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Canadian Variable Mortgage Rates Rise Again. Are More Hikes Coming?

Dave Larock in Interest Rate UpdateMortgages and Finances

The Bank of Canada (BoC) raised its policy rate by 0.25% last week, and it now stands at 1.25%.

Lender prime rates responded in predictable lock step and that meant that variable-rate borrowers had to absorb their third 0.25% rate increase in less than seven months, after enjoying seven years without any hikes.

Variable-rate borrowers are certainly having their courage tested of late, especially with the mainstream media making ominous predictions about more rate increases on the horizon. But will these warnings prove prescient?

After reading the BoC’s accompanying press statement, and more importantly, its latest Monetary Policy Report (MPR), I am sceptical. The latest rate hike was widely expected, but the Bank’s more dovish outlook was not (except by this blogger).

In the lead up to the BoC’s latest meeting, the consensus view from mainstream economists was that the Bank would hike its policy rate between three and four times in 2018. But in its latest MPR the BoC threw plenty of cold water on that forecast, and bluntly put, barring any unexpected surprises in the months ahead, more near-term rate hikes seem highly unlikely.

In today’s post I’ll provide the highlights from the BoC’s latest policy statement and MPR, along with my own observations, to explain why I hold that view.

Highlight from the BoC’s Latest Statement

  • “The Canadian economy is operating close to its potential level of activity, and inflation is close to the 2 per cent target.”

MPR Background Detail

While overall inflation is now a little above the official 2% target, at 2.1% today it is still well within the BoC’s desired range of 1% to 3% and the Bank did not sound overly concerned about higher-than-expected inflation. Instead, it noted “slowly building inflationary pressures”.

The Bank expects that “temporary factors” will cause inflation “to fluctuate over the near term” but that it will “remain close to 2% over the projected horizon”. In other words, the BoC isn’t going to over-react to near-term volatility in the inflation data.    

Recent wage growth has fuelled speculation that more BoC rate hikes may be imminent, but the Bank is predicting that additional gains will be constrained by an “elevated long-term unemployment rate and relatively low youth participation rate [which] suggest an availability of additional labour resources over and above the natural expansion of the labour force”. In other words, the Bank thinks there will be more available labour than the official unemployment rate implies, and to wit, it noted that the “composite indicator” that it uses to measure employment conditions “has fallen by less than the unemployment rate”.

The Bank believes that global competition “is likely leading to more outsourcing and automation” and that this is “weighing on wage growth”. It also recently estimated that the recent minimum wage hikes in British Columbia, Alberta and Ontario will also cost our economy about 60,000 jobs by 2019.  

The BoC raised its inflation forecast from 1.7% to 2.0% in 2018, but left its previous forecast for 2019 unchanged at 2.1%.

Highlight from the BoC’s Latest Statement

  • “Growth around the world continues to strengthen and broaden, supporting the expansion here at home. We have upgraded the outlook for the US economy due to greater momentum and the new tax legislation passed late last year.”

MPR Background Detail

The BoC increased its projected GDP growth for the U.S. economy from 2.2% to 2.6% in 2018 and from 2.0% to 2.3% in 2019, citing “stronger momentum and recent tax reform legislation”.

I am much less sold on the recent improvement in the U.S. economic data because it was underpinned by a surge in consumer spending that corresponded with a spike in credit-card borrowing and a sharp decline in the U.S. personal saving rate. Also, U.S. inventories surged in the fourth quarter, and those inventories will now need to be drawn down at the expense of future growth.

The recently enacted tax cuts that are fuelling bullish forecasts are being paid for by an increase in the U.S. federal government’s budget deficit, and that increased debt will choke off future growth. Furthermore, while many predict that the corporate tax cuts will stimulate a rise in business investment, U.S. companies have been far more inclined to use their excess cash to fund share buy backs and/or to raise their dividends over the past several years, and that’s what I expect most of them to do with their newfound tax saving. If I’m right, the corporate tax cuts won’t have nearly the stimulative impact that the consensus expects.

The BoC is calling for Chinese GDP to fall from 6.8% in 2017 to 6.4% in 2018 and to 6.3% in 2019.

As the Chinese economy slows, demand for most commodities should slow along with it. Today commodity prices are rising, and that is giving a boost to our economy, but if China’s economic momentum slows, commodity prices are likely to fall and that will turn one of our current tailwinds into a headwind going forward.

Highlight from the BoC’s Latest Statement

  • “In Canada, economic growth is expected to average around 2 1/2 per cent in the short term, before slowing to a more sustainable pace over the projection horizon. This outlook remains clouded by uncertainty related to the future of the North American Free Trade Agreement (NAFTA).”

MPR Background Detail

The BoC expects “growth from household spending … to decline … [and] robust employment gains and growth in household income … to slow”.

The Bank raised its GDP growth forecast for our economy from 2.1% to 2.2% in 2018 and from 1.5% to 1.6% in 2019.

To account for this rise, the BoC raised its forecast for consumption as percentage of our overall GDP growth from 1.3% to 1.6% in 2018 and for housing from 0% to 0.1% over the same period. That means that the Bank expects consumption and housing to account for 1.7% of our overall GDP growth of 2.2% in 2018.

The BoC is forecasting that our overall GDP growth will drop from 2.2% in 2018 to 1.6% in 2019 and not surprisingly, it expects that consumption will take the biggest hit as the full impact of the three recent policy-rate increases and the implementation of the sixth round of mortgage rule changes bite.

This is significant for the year ahead because if the BoC is projecting a lag between now and the time when both the monetary and macro-prudential changes start to materially impact our economy, it is less likely to make more changes in the interim. Especially if it believes that the eventual impact will be significant enough to knock 25% off of our overall GDP growth rate.

When the Loonie rises, it impacts our economy in much of the same ways that rate rises do, and it is once again trading at more than 80 cents versus the Greenback. Additional BoC policy-rate increases are likely to push the Loonie higher still, and that will magnify the impact of additional rate rises on our economic momentum.    

On a related note, the Bank left its forecast for exports (as a percentage of GDP growth) flat at 0.6% in 2018 and increased it from 0.8% to 0.9% in 2019. This is in spite of the Loonie’s recent rise, and more importantly, notwithstanding that Bank’s concerns about the negative impact that the NAFTA negotiations are having on this sector. Over the short term, the BoC observed that “prospects for exports have improved in light of the stronger US outlook and higher commodity prices” but the main theme in the latest MPR centred around the lasting damage that the ongoing NAFTA negotiations are having on our economic momentum.

In his accompanying press conference, BoC Governor Poloz noted that current business investment intentions are already being impacted by NAFTA uncertainty, and he speculated that companies who do business on both sides of the border are probably more inclined to invest in U.S. expansion until the trade picture becomes clearer. U.S. President Trump has indicated his willingness to delay a decision on NAFTA until after the Mexican election in July and that makes it likely that trade uncertainty will last well into 2018. Given that, even if NAFTA is ultimately preserved, the current uncertainty that surrounds its status may well have had a lasting negative impact on our economic momentum.

The BoC also believes that the current risks to oil prices “are tilted to the downside” because U.S. oil production “has been increasing strongly” and “could be even stronger”. If oil prices fall, this will create a powerful headwind for our energy sector.

Highlight from the BoC’s Latest Statement

  • “Council will therefore remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.”

MPR Background Detail

When the BoC uses the word “cautious” in its closing statement it’s a pretty clear signal to markets that it plans to take its time over the near term. But how much time?

BoC Governor Poloz previously estimated that it can take anywhere from one to two years before the economic data reflect the full impact of its policy-rate rises and, barring any surprise developments, I think the Bank will now wait for longer than the consensus expects before seriously considering another hike.

This view is also bolstered by our elevated household debt levels, which heighten our “economy’s sensitivity to interest rates”. Governor Poloz has repeatedly said that the Bank won’t have to tighten by as much as in past cycles to slow our economy.

The BoC estimates that our maximum potential output will grow by an “average 1.6% over the 2018-2019 projection horizon” and it is forecasting that our GDP growth will be 1.6% over the same period. If these projections hold and our maximum potential output expands at about the same rate as our actual output, that will keep us in Governor Poloz’s “inflationary sweet spot” and extend our economy’s runway of non-inflationary growth well into the future.  

The BoC wants to take time to observe “the dynamics of both wage growth and inflation” but despite the market’s enthusiasm for the most recent employment report, the Bank assesses that “underlying wage pressures remain modest” and it expects “recently robust employment gains … to slow”.

The Bottom Line: After reviewing the BoC’s latest detailed assessment of our economy, I think that the warnings of more near-term variable-rate increases are off the mark. I think the Bank will allow time for its last three rate hikes to take effect and will wait for the drawn-out NAFTA negotiations to run their course. 

David Larock is an independent mortgage broker and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David’s posts appear on Mondays on this blog, Move Smartly, and on his own blog, Integrated Mortgage Planners Email Dave 

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Week In Review: Rising Mortgage Rates Unlikely To Slow Down Market + Toronto Has Highest Rental Rates In Canada

 Realosophy Team in Media RoundupToronto Real Estate News

Photo Credit: Daily Hive

All you need to know regarding the housing market in Toronto, Canada and abroad.

This week in Toronto: Rising mortgage rates unlikely to slow down hot housing market, rental rates in the city are the highest in Canada and why a $750K listing could be a litmus test for Canada’s housing market. 

Elsewhere: Canada’s real estate market faces a significant test, Americans to spend 7.5% more on home remodeling in 2018 and the market is booming in Eastern Europe. 


Rising mortgage rates unlikely to slow down hot Toronto housing market (Toronto Star)
In the near-term, it will likely mean some belt-tightening among those with variable rate mortgages and lines of credit, and with more increases expected, some consumers will be scrimping further as the year goes on.
‘Peak millennial,’ condo nation, and other Toronto real estate trends to watch in 2018 (CBC)

Real estate broker Royal LePage President and CEO Phil Soper believes peak millennial will be a major player in the Toronto real estate market in 2018. “They’re finally fleeing the nest,” Soper said in an interview with CBC Toronto.

This $750K Toronto listing could be the litmus test for Canada’s housing market (Global)
The two-bedroom, one bathroom rowhouse is on the market for an asking price of just under $750,000 in the coveted neighbourhood of Trinity-Bellwoods, where you’d be lucky to snatch a single-family home for under $1 million. It’s a stone’s throw from the lovely Trinity-Bellwoods Park and just a block away from the trendy Queen Street West. The charms, though, end there.
Toronto Rental Rates Now Exceed Vancouver’s, As Housing Shortage Persists (Huffington Post)
“The huge year over year rental growth is mostly due to the fact that the demand for rental units in (Toronto) is far outpacing the current supply,” Padmapper spokesperson Crystal Chen told HuffPost Canada.
Canada’s real estate market will hit a slow patch in 2018 as tighter mortgage stress tests apply pressure and the impact could be exacerbated if an expected interest rate hike drives buyers to put off their home purchases, economists said Monday.
B.C. Premier John Horgan has rejected calls from his governing partner, the BC Green Party, to ban foreign ownership of real estate in the province as a measure to cool home prices and execute on promises to improve affordability.

“This case provides unusually candid insight into what those who would abuse our immigration and real-estate systems really think in their own words about their true motives for seeking access to Canada and our real estate,” said Vancouver immigration lawyer Sam Hyman. 

In addition to a strong housing market, rebuilding efforts stemming from Hurricanes Harvey, Irma and Maria, which devastated Texas, Puerto Rico and other parts of the southern United States in 2017, will likely spur spending on remodeling, Chris Herbert, the center’s managing director, said in a statement.
Further contributing to the poverty problem is California’s housing crisis. More than four in 10 households spent more than 30% of their income on housing in 2015. A shortage of available units has driven prices ever higher, far above income increases. And that shortage is a direct outgrowth of misguided policies.
With construction cranes for new office buildings dominating the skyline, owners of older buildings may face a choice: Upgrade to current standards to compete — an expensive proposition — or convert to residential use. The choice has been clear elsewhere, from downtown Manhattan to downtown Los Angeles, where a combined 18.1 million square feet of office space has been converted in the last 10 years. But in the nation’s capital, the change is just starting to emerge. 
“By 2020, ADUs will take off in tens of cities,” he said. “This doesn’t mean there will be an explosion of them overnight, but the concept will become more popular in the next couple of years.”
“Those markets are growing and not so much dependent on the political situation in a certain country,” Vos said during a panel discussion at the conference on central and eastern Europe, organized by Euromoney. “That doesn’t have an immediate impact on our business.”
For the eighth year in a row, Hong Kong holds the dubious distinction of being the world’s least affordable city in which to buy a home. And yet, as locals clamor to get a foothold on the property ladder and wealthy Chinese seeking an offshore haven keep buying into the top end of the market, demand for real estate continues to rise.
Realosophy Realty Inc. Brokerage is an innovative residential real estate brokerage in Toronto. A leader in real estate analytics and pro-consumer advice, Realosophy helps clients make better decisions when buying or selling a home. Email Realosophy
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Canadian Mortgage Rate Forecast for 2018 – Part 2 (Five-Year Variable Rates)

Dave Larock in Interest Rate UpdateMortgages and Finances

In today’s post I offer my forecast for five-year variable rates in 2018. (FYI – You can read my forecast for five-year fixed rates here.)

Also, at the end of the post I offer my take on whether five-year fixed or variable rates are likely to offer the lowest cost over the next five years and, more importantly, my take on which is the better option for most borrowers in the current environment.

The Bank of Canada (BoC) raised its policy rate for the first time in more than seven years over the course of 2017, from 0.50% to 1.00%, and lender prime rates, which variable-rate mortgages are priced on, quickly followed.

At the time, the BoC explained that it was clawing back the two 0.25% emergency rate cuts that it had made in response to the global oil-price shock because it was satisfied that our economy had completed its adjustment to lower oil prices, and additional rate hikes did not seem imminent. But then inflationary pressures continued to build and by the time 2017 drew to a close, the BoC was once again sounding hawkish about near-term rate increases.

Fast forward to today. The consensus expects the BoC to hike its policy rate again this Wednesday and to raise a total of three times over the next twelve months. This forecast is underpinned by steadily improving employment and wage data and also by recent sentiment surveys that show improving business confidence.

From a mortgage-rate perspective, the difference between five-year fixed and variable rates now stands at about 0.75% and if that entire gap disappears by the end of this year, variable-rate borrowers will wish they had locked in a fixed rate instead. But before we discard variable-rate options out of hand, we should remember that the consensus forecasts by our mainstream economists have predicted about ten of the last two BoC rate hikes since the start of the Great Recession (to borrow from an old joke), and that the BoC may not be able to tighten its monetary policy much more, even if it wants to.

If you added a magical truth serum to BoC Governor Poloz’s morning coffee, I think he would admit that all else being equal, he would like to continue to raise the Bank’s policy rate. Over the short term, it would help relieve rising inflationary pressures and slow household borrowing rates, and over the longer term, a higher policy rate would give the Bank more room to provide rate-cut stimulus when the next economic downturn hits.

But policy-rate changes don’t occur in a vacuum. They have a pervasive impact throughout our economy and can trigger negative side-effects that have the potential to strangle the hard-won economic momentum that the Bank’s monetary policy is intended to help preserve.

Here are some examples of the potentially negative side effects that the BoC must account for when it tightens monetary policy:

  • A loftier Loonie – The Loonie recently rose to 80 cents versus the Greenback as the odds of a near-term BoC rate hike have increased. As the charts below demonstrate, it shouldn’t take long before export sales move in the other direction. The BoC has acknowledged that a strong export sector is vital to our economy’s long-term health and as such, the Bank must carefully weigh the impact that additional rate hikes will have on its momentum.

  • Reduced consumer spending – Consumer spending is the largest driver of our overall GDP, and higher debt-service costs leave less money for other forms of spending. If consumer spending slows, the rising business confidence that has our economists so excited today could quickly dissipate (long before that confidence translates into increased business investment, which is what really matters).
  • Decreased demand for labour – Our labour market is in the midst of its best run since the start of the Great Recession. Higher interest costs will divert business capital investment that might otherwise increase the demand for labour. While it’s true that if the BoC wants to relieve inflationary pressures (which, in isolation, might be a desired outcome), the Bank should be careful what it wishes for because the most recent mortgage rule changes are also likely to have a significant impact on employment in 2018. Jobs in real-estate related sectors have risen sharply over the last decade and stand at record highs as a percentage of our overall employment (see chart below, courtesy of Ben Rabidoux of North Cove Advisors). If real-estate activity and borrowing slows, employment in these sectors is likely to decrease.

  • A further reduction in GDP growth – Our overall GDP growth has been slowing since the summer and rate hikes that exacerbate the negative side effects listed above will slow it further. I think the Bank may choose to delay the next rate hike to preserve our already waning momentum (see chart below), especially given today’s elevated trade and geopolitical uncertainties.

The BoC has clearly stated its concern about rising inflationary pressures and about its need to anticipate the road ahead when setting its monetary policy. But here are some other elements, beyond inflation, that the Bank must also account for when looking down the road:

  • Our inflation gauges are approaching their 2% targets but that’s after an extended period of below-target inflation. Now is a good time to remember that the BoC’s inflation “range” is between 1% and 3%. Given that, the Bank may not feel compelled to hike rates the minute that our inflation measures cross 2% (which is only the midpoint of the range).
  • Average wages are rising nicely now but at +2.9% on a year-over-year basis, they still have room to grow before they reach a level that is likely to create significant inflation risk. According to a recent speech by Fed Chair Janet Yellen, year-over-year wage growth in the 4% to 5% range is more likely to fit that bill. And there is no guarantee that higher wages will even feed through into higher prices to a material degree – technological advances can improve productivity without the need for more labour, and many businesses face stiff price competition that will force them to shrink their margins instead.
  • Long-term factors, as mentioned in my post last week, such as demographics, overall debt levels and technological advancements will exert downward pressure on inflation, reducing the likelihood that short-term price spikes will ultimately lead to runaway inflation. The bond market seems to agree because 10-year Government of Canada (GoC) bonds and U.S. treasuries, which are highly sensitive to changes in inflation, are still at ultra-low levels, and relatedly, the spread between 2-year and 10-year bonds is currently very narrow when compared to its long-term averages.   

While the consensus expects the BoC to raise its policy rate next week and to tighten aggressively in 2018, I am not convinced that it will, for the reasons outlined above. That said, after seven years with no rate increases, I expect that variable-rate borrowers will have their courage tested much more regularly in the years ahead.

In terms of the age-old fixed-versus-variable debate, I think that variable rates will probably save borrowers some money versus their fixed-rate equivalents over the next five years. But I think that the amount saved is likely to be small relative to past periods because the gap between fixed and variable rates is still relatively narrow.

That leads to the next question, one which each borrower must answer: If my potential saving by going variable is likely to be small (assuming that you agree with my view above), is it worth the risk that I could end up with significantly higher costs because I didn’t lock in?  And is it worth my worrying about that possibility?

In other words, is a potentially small upside saving worth the risk of a potentially much larger downside cost?

For my part, I see heightened potential for tail-risk events in the year ahead and I would be willing to pay somewhat more in interest to insure against them. (I think of the extra five-year fixed-rate interest you pay as a form of “rate insurance”.)

Specifically, I’m unsure about the impact of U.S. Federal Reserve and European Central Bank plans to withdraw a significant amount of liquidity from global financial markets this year.

We know that the central bankers who oversee the world’s largest economies have been experimenting with unconventional monetary policies for the past decade and that their balance sheets have exploded (see chart below), but we can’t reliably predict what will happen when they start withdrawing that liquidity because these policies have taken us deep in to uncharted waters.

Against the current backdrop, my gut says that battening down the hatches makes sense.

If taking my advice ends up costing you more in interest over the next five years, you will have paid for rate insurance that you didn’t end up needing – but that still won’t mean that it wasn’t the right call. After all, when you buy fire insurance on your home, you don’t feel cheated when it doesn’t end up burning down.

Insurance has its place, and in today’s mortgage market, under our current economic circumstances, I think it’s worth paying for.   

The Bottom Line: I don’t think variable mortgage rates will rise by as much in the coming year as the consensus now forecasts. That said, I favour the five-year fixed rate over the five-year variable rate for most borrowers in our current environment where economic risks are elevated. Not because I think it will save you money, but because we already know the extra cost of the five-year fixed rate today, whereas we don’t know the potential extra cost of a five-year variable rate tomorrow.

David Larock is an independent mortgage broker and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David’s posts appear on Mondays on this blog, Move Smartly, and on his own blog, Integrated Mortgage Planners Email Dave 

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Week In Review: What Data Doesn’t Tell Us + Toronto Has More Room For Density

 Realosophy Team in Media RoundupToronto Real Estate News

Photo Credit: Toronto Star

All you need to know regarding the housing market in Toronto, Canada and abroad.

This week in Toronto: What housing data does and doesn’t tell us, Toronto has more room for density and the city’s housing recovery may trail Vancouver’s. 

Elsewhere: Condos have become the last bastion of affordability in Canada’s big cities, Manhattan rent prices fall sharply and a plan for a new city in Oman. 


What Toronto and Vancouver housing data do and don’t tell us (The Globe and Mail)

Statistics Canada and the Canada Mortgage and Housing Corp. recently released a batch of data looking at “non-resident” ownership of housing in Toronto and Vancouver. Many observers have tried to spin the data in misleading ways, so it is important to look closely at what the data tell us – and what they don’t. Here are four important takeaways.

Toronto’s Housing Recovery May Trail Vancouver’s (Bloomberg)

To be sure, Toronto has seen some signs of recovery in the past two months, with sales in December having the smallest yearly decline since the introduction of a foreign home-buyer tax in Ontario in April. Still, the market now faces a new hurdle as homebuyers who don’t take out mortgage insurance will have to qualify at higher rates.

Scooch over: Toronto has room for more density, study says (Toronto Star)

“Canadian cities like Toronto, which are experiencing an affordability crunch, can accommodate much more housing supply. There’s a lot of room to grow, especially upward,” said senior policy analyst Josef Filipowicz, who wrote “Room to Grow: Comparing Urban Density in Canada and Abroad.”

Strong demand underlies healthy Toronto luxury market: Report (The Star)

Foreign buyers were never the source of the fevered real estate activity in the Toronto region, said Springate-Renaud, broker of record at the Toronto Central Engel & Volkers office.

‘Year of the condo’ dominates 2017 Toronto luxury market (The Star)

High-end real estate has continued to sell and appreciate while the rest of the Toronto area property market endured a rockier year, says the CEO of Sotheby’s International Realty Canada.


“To prospective homeowners in our largest cities, condominiums represent the last bastion of affordability,” said Royal LePage president and CEO Phil Soper.

Canadian real estate market outlook 2018 (Macleans)

What does all this mean for real estate markets in 2018? It means a possible return to the norm —a reemergence of a more boring, stable Canadian real estate market.

B.C. real estate watchdog presses council to discipline realtor (The Globe)

British Columbia’s superintendent of real estate is taking the province’s industry regulator to court, demanding the body begin disciplinary proceedings against a realtor accused of misconduct.

B.C. Green leader suggests ban on foreign real estate buyers (CBC)

If B.C. Green Party Leader, Andrew Weaver had his way, a ban on foreign buyers investing in the province’s real estate market would be announced in the upcoming budget. “This is unsustainable,” said Weaver. “If we don’t curb the amount of the demand side of this equation, it’s only going to get worse.”



In the last year, American home buyers faced shortages in the number of properties available for sale. “We saw the lowest number of active listings for sale in over two decades, a full generation,” said Javier Vivas, director of economic research for, which maintains a database of more than 99 percent of homes listed nationally and provided data for this article. 

After two years of propping up apartment prices with behind-the-scenes offers of free months and gift cards, owners contending with a flood of supply could no longer hold up the dam. They still offered sweeteners — last month, in 36 percent of all new leases, a record share — but they also agreed to whittle what they charged in rents.
Poor families in the United States are having an increasingly difficult time finding an affordable place to live, due to high rents, static incomes and a shortage of housing aid. Tenant advocates worry that the new tax bill, as well as potential cuts in housing aid, will make the problem worse.
Looking out over the London skyline now, we see both of these kind of towers: high-rises built as homes for the people, and shiny, thrusting vertical edifices of the financial heart of the city — the Gherkin, Cheesegrater, Walkie Talkie et al. We see the new luxury developments, super high-rises built as high-end homes — or more often investment opportunities. Just as old London’s skyline reflected the aspirations and ideas of its age, we see silhouettes that reflect ours.
Realosophy Realty Inc. Brokerage is an innovative residential real estate brokerage in Toronto. A leader in real estate analytics and pro-consumer advice, Realosophy helps clients make better decisions when buying or selling a home. Email Realosophy
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Canadian Mortgage Rate Forecast for 2018 – Part 1 (Five-Year Fixed Rates)

Dave Larock in Interest Rate UpdateMortgages and Finances

Welcome back!

First off, I’d like to wish a very happy new year to my readers.

In today’s post I offer my forecast for five-year fixed rates in 2018, and next week, I’ll do the same for five-year variable rates.

Five-year fixed mortgage rates bottomed in the low 2% range in the first half of 2017 and by the end of the year they had climbed back up to around 3%. This marked the most significant proportional increase that we have seen in fixed rates since the start of the Great Recession.

In spite of that, a five-year fixed rate of 3% is still dirt cheap by any historical comparison and today the vast majority of Canadians can afford their mortgage payments. This reality is borne out by today’s overall mortgage default rate, which stands at its lowest level in decades. 

But if rates continue to rise, affordability will deteriorate.

Our elevated household debt levels are keeping our policy makers up at night and are the reason why they have enacted six rounds of mortgage rule changes since rates first plunged in 2008. (Bluntly put, any credible market observer must acknowledge that the changes were both necessary and prudent.) With our overall household debt levels at record highs after a decade of rock-bottom rates, an increasing number of highly leveraged borrowers will have difficulty keeping up their payments. (This reminds me of Warren Buffet’s famous quote: “Only when the tide goes out do you discover who’s been swimming naked.”)

The key question for mortgage borrowers and, more broadly, for real-estate markets across the country (since the majority of Canadians opt for five-year fixed-rate mortgages) is whether rates will rise this year, and if so, by how much.

In normal times the most significant risk to our fixed mortgage rates is inflation, where even a small uptick, if viewed as long-term or the beginning of an uptrend, will send Government of Canada (GoC) bond yields higher. And since our fixed mortgage rates are priced off of these yields, they will rise quickly in response.

Today, our overall inflation rate, as measured by the Consumer Price Index (CPI), stands at 2.1%, which is a little above the Bank of Canada (BoC) target rate of 2%. The Bank’s more detailed inflation gauges have also crept up of late and aren’t too far away from their 2% targets. Furthermore, these trends jibe with the BoC’s belief that our economy is now operating very near to its full capacity.

Of note within the inflation data, our jobs growth has been strong over the past year and our average wage growth rate has risen sharply, from a low of 0.5% in April all the way to 2.9% in December (which is due, in part, to minimum-wage hikes in Ontario, Alberta and British Columbia). Wage rate growth is important because labour costs impact most prices across the broader economy.  

Canada also imports a significant amount of inflation from the U.S. and rising inflationary pressures are evident there as well. U.S. inflation has picked up steadily over most of the past seven months and average U.S. wage growth, which hasn’t gone up much at all for the past several years, has recently risen to 2.5%.

All that said, in the present context, even with these current trends accounted for, higher inflation may not be the biggest risk to fixed mortgage rates in 2018.

The world’s largest central banks have been pumping liquidity into financial markets since the start of the Great Recession as a way to stimulate financial markets by suppressing longer-term bond yields (after having already dropped their short-term policy rates to the floor). 

To give you an idea of the magnitude of its bond purchases, consider that the U.S. Federal Reserve has increased the size of its balance sheet by more than 500% since 2008, and it now holds bonds valued at about $4.5 trillion.

The Fed has announced that this year it will stop rolling over its maturing bonds (while also planning to continue hiking its short-term policy rate). At the same time, the European Central Bank (ECB) plans to reduce its bond purchasing program by 50%.

This will be a massive (and unprecedented) withdrawal of liquidity from financial markets and there is much debate about the impact it will have because the widespread use of unconventional monetary policy since 2008 has taken us deep into unchartered waters.

One thing we do know is that when the central banks of the world’s two largest economies reduce their influence on free market forces, the potential for destabilization will increase.

By now you can understand why many forecasters have been warning everyone to fasten their seatbelts and prepare for significantly higher mortgage rates on the horizon. But the contrarian in me thinks that now is a good time to remember one of Bob Farrell’s famous ten rules of investing: “When all the experts and forecasts agree, something else is going to happen”.

The first sign that the future might not unfold as the consensus expects can be found in longer-term bond yields, which have a long history of accurately forecasting future inflation. Low unemployment and accelerating wage growth haven’t yet convinced investors in ten-year U.S. and GoC bonds that they will need significantly higher yields to maintain their expected returns. (The charts below show the most recent five-year histories for both.)

Another indication that bond investors aren’t overly concerned about significantly higher inflation can be found in the spread between U.S. two-year and ten-year bond yields. If investors are worried about higher inflation, this spread should widen, because rising inflation will have a greater impact on longer term bond yields. Interestingly, today the spread between two-year and ten-year U.S. bond yields is the lowest it has been in almost ten years, at 0.50%, and that’s about half of its long-term average of 0.97%.

I think the bond market’s muted reaction to the recent U.S. and Canadian inflation data is based on three primary factors:

  1. Demographics – Economist David Foote once famously said that “demographics explain about two thirds of everything”. In that context, consider that in the U.S. an average of 10,000 baby boomers now turns 65 each day (and there are 80 million of them in total). U.S. consumers account for more than two thirds of U.S. economic activity and if a significant (and unprecedented) number of those consumers are now hitting retirement age, that will have a profound impact on the U.S. economic cycle. Retirees spend less, and as more boomers retire, this group will exert downward pressure on inflation. They also save more (and invest conservatively), and that will ensure steady and growing demand for safe-haven assets like government bonds. We can see further evidence of the impact that aging demographics will have by looking at the speed at which money circulates through the U.S. economy, which is referred to as the velocity of money. M1 and M2 are the two most commonly used measures of money velocity and both now hover near all-time record lows.
  2. Debt – Debt is like an invasive garden weed that crowds out an economy’s access to the resources it needs for healthy growth. When resources are choked off, both supply and demand are limited and inflationary pressures are less likely to take hold on a sustained basis. Furthermore, if a rise in inflation is met with short-term policy-rate hikes, high debt levels magnify the effect of the rate increases. Rates don’t have to rise by much to slow growth and to relieve inflationary pressures.
  3. Technological Advances – We have entered a period where technological advances are dramatically reducing costs (as well as threatening many jobs). Companies like Uber and Amazon are turning industries on their heads, and there are many other less prominent examples. Consider that today Amazon has more robots than people working for it.

While these three factors are the main drivers that will help to keep inflation low over the long term, there are other short-term factors that will impact inflation as well. For example, in both Canada and the U.S., recent economic growth has been supported by rising debt levels and reduced savings rates. Neither source of stimulus is sustainable and when they both dissipate, as they must, growth will slow and short-term inflationary pressures will ease.

Our policy makers have expressed hope that business investment will make up for some of the expected slack in consumer expenditures, but in relative terms, business investment accounts for only a fraction of what consumer spending contributes to our overall GDP. Furthermore, it is hard to see business confidence rising as consumers start to pull back, especially at a time when there is also significant uncertainty around trade and heightened concern about geopolitical risks.

All that said, if we see tightening by central banks in the first half of 2018, that may well push mortgage rates higher for a time. But the powerful countervailing forces of demographics, debt levels, and technological change will not go away. Over the next five years, my admittedly minority view is that these forces will combine to overcome most, if not all, of the effects of near-term central bank policy-rate rises.

The Bottom Line: As I finish off this post, my inbox is filling up with emails from lenders announcing increases to their five-year fixed mortgage rates after the five-year GoC bond yield spiked in response to last Friday’s impressive employment report. In spite of this, the contrarian in me believes that forecasts calling for significantly higher five-year fixed rates have not adequately accounted for powerful long-term forces that will continue to exert downward pressure on them in the years to come. 

David Larock is an independent mortgage broker and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David’s posts appear on Mondays on this blog, Move Smartly, and on his own blog, Integrated Mortgage Planners Email Dave 

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Week In Review: Home Sales Down in 2017 + TREB Blames the Government

 Realosophy Team in Media RoundupToronto Real Estate News

Photo Credit: The Globe and Mail

All you need to know regarding the housing market in Toronto, Canada and abroad.

This week in Toronto: Home sales were down in 2017 compared to 2016 and the TREB blames the government for the drop as lending tightens. 

Elsewhere: Stress tests to make an impact on the Canadian housing market, how Seattle has changed massively in the last 10 years and UK social housing deal sparks fears for tenants. 


Toronto 2017 home sales down from 2016, average price up (Toronto Star)

Home prices in the Toronto region continued their descent in December – however prices on everything from tiny condos to detached homes with backyards were still higher on average last year than they were in red-hot 2016, says the Toronto Real Estate Board.

Toronto Real Estate Board Blames Government For 18% Drop In Sales (Huffington Post)

“Research from TREB, the provincial government and Statistics Canada showed that foreign home buying was not a major driver of sales in the GTA. However, the Ontario Fair Housing Plan, which included a foreign buyer tax, had a marked psychological impact on the marketplace.”

Toronto Home Prices Fall for Seventh Month as Lending Tightens (Bloomberg)

Toronto’s housing market has fallen over the past few months as the government has tried to curb demand that had driven prices to record highs with harsher mortgage guidelines and regulations. That’s coincided with an increase in supply of new listings in the latter half of the year, resulting in slower price growth, the real estate board said.

How restrictive contracts and bigotry lingered in Toronto real estate (The Star)

There was one wrinkle, however: when WEA officials purchased the property, they discovered an unwelcome surprise on the deed: a so-called “restrictive covenant” preventing the land from being sold to “Jews or persons of objectionable nationality.”


Stress tests, foreign buyers and higher rates likely to impact housing market in 2018 (CBC)


The past decade also saw Seattle and the Puget Sound region solidify its place as one of the most economically potent spots in North America, with headquarters of two of the five Big Tech giants and a varied set of other assets. A diverse world city facing Asia for the Asian Century.

Subway Stop and Housing for Red Hook Are Among Cuomo Proposals (NY Times)

By the end of 2017, the value of homes in the United States reached $31.8 trillion, but as homeowners saw their home values climb to the highest they’ve ever been this year, affordability suffered and homelessness worsened in American cities. Housing became an even bigger concern in 2017 when American cities were hit by hurricanes and fires.

Realosophy Realty Inc. Brokerage is an innovative residential real estate brokerage in Toronto. A leader in real estate analytics and pro-consumer advice, Realosophy helps clients make better decisions when buying or selling a home. Email Realosophy
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How the Coming Mortgage Rule Changes Are Likely to Impact Canadians in 2018

Dave Larock in Interest Rate UpdateMortgages and Finances

January 1 is a highly anticipated date for most people.

This year, in addition to thinking up soon-to-be-broken new year’s resolutions, many Canadians will be wondering, and worrying, about the impact that the next round of mortgage rule changes will have on our mortgage and housing markets as well as on our overall economic momentum.

Their concern is warranted.

The Office of the Superintendent of Financial Institutions (OSFI) is about to implement the most substantial mortgage rule changes to date. As of January 1, among other changes, conventional borrowers (who make down payments of 20% or more of the purchase price), will be required to qualify using a stress-test rate that is significantly higher than the actual rate they will be paying on their mortgage.

To put that in perspective, conventional borrowers make up about two-thirds of the total Canadian mortgage market. (You can read my detailed explanation of the coming rule changes here.)

In today’s post, in the spirit of another new year’s tradition, I’m going to poke my neck out further than usual and offer predictions on how I think the impacts from the coming mortgage rule changes will materialize in the new year. (Note: The only certainty with the following predictions is that when you combine them with $1.50 you can buy one cup of hot coffee.)

The next round of mortgage rule changes will produce a combination of technical and psychological impacts on our real-estate markets

The technical impact is relatively easy to quantify. Most Canadians choose to borrow well within their affordable range and as such, it is estimated that the new stress test will affect only about 15% of conventional borrowers.

Those borrowers who are affected will have to choose between reducing their maximum purchase price or delaying their buying plans. If two-thirds of them choose the latter option, our regional housing markets will lose about 10% of their conventional buyers overnight.

That may not sound like much, but markets are made at the margin and over the short term, this will  cause a material drop in demand. Over the long term, these lost borrowers should gradually filter back into their local housing markets as their incomes rise or their purchasing plans are scaled back. For those reasons, I expect the technical impact of the next round of mortgage rule changes to dissipate over time.

The psychological impact of the coming rule changes is more difficult to forecast. Potential home buyers who aren’t directly affected may decide to postpone their purchase plans out of fear that the changes will cause house prices to fall sharply.

We saw recent examples of this when the governments of British Columbia and Ontario implemented foreign home buyers taxes (in 2016 and 2017 respectively). While the technical impact of the new tax on these provincial markets was minimal, because relatively few buyers were directly affected, the psychological impact on buyers was much more significant. In both provinces, buying activity and price appreciation slowed materially over the short term (although in both cases, they eventually rebounded).

The coming mortgage rule changes, which will apply to all federally regulated lenders, will have a greater technical impact than the British Columbia and Ontario foreign home buyers taxes, and as such, I expect the psychological impact on our regional housing markets to be greater as well.

This will be especially true for the Greater Toronto Area (GTA), where the psychological impact is likely to be magnified by other developing trends. To wit, house prices and sales activity peaked in the GTA in the spring of 2017. Since these measures are most prominently compared on a year-over-year basis, if average GTA house prices and activity stay the same between now and the spring of 2018, they will still be down by as much as 20% when year-over-year comparisons are made at that time.

Given the mainstream media’s penchant for sky-is-falling real-estate headlines, that 20% year-over-year drop in prices and sales activity may be mistakenly attributed to the sixth round of mortgage rule changes (when they had, in fact, already been baked into the data). If that happens, the short-term psychological impact of the mortgage rule changes on GTA real-estate markets will be exacerbated even further.  

While negative housing-market momentum can be self-reinforcing, I expect that both the technical and psychological impacts of the next round of mortgage rule changes will prove temporary. Over the longer term, I am more optimistic that the underlying factors that have underpinned the strength in our regional housing markets will win out. (These factors include supply/demand imbalances, record levels of immigration and the continuation of the current low-interest rate environment.)

Here are five other predictions relating to the coming mortgage rule changes:

  1. Big Five bank earnings will take a hit in 2018 – Mortgages account for about one-third of the Big Five’s total retail profits and despite reassuring statements from their senior executives, these changes, which were aimed straight at them, will bite.
  2. Credit union mortgage market share will grow – Credit unions represent the largest non-federally regulated lenders in Canada and while they may voluntarily adopt the OSFI changes, they will have more flexibility to cherry pick from the best mortgage applications that fall through the cracks under the new rules.
  3. Monoline lenders will see a rebound in mortgage originations – The sixth round of mortgage rule changes redresses some of the unfair advantages given to the banks by earlier changes. They will help to level the playing field and will allow larger monoline lenders, like First National and MCAP, to compete more effectively with the banks.
  4. Mortgage brokers will see their market share grow – For all of the collective hand wringing by my industry compatriots leading up to this next round of rule changes, the mortgage market is now more complex and difficult for borrowers to navigate than even before. Truly professional brokers who really know their stuff will be needed more than ever.
  5. The predicted rush to buy before the January 1 deadline won’t materialize – The data will show that borrowers did not run out to buy houses prior to the January 1 rule changes. Buying a house just isn’t like buying a new pair of jeans and any uptick in the sales data will be minimal.

Lastly, no post of mine is complete without a discussion of interest rates, so I’ll close by predicting that the mortgage rule changes will be one of the main factors that keeps the Bank of Canada (BoC) on hold for longer than the consensus now believes. This will be due to several factors:

  • The BoC will want time to observe how the most sweeping mortgage rule changes to date will affect regional housing markets.
  • The coming mortgage rule changes are designed to slow our rate of borrowing, and less borrowing means less spending. Simply put, debt-fuelled consumer spending has been the main driver of our economic growth over the past several years. If consumer spending slows, our policy makers hope that business investment will pick up the slack, but it’s hard for me to envision businesses becoming more confident at the same time that consumers (their customers) become less so. (I wrote about this in detail here.)
  • Consumer spending accounts for more than half of our overall GDP, and as such, less spending will also mean less GDP growth. If GDP growth slows, so too should our employment and income growth, which are the main drivers of overall inflation. As inflationary pressures ease, the BoC will have to move from offence back to defence (to quote BoC Governor Poloz’s terminology in a recent Globe & Mail interview).

The Bottom Line: The coming mortgage rule changes do have the potential to materially impact our hottest regional housing markets over the near term. That said, I believe that both the negative technical and psychological impacts associated with these changes will dissipate over the medium term and that our regional housing markets will ultimately prove resilient.

David Larock is an independent mortgage broker and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David’s posts appear on Mondays on this blog, Move Smartly, and on his own blog, Integrated Mortgage Planners Email Dave 

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The Bank of Canada Remains Cautious … For at Least as Long As Rising Wage Pressures Will Allow

Dave Larock in Interest Rate UpdateMortgages and Finances

The Bank of Canada (BoC) left its policy rate unchanged last week, as expected.

In its accompanying statement the Bank explained how developments both at home and abroad have influenced its overall economic view and today’s post will unpack this brief but detailed assessment by highlighting five key observations for anyone keeping an eye on Canadian mortgage rates:

  • The BoC noted “stronger than forecast” third-quarter growth in the U.S. but predicted that it will “moderate in the months ahead”. The Bank also explained that while “growth has firmed in other advanced economies … the global outlook remains subject to considerable uncertainty, notably about geopolitical developments and trade policies”. Central bankers don’t typically tighten monetary policy for as a long as “considerable uncertainty” is one of their central themes.
  • The BoC assessed that the recent moderation in Canadian economic growth after our red hot second-quarter has been “in line” with its expectations. “Employment growth has been very strong and wages have shown some improvement, supporting robust consumer spending in the third quarter”. If wage growth continues to accelerate, the BoC may feel that it has to raise its policy rate to stave off rising inflationary pressures. That said, while year-over-year wage growth has been impressive of late, rising from 0.5% in April to 2.7% in November, that is still considerably less wage growth than we have seen historically when our unemployment rate is 5.9% or lower. To that end, the Bank acknowledged “ongoing – albeit diminishing – slack in the labour market”.
  • The BoC noted that “business investment continued to contribute to growth after a strong first half”. While that is an encouraging sign that businesses are becoming more confident, given that “exports declined by more than was expected in the third quarter”, it is not clear whether that will continue. The most recent trade data support the Bank’s view that “export growth will resume as foreign demand strengthens” but that is far from guaranteed. If the U.S. Federal Reserve raises its policy rate this week, as is widely expected, that should weaken the Loonie against the Greenback and give a boost to our exporters – but only for as long as the BoC preserves the gap in rates by holding its policy rate steady.
  • The BoC observed “slightly higher than expected” overall inflation but attributed this to “temporary factors, particularly gasoline prices”. Given that wording, we should expect the Bank to look through any short-term spikes in our key inflation gauges. Also, while the BoC noted that core inflation has “edged up in recent months”, it doesn’t sound too concerned because it estimates that our higher levels of GDP growth have corresponded with “a higher level of potential output” for our economy, creating what BoC Governor Poloz recently dubbed our “inflationary sweet spot”.
  • The BoC closed its statement by noting that “while higher interest rates will likely be required over time … [the Bank] will continue to be cautious, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation”. While the BoC looks at many factors when determining the correct monetary-policy path going forward, today it is primarily focused on the interplay of these three key elements:
    • “Our economy’s sensitivity to interest rates” – The BoC has repeatedly predicted that our elevated household debt levels will make our economy more sensitive than usual to policy-rate increases. Given that, the Bank is likely to allow extra time for our economy to absorb the impact of the two policy-rate increases it made this past summer, and is likely to spread any additional rate increases over a longer time period.
    • “The evolution of economic capacity” – The Bank has observed that while our economic output is expanding, our economy’s maximum potential is expanding as well. This is extending our runway for non-inflationary growth and reducing the urgency for additional policy-rate increases.
    • “The dynamics of both wage growth and inflation” – Our current lengthy period of below-target inflation has given the BoC the luxury of time. That said, if wage growth continues to accelerate, inflationary pressures could increase to a point where the BoC will have no choice but to raise its policy rate. For that reason, our monthly employment data will have outsized importance in the months ahead.

The Bottom Line: Last week the BoC confirmed that there is still “considerable uncertainty” clouding its current economic forecast. Fortunately, below-target inflation has given the Bank time to wait for some of that uncertainty to dissipate. But if our average wage growth continues to accelerate, that window could close quickly. At this point, although a continuing run of robust employment reports would change my view, I continue to believe that both our fixed and variable mortgage rates will remain at or near their current levels over the near term.   

David Larock is an independent mortgage broker and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David’s posts appear on Mondays on this blog, Move Smartly, and on his own blog, Integrated Mortgage Planners Email Dave 

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You Could Be Liable for Home Tank’s Oil Spill

Bob Aaron in Legal

A recent decision of the Ontario Superior Court warns homeowners that a distributor’s delivery of fuel oil does not mean that their tanks are safe. It also cautions fuel distributors that they may be liable for spills brought about by a homeowner’s negligence.

These warnings were highlighted in a recent online blog about the case by Toronto environmental lawyer Donna Shier of Willms & Shier.

After a trial that took 25 days, Justice Robert Charney found homeowner Wayne Gendron partly responsible for an oil spill that required the demolition of his house on Hazel St., across the road from Sturgeon Lake in the city of Kawartha Lakes. The judge also found the fuel distributor liable for a portion of the damages.

Gendron’s house was heated by oil from tanks located in the basement. They were filled through a fill pipe located outside the home.

The judge found that in December 2008, Thompson Fuels delivered 700 litres of fuel oil to the house. One of the tanks leaked a total of about 600 litres, and some of it made its way through a drainage system under the house into the municipal culvert and from there into Sturgeon Lake.

Court was told that Gendron and an unlicensed friend installed two 910-litre tanks in 2000. Some years later, when he ran into financial difficulty, Gendron filled the tanks with cans of cheaper stove oil. Unfortunately, the stove oil was contaminated with water and microbes, which resulted in corrosion and perforation of the tank.

A complex series of court and tribunal cases ensued.

The Ontario Ministry of the Environment and Climate Change ordered Gendron to remediate the contamination of the lake and the land under his house. Nearly $2 million was spent to remediate that oil spill, and Gendron’s personal insurance coverage was rapidly exhausted. The house had to be demolished to remove the contaminated soil under the foundation.

The city of Kawartha Lakes was ordered by the ministry to clean up any oil left in the city’s culverts and sewers. The city unsuccessfully appealed that order three times — right up to the Court of Appeal — losing all three times.

The city then ordered Gendron, Thompson Fuels and the Technical Standards and Safety Authority (TSSA) to compensate it for the remediation. That order was appealed to the Environmental Review Tribunal. Thompson and the TSSA settled and withdrew their appeals. Gendron’s appeal was unsuccessful and he was ordered by the tribunal to pay the city more than $300,000.

The city also sued many other defendants to recover its remediation costs.

Gendron sued Thompson Fuels, the TSSA and the tank manufacturer for the spill damages. That claim was dismissed by the Superior Court.

The remaining claim against Thompson Fuels resulted in the decision by the Ontario Superior Court this past July. The court set the damages for replacing the house at more than $472,000, and the excavation costs at $48,222.

In a 40,000-word decision, Justice Charney ruled that Thompson Fuels was responsible for 40 per cent of the damages, and Gendron for 60 per cent, due to his negligent installation of the tanks and allowing them to be used with contaminated fuel.

For owners of homes or cottages heated with fuel oil, there are a number of lessons from this case:

  • Make sure the oil tanks were installed by a licensed technician
  • Use only the proper type of fuel oil
  • Oil tanks must be inspected annually. If they fail inspection, they need to be replaced.
  • Fuel distributors are not required to deliver fuel if they are not satisfied with the tank’s condition.
  • Always check with your insurance company to make sure there is enough coverage for a Gendron-type environmental disaster.

Bob Aaron is Toronto real estate lawyer. His Title Page column appears on this blog, Move Smartly, and in The Toronto Star. You can follow Bob on Twitter @bobaaron2 and at his website Email Bob

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The Inconvenient Truth About the Latest Employment Report

Dave Larock in Interest Rate UpdateMortgages and Finances

Last Friday Statistics Canada confirmed that our economy added a whopping 79,500 new jobs in November, and that result was light years ahead of the 10,000 new jobs that the consensus had expected.

Our pace of job creation matters to anyone keeping an eye on Canadian mortgage rates because over time, as the demand for labour increases, its cost should rise. And since labour costs are a significant component in the overall cost of most of the items and services that we buy, their relative movements can have a powerful impact on overall inflation (which can then lead to higher mortgage rates).

Bank of Canada (BoC) Governor Poloz recently stated his belief that our economy is hovering in what he calls an “inflationary sweet spot” where both our actual output and our maximum potential output are expanding. At the moment, this is giving our economy more room for non-inflationary growth, but a surge in employment demand could easily upset this delicate balance and compel the BoC to accelerate its rate-hike timetable.

The market’s reaction to the latest employment data was dramatic. Government of Canada (GoC) five-year bond yields surged higher by almost ten basis points, the Loonie registered its biggest one-day gain against the Greenback in almost two years, and the futures market increased the odds from 40% to 66% that the BoC will raise its policy rate in January.

In the blink of an eye the consensus market view u-turned from expecting the BoC to maintain a lower-for-longer approach to betting that the BoC’s next hike is now just around the corner. We are fortunate that the Bank keeps a much steadier hand on its policy-rate tiller.

Interestingly, there was at least one critical detail in the report that contradicted the market’s assumption that a surge in the demand for labour is about to trigger an inflation spike that will force the Bank to accelerate its rate-hike timetable. But before we get to that, let’s look at five highlights from our latest employment data to see what got investors so excited:

  • Our economy created 79,500 new jobs in November on top of the 35,000 new jobs in October.
  • Our official unemployment rate fell from 6.3% in October to 5.9% in November and that marks its lowest level since early in 2008. The participation rate, which measures the percentage of working-age Canadians who are either employed or actively looking for work, held steady at 65.7%.
  • Full-time employment increased by about 30,000 new jobs and our economy has now expanded by almost 400,000 full-time jobs over the past year. Part-time employment also rose by 50,000 new jobs.
  • Average hourly earnings rose by 2.7% last month on a year-over-year basis, up from 2.4% in October, and way up from the 0.5% year-over-year pace we saw in April of this year.
  • The manufacturing sector added another 30,000 jobs in November on top of the 7,800 new jobs that it added in October, and that’s a hopeful sign for its continued recovery.

Notwithstanding these encouraging data points, economist David Rosenberg noted a devil in the detail that casts our latest employment report in a very different light. Average hours worked plunged by 1.1% in November, which he estimates is equivalent to losing 130,000 jobs over the month.

Rosenberg also noted that “the aggregate hours worked index, which is the total volume of labour input into the economy, sagged 0.7% last month”. In other words, while we added more workers, they did less actual work.

With that understood, warnings about imminent policy-rate rises seem premature. If our economy’s overall demand for labour didn’t even rise last month, it should be able to continue hovering in today’s inflationary sweet spot for longer than the market consensus now believes.

The Bottom Line: If you’re a policy maker worried about rising inflationary pressures, a drop in the overall demand for labour matters much more than a rise in worker headcount. With that in mind, I won’t be betting the farm on a BoC rate raise in January just yet.

David Larock is an independent mortgage broker and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David’s posts appear on Mondays on this blog, Move Smartly, and on his own blog, Integrated Mortgage Planners Email Dave