Happy Monday Morning! As expected, the Bank of Canada tightened the screws once again, jacking rates up another 25bps, and bringing the overnight rate to 5%, its highest level since 2001. “It’s working,” Macklem said in an exclusive interview with The Globe and Mail on Wednesday, several hours after raising borrowing costs for the 10th time in a year and a half. “But it’s not working as quickly or as powerfully as we thought it would.” In other words, despite inflation falling from a peak of 8.1% to 3.4% in May (2.5% when stripping out mortgage interest costs) the job is not done, and the beatings shall continue until morale improves. One of the perplexing pain points for the BoC is the resiliency of the housing market. Here’s an excerpt from the latest monetary policy report. “The faster-than-expected pickup in housing resales, combined with a lack of supply, has pushed house prices higher than anticipated in January. The previously unforeseen strength in house prices is likely to persist and boost inflation by as much as 0.3 percentage points by the end of 2023, compared with the January outlook.” It’s true the price action in the housing market continues to surprise to the upside.

Happy Monday Morning! There are growing concerns about the state of variable rate mortgage holders across the country. At this point nearly everyone who’s on a variable rate mortgage has essentially hit their trigger rate. It’s become front page news, and rightfully so. Unfortunately this story isn’t going away anytime soon, as Tiff Macklem and his econs at the BoC look poised to jack rates another 25bps this week. The market is placing nearly 60% odds of a rate hike, while 20 of 24 economists polled by Reuters expect a hike on July 12th. That would push prime rate to a dizzying 7.2%. It isn’t getting much better on the fixed rate side either. A slew of lagging job data pushed yields higher across the curve. The Canada 5 year bond yield touched 4% for the first time since 2007, which means fixed rates are moving higher once again. Several of the big banks will increase mortgage rates again this week. Suffice to say this is all escalating into one giant shit sandwich and we’re all going to have to take a bite. The feds knew this was going to be a problem . Remember the March 2023 budget? Here’s

Happy Monday Morning! Headline inflation dropped like a stone in the month of May, now down to 3.4%. Mortgage interest costs surged 30% and remains the largest contributor to the year-over-year CPI increase. Strip out self inflicted mortgage interest cost, and CPI sits at 2.5% in May, back within the Bank of Canada’s control range of 1-3%. The job is done. Sure, core remains sticky, base effects are favourable, but for the most part prices have moderated. There’s nothing more to do but wait for the highest interest rates in two decades to work their way through a country suffocating on debt. The BoC has already overtightened, but that won’t prevent them from putting a nail in the coffin later this month. Remember this is an institution that sat idle while national home prices ripped 30% on an annual basis. They eventually raised rates for the first time in March of 2022, one month after the housing market had already peaked. These guys are not forward looking, regardless of how many PhD’s they employ. So here we are, 450bps later, and still pushing higher, even the banking regulator has been caught off guard. OSFI says these fixed payment variable mortgages

Happy Monday Morning! Perhaps one of the most fascinating stories of the year has been the resiliency in the nations housing market. Prices have bounced sharply since the depths of the 2022 bear market, surprising even the housing bulls. This is no bueno for the Bank of Canada who is desperately trying to reign in inflation after unleashing a firehose of cheap liquidity the past few years. After shaking markets with a surprise 25bps “unpause” in June, it looks like they’ll be back for more blood come July. In their recent publication surrounding their policy deliberations, their decision to raise rates in June was partly attributed to “Housing resale prices, which feed into the CPI with a 1-month lag, had increased for 3 consecutive months.” Rising house prices will not be tolerated, at least in the near term. That’s a difficult concept to swallow for most Canadians, considering the nearly 30 year bull market most homeowners have enjoyed. It’s almost a certainty the Bank of Canada is going to be too late to ease policy, just like they were too late to tighten policy. Remember the first rate hike came one month after the housing bull market had peaked. No

Happy Monday Morning! As mentioned in last weeks note, the great big housing boom is over. You see housing booms need credit, lots of it, to keep the wheels churning. The single largest driver of home prices over the past few years has been cheap and abundant credit. When money is basically free you tend to create speculative bubbles. Suburban houses come to mind. It doesn’t take a genius to figure out what happens when mortgage rates go from 1.5% to 5.5% in the span of twelve months. Mortgage borrowing has slowed to a trickle. Canadian households added a net $11.2 billion in mortgage debt in the first three months of this year, that’s the smallest increase in two decades, and down from a cycle high of $58B in Q1 of 2022. According to Equifax, new mortgage originations plummeted by 42% compared to Q1 2022—the lowest volume witnessed since 2014. In the opinion of rockstar veteran mortgage broker Jim Tourloukis, compensation for most brokers is down 60% year-over-year. Suffice to say the industry is entering a significant consolidation in the coming year or two, and it’s not just mortgage brokers, Realtors and developers are also on the hot seat. Building permits fell

Happy Monday Morning! The Scotia guy was right, and the Bank of Canada delivered with another rate hike. It was only 25bps but the signal sent shockwaves through the bond market. It’s incredibly rare for a central bank to raise rates, pause, and then start hiking again. Pauses are almost always met with inevitable rate cuts. This is unprecedented territory. This is already the largest cumulative rate hiking cycle since the 1980’s. Please don’t send me a long email explaining that rates are still low compared to the 80’s and that we need to keep hiking. In May of 1980 the average sales price in Canada was $65,947 and household debt to GDP hovered around 50%. The typical family had four kids and a big house with one income earner. This is not the 1980’s. Today the average sales price sits at $715,000 and you have to pack multiple generations under one roof just to service the mortgage. Household debt is hovering near an eye watering 105% of GDP. These interest rates are going to hit hard. Don’t be fooled by lagging data artificially inflated by mind blowing levels of immigration. One third of households have not seen an increase

Happy Monday Morning! The Canadian economy grew at an annualized pace of 3.1% in the first quarter, surprising to the upside and trumping the Bank of Canada’s growth forecasts. Four hundred basis points and the economy still hasn’t rolled over. This is prompting calls for the Bank of Canada to move off the sidelines and get back to raising rates once again. Here’s the outspoken chief economist of ScotiaBank, Derek Holt. Canada’s housing market continues to be on a tear as a combination of very little supply, surging immigration, a return of first-time home buyers, strong job markets, a premature halt to BoC rate hikes and returning FOMO sentiment drive renewed imbalances. I’ve argued since last year that consensus was far too negative toward Canadian housing as it over-emphasized the pressures facing a minority of super- stretched mortgage holders in a classic case of the tail wagging the dog. The broad fundamentals of Canada’s housing market remain highly constructive and will carry ongoing positive spillover effects for consumption as we saw in the Q1 GDP accounts. Recall that home sales were up by 11% m/m Seasonally adjusted in April for the biggest monthly gain since the initial stages of the

Happy Monday Morning! The blistering hot spring market, which has been plagued by a twenty year low in new listings across the country is finally starting to simmer. This is welcoming news for home buyers, whom instead of competing with six other buyers might only have to compete with three other groups on offer night. An incredible opportunity, some might say.. As of right now there is still just 3.3 months of inventory for sale across the country, conditions remain incredibly tight and prices are still ticking higher. However, with the spring market now in the rearview, many can’t help but wonder if there’s still another shoe to drop. After all, house prices remain sky high and mortgage rates have barely budged. We jacked rates by 425bps and the housing correction ended after nine months. Seems too good to be true. We’re about to get another test with bond yields pushing higher in recent weeks. The Canada 5 year has been on a tear, up 70bps this month alone. Not a great looking chart. While mortgage rates have been rangebound for the past six months, they’re back on the move again, jumping roughly 20bps over the past few weeks across

Happy Monday Morning! Inflation came in hotter than expected in April. Headline inflation ticked in at 4.4%, well above the 4.1% that was expected. It was the first month over month increase in the rate of headline inflation since June 2022. Naturally, panic ensured shortly thereafter. Markets immediately removed their expectations for a rate cut this year and have suddenly reversed course. There’s now an 11% chance of a hike at the June 7 meeting, and nearly a 40% chance of a hike by September 6 according to OIS markets. Furthermore, Scotiabank, who has been incredibly hawkish throughout this tightening cycle is putting their stamp on another 25bps hike in June. That’s bad news if you’re sitting on a variable rate mortgage. According to Desjardins, there are a lot of people up shit creek without a paddle. More than 75% of all variable rate mortgages in Canada have already breached their trigger rate. In other words, the interest owed is greater than the original monthly mortgage payment. These borrowers, along with the banks who dished out these loans, are in extend and pretend mode as amortizations climb to dizzying heights. It’s estimated these borrowers will need to increase their payments

Happy Monday Morning! Anyone following this newsletter since about January knows that the housing market has surged back to life. Inventory has fallen off a cliff at the same time buyer sentiment has rebounded, coinciding with the BoC’s Tiff Macklem taking his foot off the gas. In the GTA, home sales ripped 27% month-over-month in April on a seasonally adjusted basis. That’s the largest bounce since the depths of the pandemic. On the West Coast, seasonally adjusted home sales in Vancouver have jumped 50% over the past three months, inching closer to their long term average despite inventory at two decade lows. The result has been meaningfully higher prices since bottoming in the fall. This is hard to rationalize given mortgage rates remain elevated and affordability remains illusive. We might be inching closer to a recession but buyers don’t seem to care. According to National Bank, housing affordability hasn’t been this bad since the 1980s. Undoubtedly this is pushing prospective home buyers into the rental pool. Now add one million new migrants over the past twelve months and you can see where things start to go wrong. According to a recent rental report from Zumper, the national vacancy rate slipped below

The city of Toronto approves mass rezoning for residential development. There’s an inventory shortage not just in Canadian housing markets but around the world right now. CPI inflation comes in as expected. Are deposit runs an issue in Canada? The Bank of Canada asks Canadians to weigh in on a central bank digital currency. 

Happy Monday Morning! We get readers of all stripes on this newsletter. Policy makers, bankers, property developers, and every day people trying to figure out what’s going on in the crazy world of Real Estate up north. We’ve hit nearly seven thousand subscribers now which i’m incredibly grateful for. I’m not sure if David Rosenberg is one of them, but the esteemed economist echoed many of my thoughts this past week. Here’s Rosie in his widely followed Breakfast with Dave newsletter. You don’t say. Political pressures are poised to ramp higher as home prices begin climbing once again. April data points to a continued rebound across most major markets. Here in Vancouver, home prices have increased for three consecutive months as measured by the home price index. Multiple offers are back in full swing, especially for entry level product. This has confused a lot of prospective home buyers considering mortgage rates are still hovering near 5%. However, when looking at standing inventory its really not that hard to figure out, the number of homes listed for sale on the MLS as of the end of April stood at 8263, an eighteen year low. In other words, it’s pretty hard to