Historic loss of value in the residential market
From National Bank of Canada
The Teranet-National Bank HPI continued to decline in December so that the cumulative drop in prices since their peak in May 2022 totaled 10.0%, the largest contraction in the index ever recorded. The current decline in prices has even surpassed the 9.2% loss in value that occurred during the 2008 financial crisis. However, there is some consolation in that the seasonally adjusted monthly decrease in prices in December was less significant than in November, going from -1.0% to -0.3%. With the Bank of Canada raising its key interest rate again in December and mortgage rates remaining high, we believe that the impact on property prices should continue to be felt in the coming months. All in all, we still expect the total correction to be limited to about 15% nationally by the end of 2023, but this assumes that policy rate hikes are coming to an end and that declines occur in the second half of 2023. Although corrections are occurring in all markets covered by the index (except Lethbridge), the CMAs that have experienced the largest price growth over the past two years are also the ones that have experienced the largest declines to date. Ontario, British Columbia and the Maritimes therefore appear to be more vulnerable, while the Prairie markets are less so, helped by a buoyant economic environment.
The Teranet-National Bank Composite National House Price Index decreased by 0.3% in December compared to the previous month and after adjusting for seasonal effects, the sixth consecutive monthly decrease.
After adjusting for seasonal effects, 6 of the 11 markets in the composite index were down during the month: Winnipeg (-1.8%), Calgary (-1.1%), Ottawa-Gatineau (-1.1%), Edmonton (-0.9%), Montreal (-0.5%) and Toronto (-0.4%). Conversely, the Quebec City (+1.3%), Victoria (+1.1%), Hamilton (+0.8%), Halifax (+0.4%) and Vancouver (+0.1%) markets were up.
From December 2021 to December 2022, the composite index remained stable, the first time since the financial crisis of 2008-09 that the index did not increase over one year. Price increases in Calgary (12.4%), Edmonton (6.3%), Halifax (4.7%), Quebec City (4.7%} and Montreal (2.5%) were entirely offset by decreases in Victoria (-0.1%), Ottawa-Gatineau (-1.0%), Vancouver (-1.5%), Toronto (-1.9%), Winnipeg (-2.0%) and Hamilton (-2.9%).
Bank of Canada increases policy interest rate by 25 basis points, continues quantitative tightening
The Bank of Canada today increased its target for the overnight rate to 4%, with the Bank Rate at 4% and the deposit rate at 4%. The Bank is also continuing its policy of quantitative tightening.
Global inflation remains high and broad-based. Inflation is coming down in many countries, largely reflecting lower energy prices as well as improvements in global supply chains. In the United States and Europe, economies are slowing but proving more resilient than was expected at the time of the Banks October Monetary Policy Report (MPR). Chinas abrupt lifting of COVID-19 restrictions has prompted an upward revision to the growth forecast for China and poses an upside risk to commodity prices. Russias war on Ukraine remains a significant source of uncertainty. Financial conditions remain restrictive but have eased since October, and the Canadian dollar has been relatively stable against the US dollar.
The Bank estimates the global economy grew by about 3% in 2022, and will slow to about 2% in 2023 and 2% in 2024. This projection is slightly higher than Octobers.
In Canada, recent economic growth has been stronger than expected and the economy remains in excess demand. Labour markets are still tight: the unemployment rate is near historic lows and businesses are reporting ongoing difficulty finding workers. However, there is growing evidence that restrictive monetary policy is slowing activity, especially household spending. Consumption growth has moderated from the first half of 2022 and housing market activity has declined substantially. As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment are expected to slow. Meanwhile, weaker foreign demand will likely weigh on exports. This overall slowdown in activity will allow supply to catch up with demand.
Central Bank Raises Rates As Mortgage Arrears Also Rise!
The Bank of Canada announced a 25 basis-point (Bps) Overnight Rate increase this morning bringing the Banks Target Rate to 4.75%. The bank also announced that will continue its policy of quantitative tightening.
Tiff Macklem, Governor of the Bank of Canada, stated that Global inflation remains high and broad-based. Although inflation is dropping in many countries primarily due to lower energy prices and improvements to global supply chain, Chinas abrupt lifting of Covis restrictions poses a risk to commodity prices and the war in Ukraine continues to generate uncertainty.
In Canada, economic growth has been stronger than expected and the economy remains in excess of demand. However, there is growing evidence that restrictive monetary policy is slowing activity. As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment are expected to slow. Meanwhile, weaker foreign demand will likely weigh on exports. The overall slowdown in activity will allow supply to catch up with demand.
In conjunction with the Bank of Canadas Rate Announcement, the central bank also released its Quarterly Monetary Policy Report that outlines inflation being projected to fall around 3% in the middle of 2023 and reach the targeted 2% in 2024. A decrease rate that will generate a bumpy ride for consumers throughout 2023.
The Bank of Canadas Media Release
Monetary Policy Report January 2023
According to Ben Rabidoux of Edge Realty Analytics and author of the latest Housing and Mortgage Report done for Mortgage Professionals Canada, mortgage arrears is a lagging indicator that tells us more about how consumers were faring 9-12 months ago than it does about the near future. But, Canadas National Arrears Rate experienced an uptick from its all-time low back in October 2022. According to data from the Canadian Bankers Association, mortgage payments that are behind 3 months or more, rose to 0.15% from 0.14% where it was since June 2022. That seems to be a very small percentage but the 0.01% increase represents just over 7,400 mortgages in arrears out of a total of over 5.1 million.
The numbers do tell us households are likely going into potential recession in a better position than during other turndowns, according to Ben.
Sources: Bank of Canada, Canadian Mortgage Trends Mortgage Professionals Canada