Bank of Canada preview: A 100-bps rate hike can't be ruled out

All eyes will be on the Bank of Canada’s interest rate decision this week, which some say could be its last increase of the year, and perhaps of this rate cycle.

Markets are pricing in a 75-bps hike, which would bring the Bank of Canada’s overnight rate to 3.25%, just above its 2%-3% “neutral” range and into restrictive territory.

If that happens, economists from CIBC, TD Bank and National Bank of Canada believe this could be the central bank’s last rate hike of this cycle, with the overnight sitting at 3.25% through to the end of 2023.

However, some aren’t ruling out the possibility of the Bank surprising markets again, as it did in July, with a second outsized rate hike of 100 bps on Wednesday.

RBC economists Nathan Janzen and Claire Fan wrote that, while they expect a 75-bps rate hike, “the Bank’s commitment to front-loading rate hikes in the face of red-hot inflation means an even bigger 100-bps increase (matching July’s hike) can’t be ruled out.”

Economist Taylor Schleich at NBC agrees, writing that, following July’s surprise 100-bps hike, “we’re certainly more cognizant of the risk of a second straight 100-basis-point interest rate hike and we think it’s a greater risk than is broadly appreciated.”

What the forecasters are saying…

The following is a collection of comments and analysis pertaining to the BoC’s upcoming rate decision:

On what happens after this week

• NBC: “While we could realistically see the BoC raise its policy rate anywhere from 0.5% to 1.0%, uncertainty is just compounded thereafter. As we’ve argued before, there’s a case to be made for pausing the tightening once definitively into restrictive territory. But given the increasingly hawkish central bank rhetoric globally, our conviction here has waned and we view the odds of additional hike(s) in Q4 as meaningfully higher.”
• Scotiabank: “Calling a rate peak [this] week would…require such (false) comfort as the resulting post-75 policy rate of 3.25% would barely push into restrictive territory, only by assuming that the neutral rate range is still 2–3% when it may well be higher now by, say, guessing that we should add 50bps to the bottom and top ends of the range. It would also leave any definition of the real policy rate still in negative territory and hence stimulative on both counts. My preference would be getting to a 4-handle on the policy rate in order to have more comfort that the BoC is doing enough on inflation, and then we’ll see.”

On the impact on trigger points

• Ben Rabidoux: Mortgage borrowers “with the best deeply discounted rates will begin to hit payment triggers if the Bank of Canada raises rates another 50 bps [this week]. But, for the average rate of [borrower] pool as a whole, the trigger is closer to 100 bps from current levels.” In his latest Edge Realty Analytics newsletter, Rabidoux says the pool of originations that need to be monitored are those from March 2021 to February 2022, which he estimates amount to $261 billion, or roughly 15% of outstanding mortgage debt.

On what to look for in the BoC’s statement

• NBC: “While there’s no shortage of uncertainty on the headline decision, we’ll be just as closely watching the guidance provided in the statement. In recent decisions, the statement has read: “The Governing Council continues to judge that interest rates will need to rise further, and the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation.” With an-already restrictive policy setting (after the assumed hike), the retention of this line would, of course, be unambiguously hawkish. Alternative, less aggressive (and perhaps more likely?) guidance might read something like: “Governing Council judges that rates may need to increase further.”

On GDP

• CIBC: “While growth in Q2 as a whole was solid at an annualized +3.3%, and little changed from Q1’s pace, it was disappointing relative to consensus expectations (+4.4%) and was largely driven by an acceleration in early spring…While we still expect that the Bank of Canada will hike interest rates further to combat high inflationary pressures, a cooling economy supports our view that the peak will be lower than financial markets have been pricing in.”

On how the BoC’s rate tightening compares globally

• BMO: “While advanced world central banks have been travelling at slightly different speeds, they are all moving rapidly in the same direction—save Japan. If the Bank of Canada meets market expectations at next week’s decision with a 75-bps hike, it will re-take the leadership as the most aggressive hiker among the G10, with the highest overnight rate (3.25%) and the biggest cumulative move this year (300 bps).”

On rate cuts

• CIBC: “As for rate cuts, we’d need a recession, or two years of soft growth, to open up enough economic slack to justify any steps to ease off on monetary policy.”

Borrowing Costs and Housing Supply Impacting The GTA Real Estate Market

 There were 5,627 home sales reported through the Toronto Regional Real Estate Board’s (TRREB) MLS® System in August 2022, representing a year-over-year dip of 34.2 per cent – a lesser annual rate of decline compared to the previous four months. The August sales result also represented a month-over-month increase compared to July.

Sales represented a higher share of new listings compared to the previous three months. If this trend continues, it could indicate some support for selling prices in the months ahead. On a year-over-year basis, the MLS® Home Price Index (HPI) was up by 8.9 per cent and the average selling price for all home types combined was up by 0.9 per cent to $1,079,500. The average selling price was also up slightly month-over-month, while the HPI Composite was lower compared to July. Monthly growth in the average price versus a dip in the HPI Composite suggests a greater share of more expensive home types sold in August.

“While higher borrowing costs have impacted home purchase decisions, existing homeowners nearing mortgage renewal are also facing higher costs. There is room for the federal government to provide for greater housing affordability for existing homeowners by removing the stress test when existing mortgages are switched to a new lender, allowing for greater competition in the mortgage market. Further, allowing for longer amortization periods on mortgage renewals would assist current homeowners in an inflationary environment where everyday costs have risen dramatically,” said TRREB President Kevin Crigger.

“The Office of the Superintendent of Financial Institutions (OSFI) should weigh in on whether the current stress test remains applicable. Is it reasonable to test home buyers at two percentage points above the current elevated rates, or should a more flexible test be applied that follows the interest rate cycle? In addition, OSFI should consider removing the stress test for existing mortgage holders who want to shop for the best possible rate at renewal rather than forcing them to stay with their existing lender to avoid the stress test. This is especially the case when no additional funds are being requested,” said TRREB CEO John DiMichele.

“There are other issues beyond borrowing costs impacting housing affordability in the Greater Golden Horseshoe. The ability to bring on more supply is the longer-term challenge. However, we are moving in the right direction on this front. The strong mayor proposal from the province coupled with the recent commitment from Toronto Mayor John Tory to expand ownership and rental housing options are examples of this. TRREB looks forward to hearing additional initiatives from candidates vying for office in the upcoming municipal elections,” said TRREB Chief Market Analyst Jason Mercer.

What are the pros and cons of buying a house in a recession?

 A recession may feel like a volatile time to purchase a property. Home prices appear to rise and fall at the drop of a hat. If you are savvy enough, however, it could be your best bet to finding a great deal. Here are the pros and cons of buying a house in a recession—and everything in between.  

What is a recession?
A recession is traditionally defined as consecutive quarters of negative growth. Prior to declaring a recession, the federal government will wait for the second quarter of statistics. In recent times, such as the beginning of the COVID-19 pandemic, when economic collapse was looming, an unprecedented number of corporate bankruptcies and unemployment claims seemed inevitable. At that point, a recession was almost a guarantee, with a new recession—as well as housing market fluctuations—likely to be a casualty of market disruptions.

Is it a good time to buy a house?
Experts historically have done a poor job predicting future housing market crashes. For most of 2020 and 2021, for instance, housing costs increased dramatically; however, the federal government then hiked interest rates, therefore changing the calculations for buyers and depressing home prices. Rising interest rates force homebuyers to save money on their home purchases where possible.

Generally, purchasing a property during a recession could get you a better deal on a home. The reason for this is the number of owners or foreclosures who are forced to sell their properties to stay financially viable rises, which therefore leads to more properties becoming available on the market and lower housing prices. But because the current COVID-19-related recession is unique, each potential homebuyer is in a somewhat unprecedented financial situation. For instance, if you work in tourism or hospitality, your financial positioning will be very different from someone who is able to work from home and earn a regular, steady paycheque without any disruptions.

What impact does a recession have on house prices?
Recessions usually depress prices in almost every market—and the real estate market is no exception. Poor economic conditions typically mean there are fewer potential homebuyers with disposable income. When demand for properties drops, home prices go with it, and income generated from real estate stalls. This scenario is common, but it is still merely a general rule. It is also possible that during a recession housing prices do not rise or fall at all, but experience volatility in either direction.

The pros of buying a house during recession
Do not fret. There are pros of buying a housing during a recession. The following are some definite benefits that you can consider:

Lower prices. There are usually fewer homebuyers during a recession, which means that properties remain on the market for longer. It also means that sellers are more likely to drop their listing prices, making their property easier to sell. This scenario could mean that you find your dream home with a lucky bid at an auction, for example.

Lower mortgage rates. During a recession, it is common for interest rates to be lowered as a means of stimulating the economy. Major banks often follow suit—including by lowering mortgage rates. That means with a lower mortgage rate you will wind up paying less for your home in the long run. It is also likely to give you significant savings, depending on how low the mortgage rate goes.

Seller concessions. A property that sits on the market a long time usually makes sellers skittish. You can take advantage of this by requesting concessions like asking the seller to pay for closing costs, for example.

The cons of buying a house during recession
Buying a house during a recession also comes with its downsides. Some things that you should consider when deciding to purchase a property in the middle of a recession include:

Job uncertainty. During typical recessions, unemployment rates can skyrocket, with a lot of jobs on the chopping block, or at least in danger of cutbacks. As the COVID-19 pandemic showed with the hospitality industry, your job situation can change quickly, no matter how secure you think your position or industry. It is also important to keep in mind that your mortgage is one of many costs that come with owning a home. To avoid a situation where you are forced into a foreclosure, ensure first and foremost that you have job security.

Banks are less likely to lend money. Economic uncertainty can impact anyone’s job—and banks understand this. For fear of having to foreclose your home, lenders are less likely to approve mortgages in this economic environment.

Title issues. Title issues could potentially impact your property purchase if the current owners you are buying from go deep into debt. It is important, for this reason, to ensure your title company’s search is thorough.  

Possible difficulty selling your home. Selling during a recession could be a problem if you need to sell your current home before buying a new one. Due to the recession, you could get less money than you expected, or your house could languish on the market, depending on your location.

Source: Canadian Mortgage Professional