Canadian Inflation Spikes to 6.7% in March

Dr. Sherry Cooper Brent Shepheard 20 Apr

This is the latest update from Dominion Lending Centres Cheif Economist, Dr. Sherry Cooper

Holy Smokes! Canadian Inflation Is At 6.7%

 

StatsCanada today reported that consumer prices rose a whopping 6.7% year-over-year in March, a full percentage point above the 5.7% reading the month before. Market-driven interest rates shot up on the news as the prospects increase for another half-point rise in the overnight rate when the Bank of Canada meets again on June 1.There is no sugar-coating this. Bonds were walloped as the Government of Canada’s two-year yield shot up to 2.6%, the 5-year yield rose to 2.75%, and the 10-year yield spiked above 2.825% immediately following the data release. The 5-year yield–so crucial for setting the 5-year fixed mortgage rate–has nearly quadrupled over the past year.

 

Where Is The Inflation Coming From?

 

Inflationary pressure remained widespread in March, as prices rose across all eight major components. Prices increased against the backdrop of sustained price pressure in Canadian housing markets, substantial supply constraints and geopolitical conflict, which has affected energy, commodity, and agriculture markets. Further, employment continued to strengthen in March, as the unemployment rate fell to a record low. In March, average hourly wages for employees rose 3.4% y/y, raising the risk of wage-price spiraling.

Excluding gasoline, the Consumer Price Index (CPI) rose 5.5% year over year in March, the fastest pace since introducing the all-items excluding gasoline special aggregate in 1999, following a 4.7% gain in February.

The CPI rose 1.4% in March, following a 1.0% gain in February on a monthly basis. This was the largest increase since January 1991, when the goods and services tax was introduced. On a seasonally adjusted monthly basis, the CPI rose 0.9% in March, matching the most significant increase on record.

In March, gasoline prices rose 11.8% month over month, following a 6.9% increase in February. Global oil prices rose sharply in March because of supply uncertainty following Russia’s invasion of Ukraine. Higher crude oil prices pushed prices at the pump higher. Year over year, consumers paid 39.8% more for gasoline in March.

Month over month, prices for fuel oil and other fuels rose 19.9%, the second-largest increase on record after February 2000. On a year-over-year basis, prices for fuel oil and other fuels rose 61.0% in March.

Food prices continued to surge, as did the prices of durable goods such as automobiles and furniture. It cost considerably more for restaurants, hotel rooms, and flights.

Goods inflation hit 9.2% in March, the highest since 1982. Services inflation rose to 4.3%, the highest since 2003.

Bottom Line

Bond markets sold off all over the world today. The yield curves flattened as shorter-term yields rose more than their longer-dated counterparts.  This is reflective of the view that central banks will accelerate their tightening.

Today’s CPI report shows inflation pressures were more elevated than the Bank of Canada expected just last week when they hiked the policy rate by 50 basis points.

This could well mark the top of the surge in inflation, but the return to the 2% inflation target could be prolonged, particularly if inflation expectations become embedded. For this reason, Governor Macklem is likely to tighten aggressively once again on June 1, which will further dampen housing activity

If you have any questions, contact Brent today or book a call-back time here.

high ratio mortgage

Bank of Canada Hikes Rates by 50 BPs, Signaling More To Come

Dr. Sherry Cooper Brent Shepheard 13 Apr

This is the latest post from Dominion Lending Centres‘ Chief Economist, Dr. Sherry Cooper

The Governing Council of the Bank of Canada raised the overnight policy rate by a full 50 basis points for the first time in 22 years. This was a widely telegraphed action that will be followed by the US Federal Reserve next month. While the BoC was the first G-7 central bank to take such aggressive action, the Bank of New Zealand also hiked rates today by half a percentage point. Considering the surge in inflation and the strength of the Canadian economy, another jumbo rate hike may well be in the cards.

The Bank now realizes that inflation is coming, not just from supply disruptions but also from excessive demand.

“In Canada, Growth is strong, and the economy is moving into excess demand. Labour markets are tight, and wage growth is back to its pre-pandemic pace and rising. Businesses increasingly report they are having difficulty meeting demand, and are able to pass on higher input costs by increasing prices.”

The Bank now says that

“Growth looks to have been stronger in the first quarter than projected in January and is likely to pick up in the second quarter. Consumer spending is strengthening with the lifting of pandemic containment measures. Exports and business investment will continue to recover, supported by strong foreign demand and high commodity prices. Housing market activity, which has been exceptionally high, is expected to moderate.”

The Governing Council has, once again, revised up its inflation forecast. CPI inflation is now expected to average almost 6% in the first half of 2022 and remain well above the control range throughout this year. It is then expected to ease to about 2½% in the second half of 2023 and return to the 2% target in 2024. There is an increasing risk that expectations of elevated inflation could become entrenched.

With the economy moving into excess demand and inflation persisting well above target, the Governing Council judges that interest rates will need to rise further. The Bank is also ending reinvestment and will begin quantitative tightening (QT), effective April 25. Maturing Government of Canada bonds on the Bank’s balance sheet will no longer be replaced, and, as a result, the balance sheet size will decline over time. This will put further upward pressure on interest rates further out the yield curve.

Bottom Line

Traders are betting that the overnight rate will approach 3.0% one year from today. In today’s Monetary Policy Report (MPR), the Bank revised upward its estimate of the neutral overnight rate to a range of 2.0% to 3.0%–up 25 bps from their estimate one year ago. This is the Bank’s estimate of the overnight rate that is consistent with the noninflationary potential growth rate of the economy.

The rise in interest rates has already shown signs of slowing the Canadian housing market. The MPR states that

“Resales are expected to soften somewhat in the second quarter as borrowing rates rise. Low levels of both builders’ inventories and existing homes for sale should support new construction and renovations in the near term.”

Bond yields have risen in anticipation of the Bank of Canada’s move to take the five-year fixed mortgage rate up to between 3.5% and 4%. This could be a pivotal time, as mortgage borrowers must qualify for loans at the maximum of 5.25% or 2 percentage points above the offered contract rate. We are now beyond the  2 ppts threshold, which reduces the buying power of many.

If you have any questions, contact Brent today or book a call-back time here.

Interest Rates Rise

7 Closing Costs You Need To Budget For

Mortgage Brent Shepheard 2 Apr

7 Closing Costs You Need To Budget For

 

What are closing costs?

Closing costs are an often overlooked expense in the home buying process, especially among first-time home buyers.   Closing costs are in addition to your down-payment funds.  Most lenders use a standard calculation of 1.5% of the purchase price to determine the closing costs needed to satisfy their funding requirements.

For example, if you purchase a property for $675,000, be prepared to show $10,125 (1.5% x $675,000) of liquid funds available in addition to any down-payment funds.

Let’s take a look at 7 Common Closing Costs you need to budget for:

1. HOME INSURANCE

Lenders will require that you have an active homeowner and fire insurance policy in place prior to funding.    Your Lawyer or Notary will verify your insurance as part of your closing process.  The amount to be insured is typically the mortgage amount of the full replacement cost of the home.  These costs vary and you are free to shop for the best deal.  If you are buying a strata property, your strata will have active insurance in place.

 

2. APPRAISAL AND HOME INSPECTION FEES

The appraisal is for the benefit of the lender and the home inspection is for the benefit of the home buyer.   An appraisal is required when the lender needs to determine the current market value of a property.  The appraisal fee is the responsibility of the borrower and forms part of your closing costs.  A home inspection is more common when buying a detached home in comparison to strata properties.   The inspection is optional but always advised.  A good home inspector will find issues with the property that can be brought to the seller’s attention when negotiating a sale.

 

3. PROPERTY TRANSFER TAX (PTT)

In British Columbia, every time a property changes owners, it is taxed under the Property Transfer Tax (PTT)  The tax is paid for by the buyer and is usually the largest expense in closing.   If you are a first-time homebuyer, you may qualify for an exemption from the PPT.  Click here to see if you qualify for an exemption.   As of April 2nd, 2022 the PTT is calculated as:

  • 1% of the fair market value up to and including $200,000
  • 2% of the fair market value between $200,001 – $2,000,000
  • 3% of the fair market value above $2,000,001
  • an additional 2% tax on the fair market values above $3,000,000

 

4. LEGAL FEES

You are entering into a legally binding agreement with your mortgage lender.  It is required that you have your own legal representative act on your behalf in this transaction.  You can use a Notary or Real Estate Lawyer and they will charge anywhere between $750 – $2,000 for a standard purchase transaction.  Fees will vary so feel free to get a few quotes or ask me for a referral.

 

5. TITLE INSURANCE

The ownership of a property is legally referred to as title.  Title insurance is a legal form of assurance as to the state of a property’s title.  It protects the lenders and purchasers against any loss or damage suffered due to fraud, survey mistakes, encroachment issues, existing undisclosed liens, or any other issue that would prevent an owner from having clear ownership of the property.  Your Notary or Lawyer will ensure you have title insurance and it costs around $250.

 

6. ADJUSTMENTS TO THE CURRENT OWNER

The buyer may need to pay the seller for any prepaid property expenses such as property taxes, utility bills, or strata fees.   For example, if you take possession of a property in August and the current owner paid the property taxes for the year, an adjustment is required.  The amount will be determined by your Lawyer or Notary using a pro-rated daily rate.  Adjustments are listed in detail in your Statement of Adjustments prepared by your Lawyer or Notary.

 

7. GST – GOVERNMENT SALES TAX

GST is paid only on new construction purchases (pre-builds, new homes etc.).  The GST is 5% of the purchase price and can be added to your mortgage balance.

For example, if you purchase a newly built condo for $529,900 you need to pay $26,495 (5%) in GST.  This makes the total purchase price of the condo $556,395.

 

 

If you have any questions, contact Brent today or book a call-back time here.

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