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When is the BoC cutting rates?

The BoC announced this morning (March 6th) 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. They are now considering the economy is in a “Modest Excess Supply”. The next meeting of the BoC is on April 10th 2024.


What is "Excess Supply"?  


The Bank of Canada now believes the economy is in a state of "Modest Excess Supply."  This means that we're capable of producing more goods and services than people are willing or able to buy. In a normal market, this would lead to lower prices to encourage more spending and reduce inflation. 





Fig 1. Inflation since 2020 to Today in Canada


Inflation is slowing down, but shelter costs remain a key factor in the Bank of Canada's decisions.


Now that we have inflation somewhat under control, with a recent reading of 2.9% in January (the latest data available), the Bank of Canada is focusing on other economic factors. This, combined with the inflation downtrend from December 2023 (3.4 %) and an economy capable of producing more goods and services than people are willing (or capable) of buying, should lead to rate cuts soon. However, the BoC still has a problem on its hands: shelter cost.


What are "Shelter Costs"? 


This component of inflation includes both rent costs and mortgage costs, making up roughly 30% of the inflation number.  Unfortunately, it's running at around 6% per year, significantly higher than the overall inflation rate. For inflation to return to the Bank of Canada's 2% target, everything else in the economy needs to have 0% growth on average –  a tall order! Sadly, we are not there yet.


One way to reduce shelter costs is to reduce interest rates and/or housing prices. House prices have been remarkably resilient even in the face of much higher interest rates. Interest rates (the fixed kind) are also seemingly very happy where they currently stand. A 5-year fixed insured rate is 4.85% right now, the lowest since May 2023. So, the mortgage component is not going down soon. For rents, there are not enough rental units available across the country, so rents are not going down soon either. Construction of new units has slowed down because of high construction costs (land, material, labour, permitting and financing). Therefore, shelter costs are not going down soon.


What This Means for Mortgage Rates?


To avoid putting more pressure on the shelter cost component, the BoC will wait until after peak purchasing seasons in Toronto and Vancouver before making a move. This pushes the first rate cut to June or July. Also, do not expect large moves, at first, something like a 0.25% cut. The reason is that the American economy is doing well for now. They are also in an election year so the Federal Reserve (American equivalent of the BoC) will not cut rates until after the November election. They do not want to be seen as taking a side in the election. If the BoC cut rates before the Americans do, this will weaken the Canadian dollar, and you guessed it, create inflation. So we may not see this year the 1-2% rate cuts that have been predicted by economists.


Advice for Mortgage Holders & Seekers


This is good mortgage news. This is also good news for incoming renewals. Yes, there will still be a payment shock because most people will see at least a doubling of their interest rates, but this is better than the 3x of last fall. There are solutions to avoid your payment going up 30%+ at renewal, but every customer is different, so every case will have to be looked at individually. If you have a renewal in the next 4 months, please contact me sooner rather than later.


If you are pre-approved, it is more likely that you have a fixed rate instead of a variable rate, so you may qualify for a little more than you were. If you are still searching for a property, please contact me for an update. For those considering purchasing, I suggest getting pre-approved now. With fixed rates trending lower, we might get a repeat of last spring when the rate hit the mid 4%.  The inventory (number of properties for sale) dried up quickly and bidding wars became the norm. The short-term effect on property values is likely a price stabilization or, if rates continue to go down, prices might start creeping up again. I don't expect a significant price movement for now, but the real estate spring season may come early.


Here a few interesting news:


The BC goverment in its last budget increase the exemption for the property transfer tax for the First Time Home Buyer up to 835K. This is good news as it reduces the amount of cash required to purchase a first property. The tax reduction will take effect on April 1st.




In the same budget the BC goverment also added a new Tax on house flipper. The new tax will be levied on property selling in less than 2 years. There is plenty of exemption however based on life circumstance. You can read more following the link below.




CMHC stopped their not very popular First Time Home Buyer Incentive (FTHBI). This was the program that was allowing first time home buyer to borrow between 5 and 10% of their down payment as a second mortgage. This is not to be mixed with the program allowing to buy a property with only 5% down (High Ratio Mortgage).



If you need any help with a mortgage you can contact take an appointment:




Sincerely,


Simon Bilodeau

Mortgage Broker

DLC-Mortgage Negotiators

604-828-9864

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