More housing data trickling out of Canada’s two largest major metros. Greater Vancouver home sales fell 46% year-over-year. It was one of the slowest Septembers on record, other than 2008, 2012, and 2018. Prices are still moving lower, albeit mostly in suburban markets which saw excessive price gains during the pandemic. For example, the median sales price of a detached home in the Fraser Valley inflated by $800,000 from February 2020 to February 2022. Since peaking, prices have dropped a whopping $455,000, giving back a good chunk its initial gains. What’s perhaps even more interesting though is that new listings are plummeting. New listings in Greater Vancouver fell to 20 year lows for the month of September. It appears both buyers and sellers don’t like todays prices. Both are refusing to transact at today’s prices. Negotiations have become hostile. A similar story is playing out in the GTA. Both Toronto home sales and new listings plummeted to 20 year lows in the month of September! Prices are inching lower but at a much slower pace with sellers pulling inventory off the market. Many sellers are choosing to rent out their properties instead, or planning to try selling again in the

Another massive week in the rates market with the US Federal Reserve jacking rates up another 75bps. While this was expected, it was the stark comments from Jerome Powell that really shook markets. Powell basically, in a polite way, said Americans need to endure some economic pain, including job loss, to slow demand and get inflation down. Furthermore, he wants to see a correction in the housing market. “What we need is supply and demand to get better aligned so house prices go up at a reasonable level, at a reasonable pace, so that people can afford houses again, so we probably in the housing market need to go through a correction to get back to that place.” How much of a correction does the Fed need to see? In the US, Home sales have declined for seven months in a row. New family home sales are down 30% year-over-year. Source: Global Macro Investor Pending home sales are approaching pandemic lows. Source: Global Macro Investor The Monthly Supply of New Homes just exploded to 10.9 months. Builders are screwed and prices are heading lower. Source: Global Macro Investor The wheels are in motion for a deepening housing correction. This is

Higher interest rates continue to slow the nations housing market. National home sales, as reported by CREA, fell 25% year-over-year in the month of August. It was also the sixth consecutive monthly decline in home sales. While new listings remain weak as sellers resist selling at recent valuations, inventory is still climbing and prices continue to move lower. The national home price index fell another 1.6% month-over-month in August. The index measures the price of a “typical home” and suggests the typical home has dropped by $108,000 since peaking in March. National prices have now declined 12%, the steepest correction since the index was created in 2005. Of course, there is no national housing market per se, but from a larger macro perspective this kind of move is significant. House prices are dropping across the nation, here’s how the correction looks year to date: Greater Toronto Area -15% Ottawa -11% Greater Vancouver -7% Montreal -6% Calgary -2% Remember, this exactly what the Bank of Canada wanted. Housing is the economy and it’s rolling over, hopefully enough to bring inflation down with it. Per Stats Canada, households lost nearly $1 trillion of net worth in the second quarter as house prices

As expected, the Bank of Canada raised interest rates another 75bps this past week. The overnight rate is now up a whopping 300bps year to date, the quickest tightening of monetary policy on a percentage basis since the 1980’s. While there was no additional commentary from BoC Governor Tiff Macklem, the official press release notes, “Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further.” For what it’s worth, markets are still expecting the Bank of Canada to lift rates to 3.75% before hitting pause. So, assuming they are right we have another 50bps to go. However, even if they stopped here, the damage is already done, let’s assess. The banks prime rate is now at 5.45%, which as per the always brilliant Rob Mclister, implies the following: Payments on a run-of-the-mill prime – 1.00% adjustable rate mortgage (ARM) will now be about $154 higher per month—per $100,000 borrowed—compared to March 1 (before the BoC started this campaign). Interest-only HELOC payments will leap by about $63 a month, per $100,000 borrowed. The lowest nationally available stress test rates have risen to: 6.59% uninsured (a 4.59% one-year fixed from Manulife Bank)

Canada’s second quarter GDP came in at 3.3% annualized rate, below economists forecasts of 4.4% and below the Bank of Canada’s own estimate of 4%. While weaker than expected, that won’t prevent the Bank of Canada from delivering a super sized rate hike this week on September 07th. Markets are still pricing in a 75bps rate hike, bringing the overnight policy rate higher by a total of 300bps year-to-date. We’ve already discussed the immediate implications for the housing market, with variable rate holders expected to feel the blow and instantly reducing borrowing power for prospective purchasers. August housing data suggests the bear market in housing continues. In Greater Vancouver, home sales fell 40% year-over-year for the month of August. Over the past two decades only the years 2008 & 2012 have seen weaker sales volumes in August. Sellers are putting up a good fight, new listings fell 17% and are running at two decade lows right now. It seems both buyers and sellers aren’t pleased with pricing right now. The home price index continues to leak lower, dropping 2% month over month, bringing prices down 6.7% from their peak earlier this year. In the Fraser Valley prices are off 13%. Meanwhile,

Canadian banks reported quarterly earnings this past week. One thing was clear, loan loss provisions are increasing, albeit from very low levels. Banks are preparing for more turbulence ahead, as highlighted by comments from Canada’s largest bank, RBC. The bank says interest rate hikes may trigger higher monthly payments for 80,000 customers with variable rate mortgages. The increases will average about $200 per month. Public commentary from RBC adds to what we’ve been discussing in this newsletter for several months now. An aggressive Bank of Canada is poised to send shock waves to variable rate holders across the nation. Let’s unpack this a bit further. There are two types of variable mortgage products in Canada. A floating rate variable which increases monthly mortgage payments every time the Bank of Canada raises rates. Then we have fixed payment variable mortgages which keep monthly mortgage payments the same regardless of interest rate increases. Instead, as rates rise, these mortgages will reduce the amount of principal being paid down. If interest rates rise to a point where no principal is being paid down, these mortgages get triggered, and banks will prompt you to increase your monthly payments. We are now reaching that stage. The

Inflation has likely peaked from a rate of change perspective, dropping to 7.6% year-over-year in July, down from 8.1% in June. However, we are far from out of the woods. What’s interesting here are the comments from Bank of Canada Governor, Tiff Macklem, immediately following the release. It’s not often you see the Bank of Canada issue an op-ed immediately following a CPI print. “As the central bank, it’s our job to control inflation and that means we need to cool things down. That’s why we have been raising interest rates since March. In July, we took the unusual step of raising the policy interest rate by a full percentage point, to 2.5 per cent. Increasing our policy rate raises borrowing costs across the economy — for things like personal loans, car loans, and mortgages. And when we increase the cost of borrowing, consumers tend to borrow and spend less and save more. We need to slow down spending to allow supply time to catch up with demand and take the steam out of inflation. One area of the economy where it is easy to see how this works is the housing market. With higher mortgage costs, housing activity has

Desjardins is joining a growing chorus of housing bears, calling for further price declines in the nations housing market this year. The bank is now calling for a 25% drop from peak to trough in the average sales price nationally. Keep in mind the average sales price is skewed predominantly by the GTA, and a change in the composition of sold houses. In other words, if fewer luxury homes are sold it will naturally lower the average sales price. Again, as we’ve talked about before, price predictions aren’t worth the paper they’re written on, what’s more important are the sentiment indicators. People are really negative about Real Estate, something we haven’t seen in a long time. Let’s not forget RBC’s recent call for the steepest correction in 40 years. It’s not hard to bump into a housing bear these days, everyone is on the same side of the boat. There’s no sake in being a contrarian for contrarians sake, it’s hard not to see prices falling further, rising interest rates, massive debts, hawkish central bank, etc, etc. But markets also tend to do the opposite of what everyone thinks. Remember the pandemic and the mortgage deferral cliff? Not prepared to call

As discussed last week, our early indicators pointed to Greater Vancouver home sales falling to a 22 year low in home sales for July. The Real Estate board has officially confirmed the precipitous decline. July sales were also 35% below the ten year average, and the typical price of a home is now down 4.5% as per the lagging home price index. In reality, prices are down anywhere from about 5-15% depending on the location and the product type. To put it simply, the more it went up during the pandemic, the more it is correcting now. Nature is healing. Things could be worse here, just look at Toronto. The GTA has recorded three consecutive months of home sales printing twenty year lows. The price of a typical home, as measured by the home price index, declined 3.9% last month. For anyone following along at home, house prices shedding 4% per month is far from normal, and is certainly not healthy despite the obvious overvaluation preceding the decline. Toronto area home prices are now down 13% from the peak, shedding $178,000 off the price of a typical home. It’s not hard to figure out what happens when Canada’s two largest

The worlds most important central bank, the US Federal Reserve, raised rates another 75bps this past week. The following day, second quarter GDP contracted 0.9%, marking the second straight quarter of contracting economic growth. While policy makers are not officially calling it a recession, we are arguably in one already. As highlighted by the always brilliant David Rosenberg, Back-to-back GDP contractions may not be the official definition of recession, but the reality is that whenever it’s happened in the past, the economy was in recession. Rosie added, “It hasn’t dawned on most people that the first-half GDP contraction reflected the inflation, equity market, and fiscal withdrawal shocks. The Fed-induced rate shock comes next. This recession is going to have legs.” Remember, monetary policy works on a lag, and research suggests it takes anywhere from nine months to two years to filter through the real economy. In real life, it feels much quicker than that. Surveys of consumer sentiment are already below the 2008 troughs and the University of Michigan survey of consumer sentiment recently took out its lows from the original Volcker era in 1980 — when gasoline was being rationed and unemployment hit 7.5% on its way to a pre-Covid

Another month, another record inflation print. Canada’s CPI inflation printed 8.1%, the highest level since January 1983. The silver lining is this was actually lower than market expectations of 8.4%, sending bond yields lower on the premise that inflation is likely peaking and a recession is becoming nearly inevitable if we aren’t in one already. The Canada 5 year bond which prices fixed rate mortgages continues to fall, dipping below 2.9% and now down nearly 50bps from the recent peak in June. Some lenders are slashing five year fixed rate mortgages, albeit somewhat marginally. The reality is that fixed rate mortgages are still too high to prevent a further correction in the nations housing market. It’s also worth noting that another increase in prime rates is due in September when the Bank of Canada hikes rates again. If the Bank moves rates up another 50bps as expected, it will trigger quite a few fixed payment variable mortgages, a product which accounts for 80% of all variable mortgages in circulation. I can assure you very few homeowners are prepared for a call from their bank in September asking them to increase their monthly payment or provide a lump sum of cash

Another month, another jumbo sized rate hike from the Bank of Canada. Tiff Macklem and crew surprised markets with a 100bps rate hike, the largest move since 1998 when the central bank was trying to support a weak Loonie. It was just two years ago when the Bank of Canada was rather irresponsible in encouraging the private sector to take on more borrowing, ensuring interest rates would remain at zero until the end of 2023. In the past four months, the bank has taken interest rates from zero to their target neutral rate of 2.5%, an incredible pace of change. While the bank is adamant they are “front loading” interest rates, there’s still another 100bps of tightening priced in for this year. This will have serious ramifications for the housing market so let’s discuss. One of the pillars supporting the housing market has been variable rate mortgages. They’ve been dirt cheap, averaging more than 150bps cheaper than the fixed rate mortgages this year. For this reason, we’ve seen an increasing number of new purchasers opting to go with variable rate mortgages. So far this year, over 50% of new mortgage originations have been variable, a historically high figure. If you were