoC is on June 5th 2024.
Inflation and Economy
The reason that the BoC is now more inclined to have rate cuts later this year is because all of the economic metrics that they are following are trending in the right direction to curb inflation. Inflation for February (the latest data available) was 2.8% down from 2.9% in January. Most components of the data are trending downward, except for Shelter cost. Shelter cost is a mix of mortgage payments (influenced by mortgage interest rates) and rent payments, mostly influenced by the lack of rental availability and mortgage interest rates. So, waiting for the shelter component to go down is a bad idea since reducing rates will help alleviate pressure on this inflation component.
The economy is now slowing down. We have the GDP at only 1% for the last quarter of 2023, and unemployment is now at 6.1%. Unemployment is now constantly rising from a low of 4.9% in June 2022. Unemployment is also a lagging indicator because companies do not want to cut their workforce for a single bad quarter and risk losing talent that will be difficult to replace. So, if they start laying off people this means that they don't expect the economy to recover in a timeframe that will justify maintaining the same workforce.
For the real estate market, the BoC snooze fest is also showing up with slow sales numbers in real estate. In greater Vancouver, 2,415 homes were sold in March. This is 4.7% lower than March of 2023 (2,535 units sold). Let's not forget that last year interest rates were lower than they are today. This is 31.2% below the 10-year average for March sales. It is also below the 20-year average for the number of sales for March. However, the price went up by 1 to 2 % depending on the type of property. This is due to many buyers waiting for a clear sign that BoC is done hiking rates and start cutting.
Is the BoC late to work?
I think so, they could have cut rates today by 0.25% with no risk of increasing inflation. Data from the real estate market of Toronto and Vancouver both show that a little more life would have not impacted prices upward. It would have given variable rate mortgage holders a few more dollars for them to either spend or pay down their credit cards. This would have also reduced the cost of credit for businesses that could have reduced their need for constant price increases by offsetting other cost increases. Actually, at this point, reducing rates would likely help reduce inflation. It would also help start building more properties because interest costs are really important in development projects. Also, that move would have not affected fixed mortgage rates, since they are already down from their peak of last fall. The risk they take by waiting is to create unnecessary damage to the economy, which would render a recovery that much longer. They also risk creating a self-feeding loop of bad economics creating worse economic conditions by making people postpone large purchases by making them save more by preparing themself for a rainy day.
Advice for Mortgage Holders and Seekers
If you have a mortgage, nothing changes for you. If you have a renewal in the coming 12 months you should start your process sooner than later because you may have a risk for a payment shock.
If you are looking for a mortgage, your pre-approval does not change. If you are not pre-approved yet I would suggest starting your process now and not waiting until the big news of interest rate cuts arrive. You would have the chance to look into a market with more inventory and less competition than if you wait.
If you need any help with a mortgage, you can contact me or Gina by scheduling an appointment:
Sincerely,
Simon Bilodeau and Gina Lopez
Mortgage Broker
DLC-Mortgage Negotiators
604-828-9864