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What another Bank of Canada hike could mean to the housing market and borrowers

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Good Morning!

Another Bank of Canada interest rate decision is upon us and as the end of the hiking cycle draws near, it promises to be a cliff hanger.

The central bank has raised its benchmark interest rate at a record pace of 400 bps in nine months to 4.25 per cent, and said after its last increase that a decision to raise rates further would depend on the data.

Most expect another hike tomorrow, and the market is putting high odds on a quarter-point increase, which would take the rate to 4.5 per cent.

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But data have failed to provide a 100 per cent clear answer either way, and some economists are arguing that the Bank should hold fire.

“Those who argue that another 25 basis points increase will not kill the economy forget that at this stage of the business cycle, the impact of further hikes is not linear. In other words, the marginal increase could be the straw that breaks the camel’s back,” wrote National Bank economists Matthieu Arseneau and Taylor Schleich.

Signs of stress have been showing up in the Bank of Canada’s own indicators, says Capital Economics. The Bank uses the share of new mortgage borrowers (including renewals) with a debt service ratio of more than 25 per cent of income to identify financially vulnerable households. That share has grown from 12 per cent before the Bank started hiking to 27 per cent in the third quarter. Capital calculates that the share is on track to reach 35 per cent this quarter.

“We suspect the Bank is more concerned about the financial risks of its actions than it has let on so far,” said Capital economist Stephen Brown.

Homebuyers, struggling with the highest borrowing rates in almost 20 years, may also soon face tougher mortgage rules.

Canada’s banking watchdog, Office of the Superintendent of Financial Institutions or OSFI, has proposed a number of measures beyond the existing mortgage stress test including loan-to-income and debt-to-income restrictions and debt-service coverage restrictions.

 

Currently the mortgage stress test puts the minimum qualifying rate for an uninsured mortgage at the greater of the contract rate plus two per cent, or 5.25 per cent.

“It’s going to be an interesting spring,” said Victor Tran, a RATESDOTCA mortgage expert. “If the BoC raises the overnight rate, we may see a slower housing market during the traditional spring housing rush than we are used to, as buyers wait for the market to bottom out before purchasing.

“However, the recent OSFI announcement could push more buyers into the market to purchase before they become unable to do so. Especially if it looks like the consultation will lead to changes in loan-to-income and debt-to-income ratios.”

Tran also predicts that if the Bank hikes the expected 25 bps and the variable-rate hits new highs the spring market may see a surge of investors forced to sell condos, possibly double the usual number.

That and a glut of new builds coming into the market in 2023 could bring condo prices down further.

A increase in mortgage fraud is also possible as people stretch to buy or renew a mortgage under the higher interest rates, he said.

If the Bank raises its rate by 25 basis points on Jan. 25 to 4.5 per cent, the prime rate of commercial banks will rise to 6.7 per cent.

RATESDOTCA says for every 25 bps increase a homeowner with a variable-rate mortgage can expect to pay about $14 more a month per $100,000 of mortgage.

Thus, a homeowner with a $500,000 mortgage at a rate of 5.25 per cent would see their rate rise to 5.50 per cent and payments increase $74 a month to $3,070, it said.

If this same homeowner had taken out their mortgage before March 2022, they would have seen a total increase to their mortgage payments of $1,129 a month since the Bank began hiking rates.

On a more hopeful note, BMO senior economist Robert Kavcic says mortgage rates should now be at or near their peak, if the Bank of Canada continues as expected.

If the Bank stops after a last 25 bps hike, the upward march of variable rates will end.

Meanwhile, a rally in government bonds has pulled 5-year yields in Canada — the basis for most long-term fixed mortgage rates — down to about 2.8 per cent, below the lows seen in December, said Kavcic.

These levels now look more consistent with 5-year fixed mortgage rates being in the 4.5 to 5 per cent range, he said, though it takes time for this to work through the system. (Currently 5-year fixed rates range from 4.39 to 6.49 per cent, according to mortgage comparison sites.)

“This is still a massive shock compared to readily available rates around 1.5 per cent just a year ago, but the stall in upward momentum should help at the margin, and offer some confidence that the worst of the rate shock is behind us,” wrote Kavcic.

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The market is betting the Bank of Canada will hike rates one more time on Jan. 25, with most commercial banks forecasting a quarter-point raise, which would bring the key rate to 4.5 per cent — the highest since 2007. Whether that’s a good bet remains to be seen. As National Bank’s chart above suggests the track record of market rate calls could be better. In all, the Bank of Canada surprised the markets five times in eight meetings in 2022.

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Uber brings back ride share for some Canadian cities — but under a new name – Global News

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Uber brings back ride share for some Canadian cities — but under a new name  Global NewsView Full Coverage on Google News

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'Not telling us the truth': NSP customers complain utility isn't transparent about outages – CBC.ca

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Tiny wines find home in B.C.’s market, as Canadians consider reducing consumption

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VANCOUVER — Wine lovers have growing options on the shelf to enjoy their favourite beverage as producers in B.C. offer smaller container sizes.

Multiple British Columbia wineries over the last several years have begun offering their product in smaller, single-serve cans and bottles.

Along with making wine more attractive to those looking to toss some in a backpack or sip on the golf course, the petite containers leave wineries with options for a potential shift in mindset as Canadians discuss the health benefits of reducing alcohol consumption.

Vancouver-based wine consultant Kurtis Kolt said he’s watched the segment of the wine industry offering smaller bottles and cans “explode” over the last several years, particularly during the COVID-19 pandemic when people were meeting outdoors in parks and beaches and looking for something more portable to take with them.

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“You’re not taking a hit on quality, you know? In fact, if someone is only going to be having a glass or two, you’re cracking a can and it’s completely fresh, guaranteed,” he said.

It’s also an advantage for people who want to drink less, he said.

“It’s much less of a commitment to crack open a can or a small bottle or a smaller vessel than it is to open a bottle,” he said.

“Then you have to decide how quickly you’re going to go through it or end up dumping some out if you don’t finish it.”

Last month, the Canadian Centre on Substance Use and Addiction released a report funded by Health Canada saying no amount of alcohol is safe and those who consume up to two standard drinks per week face a low health risk.

That’s a significant change from the centre’s 2011 advice that said having 15 drinks per week for men and 10 drinks per week for women was low risk.

Health Canada has said it is reviewing the report.

Charlie Baessler, the managing partner at Corcelettes Estate Winery in the southern Interior, said his winery’s Santé en Cannette sparkling wine in a can was released in 2020 as a reduced alcohol, reduced sugar, low-calorie option.

“We’ve kind of gone above and beyond to attract a bit of a younger, millennial-type market segment with a fun design concept of the can and sparkling, low alcohol — all these things that have been recently a big item on the news,” he said.

Santé en Cannette is a nine per cent wine and reducing the alcohol was a way to reduce its calories, he said. The can also makes it attractive for events like a picnic or golf, is recyclable, and makes it easier for restaurants that might want to offer sparkling wine by the glass without opening an entire bottle.

At the same time, the lower alcohol content makes it an option for people who might want a glass of wine without feeling the same effect that comes from a higher alcohol content, he said.

“So the health is clearly one incentive, but I think more importantly, so was being able to enjoy a locally made product of B.C. from a boutique winery, dare I say, with a mimosa at 11 o’clock and not ruin your day,” he said.

Baessler said the winery has doubled production since the product was first released to about 30,000 cans a year, which they expect to match this year.

He said there’s naturally a market for the product but he doesn’t expect it to compete with the higher-alcohol wine.

“So this isn’t our Holy Grail. This is something that we do for fun and we’ll never compete, or never distract, from what is our core line of riper, higher-alcohol wine,” he said.

Jeff Guignard, executive director of B.C.’s Alliance of Beverage Licensees, which represents bars, pubs and private liquor stores, said the industry has seen a shift in consumers wanting options that are more convenient.

“It’s not a massive change in consumer behaviour but it is a definitely a noticeable one, which is why you see big companies responding to it,” he said.

Guignard said the latest CCSA report is creating an increased awareness and desire to become educated about responsible consumption choices, which is a good thing, but he adds it’s important for people to look at the relative risk of what they’re doing.

“If you’re eating fast food three meals a day, I don’t think having a beer or not is going to be the single most important determinant of your health,” he said.

“But from a consumer perspective, as consumer preferences change, of course beverage manufacturers respond with different packaging or different products, the same way you’ve seen in the last five years, a large number of low-alcohol or no-alcohol beverages being introduced to the market.”

While he won’t predict how much the market share could grow, Guignard said non-alcoholic beverages and low-alcoholic beverages will continue to be a significant piece of the market.

“I don’t know if it’s reached its peak or if it will grow. I just expect it to be part of the market for now on.”

This report by The Canadian Press was first published Feb. 5, 2023.

 

Ashley Joannou, The Canadian Press

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