Welcome to Mortgage Rundown, a quick take on Canada’s home financing landscape from mortgage strategist Robert McLister.
The bad dream that is COVID-19 has muddied the mortgage rate outlook again.
As Omicron threatens Canada’s recovery, many with variable-rate mortgages now expect – and hope – the Bank of Canada will keep rates lower for longer. Expectations in the bond market, however, suggest the variable-rate party won’t be extended for long.
Investors now expect the first Bank of Canada rate hike by April, consistent with major economists’ expectations and the BoC’s own guidance. Last week, market pricing suggested a hike in March – these implied rate forecasts change like the wind.
Regardless, the market clearly doesn’t think Omicron will defer rate hikes as much as Delta. Nor did it keep the U.S. Federal Reserve from projecting two more hikes in 2022 (three total) in its rate announcement on Wednesday. And with the prices soaring on housing, food, clothing and just about everything else you need, can demands for wage gains be far behind?
Once the central bank is convinced that rising wages are fuelling significantly higher price levels, it’ll have little choice but to hike rates in order to keep inflation expectations anchored near 2 per cent. The questions will then shift to the pace and extent of rate hikes.
Falling neutral
The most interesting question is not when rates will go up, but by how much. And the answer may have changed this week.
Visions of a never-ending pandemic and fears of inflation dramatically outpacing incomes have driven U.S. consumer confidence to a near-decade low, according to the University of Michigan’s consumer sentiment for the U.S. And in case you’re wondering, American sentiment does impact Canadian rates.
Add the fact that so many people are saddled with debt these days and it’s harder for a recovery to stay airborne once rates start rising.
That’s why it wasn’t surprising this week to hear the Bank of Canada say neutral interest rates “are lower than in the past and will likely remain low in the future.” The neutral rate is “the interest rate at which monetary policy neither stimulates nor holds back economic activity,” it said.
After its new inflation mandate this week, the bank reiterated that it may need to hold interest rates low for longer. It followed that up Wednesday by noting it’s “likely to lower its policy rate to the effective lower bound (0.25 per cent) more often in response to [economic] shocks.”
Decoding it all
RBC Dominion Securities wrote this week that the bank’s new framework implies “a terminal rate no higher than the 1.75 per cent reached in the 2017-18 hiking cycle.”
Leading up to a rate-hike cycle in 2022, that’s about as variable-rate friendly an outlook as you’re going to get.
Indeed, variable is where risk-tolerant, financially secure borrowers want to be – long-term. That’s particularly true after the prime rate has already risen between 75 and 175 basis points, which, history suggests, is when the odds overwhelmingly favour variable. (There are 100 basis points in a percentage point.)
In 2022 and 2023, however, it’s possible that inflation won’t be as short-lived as the Bank of Canada thinks. We have to remember that the bank isn’t clairvoyant. It has continually underestimated Canada’s inflation problem.
The risk is that rates shoot above the bank’s estimated neutral rate and punish variable-rate borrowers. This is partly why fixed mortgage rates are still relevant to so many.
To sum up Omicron’s effect, it’s likely going to be more fleeting than inflation. If price levels don’t cool significantly by spring 2022, the central bank may be forced to repeatedly tighten monetary policy more than expected, despite Omicron putting the brakes on near-term growth.
Quiet week on the rate front
Despite a big dip in bond yields – which typically lead fixed rates – the lowest nationally available five-year fixed rates held steady. Rates tend to be sticky during the holidays. It’s possible we see a few lenders and brokers trim fixed rates before New Year’s, but I wouldn’t expect much improvement in the lowest rates.
Variable pricing is going nowhere fast until the new year. Floating rates are still roughly 130 bps cheaper than five-year fixed rates. That upfront rate advantage continues to lure in borrowers, especially with Omicron dimming the economic outlook.
Mortgage brokers and credit unions offer some of the lowest insured and uninsured rates on a provincial basis. Google “best five-year fixed rates,” for example, and you’ll find the cheapest five-year deals.
Lowest nationally available mortgage rates
TERM
UNINSURED
PROVIDER
INSURED
PROVIDER
1-year fixed
1.99%
Manulife*
1.99%
True North
2-year fixed
2.18%
Scotia eHOME
1.99%
Radius Financial
3-year fixed
2.38%
Scotia eHOME
2.33%
Scotia eHOME
4-year fixed
2.53%
Scotia eHOME
2.39%
True North
5-year fixed
2.64%
Tangerine
2.44%
Nesto
10-year fixed
3.30%
First National
2.79%
Nesto
5-year variable
1.35%
Tangerine
0.99%
HSBC
5-year hybrid
2.04%
Scotia eHOME
2.04%
Scotia eHOME
HELOC
2.35%
Tangerine
N/A
N/A
Rates in the table are as of Dec. 15, from providers that lend in at least nine provinces and advertise rates on their websites. Use these rates as a guide for the most that an average creditworthy borrower should pay. Insured rates apply to those buying with a down payment of less than 20 per cent, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases of more than $1-million and may include applicable lender rate premiums.
This & That
· On Friday, Canada’s banking regulator is set to announce the minimum interest rate that borrowers must prove they can afford to get a federally regulated mortgage. It now stands at 5.25 per cent. With the Bank of Canada hinting at lower rates for longer and fears of a housing bubble, the question is how much Office of the Superintendent of Financial Institutions will hike the minimum qualifying rate to protect the banking system from housing overvaluation. My guess is a rise of 15 to 45 basis points.
· The latest data from Canada Mortgage and Housing Corp. show 53 per cent of 2021 homebuyers were first-time buyers. Most first-time buyers tend to be much more sensitive to rate hikes than repeat buyers.
On its own, the government’s proposed 1 per cent “Underutilized Housing Tax” will do little to slow home prices. But the tax, which targets foreign buyers, may combine with higher rates and more federal mortgage tightening (if it happens, as I expect) to dampen homebuyer sentiment in 2022. Of course, rates aside, the two biggest home price drivers remain record-low housing inventories and a household formation that leads the G7. A tax that would only apply to a very small percentage of homebuyers is almost meaningless at addressing the supply shortage.
Robert McLister is an interest rate analyst, mortgage strategist and columnist. You can follow him on Twitter at @RobMcLister.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.
The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.
The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.
This report by The Canadian Press was first published Sept. 12, 2024.
Dollarama Inc.’s food aisles may have expanded far beyond sweet treats or piles of gum by the checkout counter in recent years, but its chief executive maintains his company is “not in the grocery business,” even if it’s keeping an eye on the sector.
“It’s just one small part of our store,” Neil Rossy told analysts on a Wednesday call, where he was questioned about the company’s food merchandise and rivals playing in the same space.
“We will keep an eye on all retailers — like all retailers keep an eye on us — to make sure that we’re competitive and we understand what’s out there.”
Over the last decade and as consumers have more recently sought deals, Dollarama’s food merchandise has expanded to include bread and pantry staples like cereal, rice and pasta sold at prices on par or below supermarkets.
However, the competition in the discount segment of the market Dollarama operates in intensified recently when the country’s biggest grocery chain began piloting a new ultra-discount store.
The No Name stores being tested by Loblaw Cos. Ltd. in Windsor, St. Catharines and Brockville, Ont., are billed as 20 per cent cheaper than discount retail competitors including No Frills. The grocery giant is able to offer such cost savings by relying on a smaller store footprint, fewer chilled products and a hearty range of No Name merchandise.
Though Rossy brushed off notions that his company is a supermarket challenger, grocers aren’t off his radar.
“All retailers in Canada are realistic about the fact that everyone is everyone’s competition on any given item or category,” he said.
Rossy declined to reveal how much of the chain’s sales would overlap with Loblaw or the food category, arguing the vast variety of items Dollarama sells is its strength rather than its grocery products alone.
“What makes Dollarama Dollarama is a very wide assortment of different departments that somewhat represent the old five-and-dime local convenience store,” he said.
The breadth of Dollarama’s offerings helped carry the company to a second-quarter profit of $285.9 million, up from $245.8 million in the same quarter last year as its sales rose 7.4 per cent.
The retailer said Wednesday the profit amounted to $1.02 per diluted share for the 13-week period ended July 28, up from 86 cents per diluted share a year earlier.
The period the quarter covers includes the start of summer, when Rossy said the weather was “terrible.”
“The weather got slightly better towards the end of the summer and our sales certainly increased, but not enough to make up for the season’s horrible start,” he said.
Sales totalled $1.56 billion for the quarter, up from $1.46 billion in the same quarter last year.
Comparable store sales, a key metric for retailers, increased 4.7 per cent, while the average transaction was down2.2 per cent and traffic was up seven per cent, RBC analyst Irene Nattel pointed out.
She told investors in a note that the numbers reflect “solid demand as cautious consumers focus on core consumables and everyday essentials.”
Analysts have attributed such behaviour to interest rates that have been slow to drop and high prices of key consumer goods, which are weighing on household budgets.
To cope, many Canadians have spent more time seeking deals, trading down to more affordable brands and forgoing small luxuries they would treat themselves to in better economic times.
“When people feel squeezed, they tend to shy away from discretionary, focus on the basics,” Rossy said. “When people are feeling good about their wallet, they tend to be more lax about the basics and more willing to spend on discretionary.”
The current economic situation has drawn in not just the average Canadian looking to save a buck or two, but also wealthier consumers.
“When the entire economy is feeling slightly squeezed, we get more consumers who might not have to or want to shop at a Dollarama generally or who enjoy shopping at a Dollarama but have the luxury of not having to worry about the price in some other store that they happen to be standing in that has those goods,” Rossy said.
“Well, when times are tougher, they’ll consider the extra five minutes to go to the store next door.”
This report by The Canadian Press was first published Sept. 11, 2024.
TORONTO – The U.S. Consumer Financial Protection Bureau has ordered TD Bank Group to pay US$28 million for repeatedly sharing inaccurate, negative information about its customers to consumer reporting companies.
The agency says TD has to pay US$7.76 million in total to tens of thousands of victims of its illegal actions, along with a US$20 million civil penalty.
It says TD shared information that contained systemic errors about credit card and bank deposit accounts to consumer reporting companies, which can include credit reports as well as screening reports for tenants and employees and other background checks.
CFPB director Rohit Chopra says in a statement that TD threatened the consumer reports of customers with fraudulent information then “barely lifted a finger to fix it,” and that regulators will need to “focus major attention” on TD Bank to change its course.
TD says in a statement it self-identified these issues and proactively worked to improve its practices, and that it is committed to delivering on its responsibilities to its customers.
The bank also faces scrutiny in the U.S. over its anti-money laundering program where it expects to pay more than US$3 billion in monetary penalties to resolve.
This report by The Canadian Press was first published Sept. 11, 2024.
/cloudfront-us-east-1.images.arcpublishing.com/tgam/ARKQKE33WBF65M3O4FYCA5LSSY)
