It’s official, mortgage rates have hit 4% here in Canada. Several of the large banks have increased their popular 5 year fixed rate mortgage above 4%. You’d have to go back to about 2013 when rates were this high. Also worth adding that 2013 was a pretty slow year for housing and so I expect nothing less for us over the coming year. You have to remember, people buy payments, not houses. If they feel they can make the payment then they’ll buy the house. I won’t bore you to death on mortgage rates but here’s the gist of what you need to know. The 5 year mortgage went from 2.5% to 4% in two months. That increases the typical mortgage payment in Canada by about $550/ month. In more expensive cities like Vancouver & Toronto that increase is even higher. Now throw in the rising cost of living and you can see that something has to give. The cost and the availability of credit is ultimately what drives home prices. The media likes to talk about foreign buyers and investors but that’s really just skirting around the elephant in the room. At the height of the frenzy people were taking

Happy Monday Morning! It looks like inflation might not be transitory after all, and the bond market is finally figuring that out. Bonds have been selling off hard lately, sending yields much higher, and tightening financial conditions in the process. This is particularly important for the Canadian housing market. If there was ever a catalyst to prick the bubble that everyone has been talking about for over a decade it would be higher mortgage rates crushing demand and highly leveraged households. I would argue the 5 year bond in Canada is the most important metric to watch. The 5 year bond yield effectively prices the 5 year fixed mortgage rate. It took a 30 year high in inflation and a war to finally get it moving, but the 5 year bond yield has been on a tear in recent weeks. It is now sitting at 2.497%, the highest reading since 2010. As a result, fixed rate mortgages are on the move, with all major Canadian banks now offering mortgage rates north of 3.5%, and they could reach 4% within the next few weeks. Some banks have had to increase fixed rates 3 times over the past week, trying to keep

Consumer prices ripped to a thirty year high in Canada, rising 5.7% from last year. Shelter inflation was up 6.6%, the highest since 1983. Per ScotiaBank, much of that is being driven by the homeowners’ replacement cost, which was up 13.2% y/y. Unlike the US that uses owners’ equivalent rent, Canada captures housing primarily through the house-only part of builder prices (ex-land) as the main driver of replacement costs. I can assure you the cost of construction or replacement of a home is up much more than 13% but the same can be said about most of Stats Canada’s inflation basket. For example, let’s take a further look into housing. Officially shelter costs are up 6.6%, however national housing data just released by CREA (Canadian Real Estate Association) shows home prices are now up 29% from last year, the fastest pace of increases on record. Once again, house price inflation is widespread across the nation: Toronto +36% Montreal +20% Vancouver +21% Calgary +16% Ottawa +16% The good news is housing is starting to slow, at least in the two major markets of Vancouver & Toronto. However, inventory remains at crisis levels and just a moderation in prices is the best

Inflation concerns continue to percolate. US CPI inflation ripped to 7.9% in February, the highest reading in over 40 years. So now we basically have inflation at 8% and interest rates at zero. Of course this has major implications not only from a financial perspective but a societal perspective. It’s also a fundamental driver behind massive house price gains, or rather, the ongoing currency debasement. Savers have unfortunately been annihilated over the past couple of years, and it is becoming difficult to see how things get any better. Based on recent projects it is likely we will see inflation north of 10% in the coming months. The last time inflation was at 10% US debt to GDP was 30%, today it sits at 130%. In other words, it’s going to be incredibly difficult for central bankers to fight inflation without triggering something. While we are mostly talking US figures here, the same applies to Canada and then some. Our debt figures are even worse and even more concentrated in the private sector which has limited ability to absorb higher rates, ie they can’t issue new debt to pay for old debt like the public sector can. This doesn’t mean the Bank

Brace yourselves, we have liftoff! The Bank of Canada officially raised interest rates a mere 25bps last week. This was the first move since 2018 and comes at a time when inflation is running at 30 year highs. Markets believe another 5-7 rate hikes are still coming this year and some are calling this the Paul Volcker moment. In case you forgot, Paul Volcker was the head of the US Federal Reserve in the 1980’s, the last time inflation was running this high. Volcker raised rates from 11% to 21% in order to squash inflation which undoubtedly caused a lot of pain. Things got so bad that home builders started mailing 2×4 lumber in the mail to Volcker as part of a protest, claiming their lumber was no longer needed since nobody was buying houses. So is this our Volcker moment? I think some much needed context is in order. Back in the 1980’s, Canada’s household debt to GDP sat at roughly 40%. Today it is over 100% of GDP. In other words, it’s not going to take much to severely tighten financial conditions. Per David Doyle at Macquarie Macro Research, when you account for private sector debt levels in

I have long argued that a sell-off in Canadian housing will not be self-induced. In other words, policy makers are not going to willingly tank the market. If / when you have a downturn it will be due to something out of our control, likely a crisis in emerging markets that ripples through global financial system. The recent turmoil developing across Ukraine and Russia is undoubtedly something I am watching closely. Western Governments, including Canada have moved to restrict select Russian Banks from using SWIFT, disconnecting Russia from the international financial system. I will not pretend to be a geopolitical expert, nor an expert on the plumbing of the global financial system. However, let’s take a look at what the experts are saying. Zoltan Pozsar, Managing Director and Head of Short-Term Interest Rate Strategy at Credit Suisse, and perhaps the most respected in his field of expertise is warning that exclusion of various Russian lenders from the SWIFT messaging system could result in missed payments and giant overdrafts within the international banking system, and spur monetary authorities to reactivate daily operations to supply the market with dollars. “Exclusions from SWIFT will lead to missed payments and giant overdrafts similar to the

I know you probably don’t need another reminder on inflation so i’ll keep this brief. Inflation figures ticked higher again in January, with consumer prices rising 5.1% from last year. Prices are now rising at their quickest pace since 1991. In other words, so long as you don’t eat, drive a car or own a home there is no inflation. Speaking of owning a home, shelter costs are now rising at 6.2%. Remember the shelter component of inflation accounts for rent, property taxes, home and mortgage insurance, electricity, and mortgage interest costs. Thanks to falling interest rates over the past couple of years this has kept shelter inflation lower than it otherwise ought to be. If you turn your attention to the resale market, housing inflation is rampant. National real estate figures released this past week show home prices across Canada are up a record 28% from last year. This far surpasses the previous records created during the 2017 bull market. What’s more alarming is that national prices were up 3% from last month which suggests that house price inflation is actually getting worse, not better. Whoops. Here are the Annual price increases by city: Calgary +11.4% Victoria +24.9% Greater

Inflation in the United States surged to 40 year highs in January, with consumer prices growing by 7.5% year-over-year. The last time inflation was rising this quickly the fed funds rate was sitting at 15%, today it sits at zero. This is ramping up calls for aggressive interest rate increases in order to quell inflation, with Goldman Sachs now calling for 7 rate hikes by the end of this year. It goes without saying that whatever the US does, Canada is essentially forced to follow suit. In other words, housing bears are frothing at the mouth as record high house prices, and massive debt loads collide with rising interest rates. While there is no doubt interest rates are heading higher, i’d argue it’s a complicated path forward. I would like point to a recent letter from Hirschmann Capital here. The argument that the Fed can halt inflation by hiking interest rates as it did to end the 1970s inflation is somewhat of a ridiculous statement when you unpack things further. Per Hirschmann, From 1979-81, the Fed hiked the federal funds rate (FFR) by ~1000bps to curtail inflation. In 1979, however, the US Government’s debt to GDP ratio was only 31% of

Everyone is well aware of the great reshuffling throughout the pandemic. People migrated away from the city, opting for more space and privacy while they worked from home. Everyone rushed out to the suburbs. Similar to the toilet paper crisis at the onset of the pandemic, housing inventory in the burbs was swiftly plucked bare. Recent housing data just released for January shows the extent of the mania. Of all the homes sold in the Fraser Valley this January, 1247 homes to be exact, a total of 70% of them sold above the asking price. This was a new high for the valley, surpassing the previous boom in 2016/17. Bidding wars have resulted in a rapid rise in prices, particularly for detached houses. Since the start of the pandemic, March 2020, the typical price of a house in the Fraser Valley has inflated by $581,000. What was once considered home to the middle class has morphed into a speculative mania where the benchmark price of a house sits at $1.569M. Giddy up! Let’s dissect this a bit further, shall we. Since the start of the pandemic, from March 2020 to January 2022, house prices have inflated as follows: – Abbotsford

To the dismay of prospective home buyers hoping for a cool down in the nations housing market, Bank of Canada governor Tiff Macklem left interest rates unchanged this past week. It was an odd move considering a 25bps rate hike was already priced into the markets, and there would have been no justification needed, given CPI inflation is currently running at thirty year highs. Instead, the Bank of Canada will wait until March to raise rates a mere 25bps. In essence, the Bank of Canada extended the housing bull market another six weeks. While rates will clearly be heading higher, it will take some time for this to filter through into housing. Remember, most buyers secure their mortgage rate for 90 days, so they won’t be impacted by any immediate rate hikes. This is particularly true for variable rate mortgages which can still be had for around a stunningly low 1.3%. It’s no wonder this product remains historically popular, with nearly 55% of all new originations opting to go with variable rates. Ironically, the only question the Bank of Canada received on the housing front was regarding the growing uptake in variable rate mortgages. The long winded answer from deputy governor

Consumer prices continue to rip higher in Canada, officially growing at their fastest pace in 30 years per Stats Canada data this December. Consumer prices were up 4.8%, while shelter costs, which make up a part of the CPI basket, were up 5% from last year. Of course this is stirring the ongoing debate on we measure inflation, as both resale prices and market rents are suggesting a much different picture. Prospective home buyers are currently grasping with the worst buying conditions on record. There are currently fewer properties listed for sale in Canada than at any point on record.  House price inflation is out of control, with the Canadian Real Estate Association reporting national home prices were up 26% year-over-year in December. This is the fastest pace of house price inflation on record, surpassing the previous highs set in 2017. While one can argue there is no national housing market, that housing prices vary region by region, one common denominator remains the same, house prices are up, a lot. Here’s home price growth by city over the past 12 months: – Toronto 31% – Victoria 24% – Montreal 23% – Vancouver 17% – Ottawa 16% – Winnipeg 12% – Calgary 10%

As of this week, unvaccinated US truckers will not be able to cross the Canadian border. This decision by the Trudeau government is going to have significant economic impacts. COVID politics aside, let’s discuss the economic ramifications moving forward and how this could ultimately come full circle for the housing market. More than 70% of cross-border trade moves by truck. Canada imports $21B worth of food from the US each year. Suffice to say, truckers are the lifeblood of the supply chain ensuring Canadians get their food, and other consumer goods. So who’s going to deliver the goods? According to the American Trucking Association, only 50 to 60% of US truckers are vaccinated. Meanwhile there is already an acute, structural shortage of truckers. It is estimated the US is short about 80,000 truckers, in Canada we are short by about 23,000. There is nobody available to replace unvaccinated drivers. In other words, expect more supply shortages, and with that, higher prices. Canadians are already grappling with empty shelves at grocery stores and consumer price inflation running at an eighteen year high. Things are particularly bad here in BC where many of our farms were completely wiped out a few months