Month: October 2020

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Bank of Canada Holds Overnight Rate at 0.25% and Recalibrates Bond-Buying Program

General Beata Wojtalik 28 Oct

Bank of Canada Holds Overnight Rate at 0.25% and Recalibrates Bond-Buying Program

Bank of Canada Recalibrates Quantitative Easing

As expected, the Bank held its target overnight rate at the effective lower bound of 25 basis points with the clear notion that negative policy rates are not in the cards. Instead, the central bank will continue to rely on large-scale asset purchases–quantitative easing (QE). The central bank is recalibrating its QE program as promised in recent weeks. In mid-October, it announced that it would end its Repo, Bankers Acceptance and Canada Mortgage Bond purchases this month, as they are no longer needed to assure liquidity in those markets. The volumes of purchases have declined sharply since April. This move will have minimal impact on market interest rates.

The Governing Council announced today it would also gradually reduce purchases of federal government bonds from at least $5 billion to at least $4 billion per week. “The Governing Council judges that, with these combined adjustments, the QE program is providing at least as much monetary stimulus as before.”

The PC opposition party has been warning Governor Macklem of the risks of financing Trudeau’s government spending. But the Bank has little alternative but to step-up its buying of newly issued benchmark bonds–those currently being sold by the government, as opposed to older debt that is becoming increasingly illiquid. As reported in Bloomberg News, “It means the bank’s quantitative easing program will increasingly mirror government debt sales at a time when opposition lawmakers are warning it against directly financing Prime Minister Justin Trudeau’s fiscal agenda.” (See chart below). The Bank already owns more than a third of all outstanding Government of Canada debt, proportionately more than most central banks because Canada ran budget surpluses, which paid down debt for so long.

Virtually every major central bank in the world is conducting an emergency QE program in response to the COVID-19 crisis. The Bank of Canada says its QE program reinforces its commitment to hold interest rates at historic lows over the next few years until the annual inflation rate is sustainably at its target 2% level. Today’s October Monetary Policy Report indicates they will likely keep the overnight rate at 0.25% until 2023.

The central bank has no intention of paring back stimulus, with risks to the economy growing amid the second wave of COVID-19 cases. “As the economy recuperates, it will continue to require extraordinary monetary policy support,” the bank said. “We are committed to providing the monetary policy stimulus needed to support the recovery and achieve the inflation objective.”

October Monetary Policy Report

  • Following the sharp bounce back in growth that occurred when containment measures were lifted, and the economy reopened, the Canadian economy transitioned to a slower, more protracted recuperation phase of its recovery. The recovery phases are proceeding largely as described in the July Report, though the initial rebound was stronger than expected. Furthermore, the near-term slowing in the recuperation phase is likely to be more pronounced due to the recent increase of COVID-19 infections.
  • There is ongoing and significant slack in the Canadian economy. The gap between the actual output and the economy’s potential output is not expected to close until 2023. The economy is progressing unevenly, with some sectors and workers disproportionately affected by the virus–particularly those in accommodation, food, arts, entertainment and recreation, as well as global transportation. Many of those hardest-hit are low-income workers.
  • Oil prices remain below pre-pandemic levels and are assumed to remain around current levels, hitting Alberta hard.
  • Ongoing slack in the economy is expected to continue to hold inflation down into 2023.

The Bank of Canada’s forecast for Canadian growth is shown in the table below. The economic recovery is projected to be prolonged, underpinned by policy support but largely influenced by the evolution of the virus, ongoing uncertainty and structural changes to the economy. These changes could result in longer-term shifts of workers and capital across different regions and sectors of the economy. This adjustment process weighs on the Bank’s estimates of potential growth.

After declining by about 5 1/2 percent in 2020, the economy is expected to expand by almost 4 percent on average in 2021 and 2022. Two factors will likely lead to quarterly patterns of growth that are unusually choppy: localized outbreaks and containment measures and varied recovery rates across industries.

Inflation is expected to remain below the lower end of the Bank’s inflation-control target range of 1 to 3 percent until early 2021, largely due to the effects of low energy prices. Subsequently, inflation is anticipated to be within the target range, but economic slack will continue to put downward pressure on inflation throughout the projection period.

The Reopening Phase Was Strong But Uneven

Growth is estimated to have rebounded strongly in the third quarter, reversing about two-thirds of the decline observed in the first half of the year.  A sizable bounce back in activity resulted from a rebound in foreign demand, the release of pent-up demand for housing and some durable goods, and robust policy support.

Housing activity recovered sharply in the third quarter, supported by historically low financing costs, resilient incomes for higher-earning households, and extra sales and construction that made up for delayed spring activity (Chart 7). By September, cumulative resales are estimated to have compensated for the missed activity during the normally busy spring market. Housing activity may also be benefiting from changes in preferences. In particular, more than one-quarter of respondents to the Canadian Survey of Consumer Expectations in the third quarter of 2020 reported they would like to move to a larger or single-family home because of the pandemic. The strength of the housing market recovery, combined with a tight resale market, has led to the rapid growth of house prices in some markets. In contrast to the appreciation of house values observed in Toronto and Vancouver in 2016, price growth has been strongest in markets with moderate loan-to-income ratios, such as Ottawa, Montréal and Halifax.

Bottom Line

Interest rates will remain low for the foreseeable future. The pandemic will largely determine the growth of the economy and the government’s response. Experts suggest that this second wave will last for much of the winter and that a widely dispersed vaccine will not be available until at least well into 2021. As tough as that is to take, Canada is still doing a better job of containing the virus than the US, UK and the Euro area. Output is likely to remain below pre-pandemic levels everywhere through the end of 2022, the Bank of Canada’s forecast horizon.

Sherry Cooper

Bank of Canada Will Stop Buying Canada Mortgage Bonds

General Beata Wojtalik 26 Oct

Bank of Canada Will Stop Buying Canada Mortgage Bonds

This Wednesday, the Bank of Canada will release its interest rate announcement and the October Monetary Policy Report. Most people expect the overnight rate to remain at 0.25%, where it has been since the pandemic hit. A few have suggested that the Bank could take a page from Australia and reduce overnight rates by 15 basis points. I don’t think so.

Canada’s economy is not as similar to Australia’s as you might think. Yes, both countries speak mostly English, are commodity exporters, and have a currency called the dollar. But that is where the similarities end. Australia is largely a supplier to China and East Asia, while the US dominates Canada’s exports. And our major resource is oil rather than metals. Most importantly, the Bank of Canada believes that lower rates would not be helpful, given the squeeze they put on the banking system’s workings.

The Bank has committed to staying at 0.25% until economic conditions would be consistent with a sustained 2% inflation rate. With the second wave of COVID cases and rolling shutdowns upon us, the economic rebound will slow in the coming quarters. Moreover, it is unlikely we will see inflation averaging above 2% or higher through 2022. The base case forecast for overnight rates by the Bank of Canada will remain at 0.25% until 2023 unless we see a miraculous end to the pandemic far sooner than most experts predict.

Where the Bank will make policy changes is in quantitative easing–the buying of financial assets to improve liquidity in financial markets. The Bank’s Governing Council has, for months, hinted at the need for the current structure of the QE program to be “calibrated.” While there have been few details on what this means, we interpret it to imply a move away from a QE program supporting ‘market-functioning’ to one that attempts to achieve a ‘monetary policy objective.’ To some degree, this has already started.

On October 15, the Bank announced it would retire the Repo purchase program, the Bankers’ Acceptance purchase Facility and the Canadian Mortgage Bond Purchase Program (CMBP). These areas of the Canadian fixed income market are fully functioning at present, and the Bank likely felt ongoing support was no longer necessary. The end of the CMBP got the attention of some mortgage market participants who argued it spelled the end of declining mortgage rates. I think this is a misinterpretation of the Bank’s actions.

As the chart below shows, the use of the CMBP has waned considerably since its introduction in March. It just isn’t needed any longer to assure liquidity in the CMB market. Since August, lenders have only been using about $70 to $190 million per week of the BoC’s $500 million capacity. The last time lenders fully utilized, it was in April when the emergency program was clearly needed. Ending this program should have little impact on mortgage rates.

“As overall financial market conditions continue to improve in Canada, usage in several of the Bank of Canada’s programs that support the functioning of key financial markets has declined significantly,” the Bank said in announcing the changes. The program, designed to provide much-needed liquidity to the banking system to keep credit flowing during the worst of the crisis, has “fallen into disuse as the stresses from the pandemic eased, and markets became much more self-sufficient.” 

The move follows the bank’s decision a month ago to reduce its purchases of federal government treasury bills and similar short-term provincial money market debt, citing improvements in the health of short-term funding markets.

The CMB purchase program is also dwarfed by the Bank’s Government Bond Purchase Program (GBPP), as the chart below shows. “The central bank has pledged repeatedly that it will maintain the highest-profile of its emergency asset-buying programs – its minimum $5-billion-a-week purchases of Government of Canada bonds – until the [economic] recovery is well underway. It has also so far maintained its two programs to purchase provincial and corporate bonds, even though both programs’ demand has been far below original expectations.

Mortgage rates in Canada have an 85% correlation with the 5-year Government of Canada bond yield, which has fallen sharply over the course of the pandemic crisis.

Bottom LineOf the three programs being wound down in the bank’s latest announcement, the biggest is the expanded term repo program, under which the central bank has purchased more than $200-billion of the short-term bank financing instruments since mid-March. The program hasn’t generated any purchases since mid-September.

The Bankers’ Acceptance Purchase Facility, involving short-term credit instruments typically used in international trade financing, was used heavily when introduced in March. Still, it hasn’t been tapped at all since late April. The central bank made about $47-billion in purchases under the program. However, all of those purchased assets have since reached maturity, meaning the central bank is no longer holding any bankers’ acceptances on its balance sheet.

The Canada Mortgage Bond Purchase Program predates the pandemic, but the Bank of Canada ramped up its purchases dramatically during the crisis. Since mid-March, it has accumulated about $8-billion of the bonds under its emergency measures through twice-weekly purchases directly from Canada Mortgage and Housing Corp. The size of the bank’s typical purchases in the past couple of months has been less than a quarter of what it was routinely buying in the spring.

These changes in the QE program will have little impact on interest rates and mortgage markets.

Sherry Cooper

Latest in Mortgage News: Dominion Lending Centres Unveils New Deals

General Beata Wojtalik 26 Oct

Latest in Mortgage News: Dominion Lending Centres Unveils New Deals

Dominion Lending Centres continued its growth trajectory this month with several new announcements.

Earlier this month, Founders Advantagewhich bought a controlling share of DLC in 2016announced it has entered into an agreement to acquire 100% of DLC as part of a larger restructuring that will see DLC and Founders merge to create a new entity known as Dominion Lending Centres Inc. If approved, the new public company would trade under the symbol DLCG.

As part of the proposed deal, Dominion Lending Centres co-founder Gary Mauris will assume the role of Chief Executive Officer and Executive Chairman, while co-founder Chris Kayat will become Executive Vice-Chairman.

Recapping the company’s journey in a call with investors, Mauris touched on the initial reason for selling 60% of the company to Founders Advantage, saying at that point they were looking to de-risk somewhat, feeling it was the “prudent and responsible” thing to do.

But Mauris added there were frustrations along the way after the sale, despite believing that the management team at FA had “very, very good intentions.”

“From the early days, we felt we weren’t being recognized for the value we brought to the market,” he said. “From almost day one, Dominion Lending Centres Group, including Mortgage Centre Canada and Mortgage Architects and Dominion Lending Centres, were knocking it out of the park. Quarter after quarter were were doing amazing things, but yet we weren’t being recognized for the value we were bringing, especially in the market, under the symbol FCF.”

Mauris added that he and Kayat have personally made sizeable investments in the company this year, proving that they are “100% focused on the future.”

“What it means for us is, we’re going to be purely focusing on Dominion Lending Centres. We think it will have a meaningful impact for our company going forward,” Mauris said.

Pending approval from the TSX, the deal could close by the end of 2020.

And in a second announcement earlier this week, DLC Group announced a franchise agreement with Premiere Mortgage Centre, which counts more than 180 mortgage professionals throughout its network in Ontario and Atlantic Canada.

We are incredibly pleased to be working with the Premiere Group,” Mauris said in a release. “They are highly respected industry veterans with some of the top mortgage professionals in Canada.”

DLC, with more than 6,000 agents working under its brand name, last year originated $40 billion in funded mortgage, and is on track to originate nearly $45 billion this year, Mauris said.

Meridian Credit Union Unveils Interest-Only Mortgage

Meridian Credit Union became the latest mortgage provider to unveil a new interest-only mortgage product.

Meridian, which is the largest credit union in Ontario and second-largest in Canada, positioned its new Hybrid Mortgage as a solution for well-qualified borrowers to increase their buying power.

One of the key benefits of an interest-only mortgage is its ability to lower your monthly payments (since you’re only paying the interest portion) and makes it easier to qualify, even though the mortgage is restricted to those putting down at least 20%.

“Even with a 20% down payment, purchase options for first-time home buyers can be restricted with conventional mortgages, especially for young professionals and recent graduates who may be starting their careers and already have other financial obligations like student loans,” David Moore, Chief Marketing Officer and Senior Vice President Retail Banking, Meridian, said in a release. “Meridian’s Hybrid Mortgage is a creative solution for members who are just starting out on the path of home ownership, so they don’t need to put their dreams for the future on hold.”

And unlike banks and other lenders that qualify borrowers at the mortgage stress test of 4.79%, Meridian qualifies borrowers by ensuring they can afford the monthly minimum payment.

Meridian’s Hybrid Mortgage consists of a variable-rate portion (currently 3.83%) and a 5-year fixed portion (3.92%). Borrowers can only use the interest-only option on up to 60% of their home’s value. Given its non-competitive rates, the Hybrid Mortgage is meant to be a short-term solution, with the intention that most homeowners would transition to a standard mortgage product “as their financial capacity deepens, Meridian notes.

Home Prices Up 17% in September, But Some Signs of Cooling Emerge

General Beata Wojtalik 21 Oct

Home Prices Up 17% in September, But Some Signs of Cooling Emerge

The average home price in Canada surpassed $600,000 for the first time ever in September and home sales jumped nearly 46% compared to a year ago.

But, beneath the headline-grabbing details from the Canadian Real Estate Association’s latest housing report, there were some underlying signs of cooling.

But first, here’s a rundown of September’s stats:

  • MLS home sales: Up 45.6% year-over-year
  • Average national sale price: $604,000, up 17.5% from a year ago
    • Removing the high-priced markets of the Greater Toronto and Vancouver areas, the average sale price was $479,000, still up by more than 20%
  • Months of housing inventory: 2.6 months
    • This is how long it would take to liquidate current inventories at the current sales rate.
    • This is unchanged from August, and a record low

“This is starting to sound like a broken record (about records being broken), but Canadian home sales and prices set records once again in September amid record-tight overall market conditions, as they did in July and August,” Shaun Cathcart, CREA’s senior economist, said in a release. “Reasons have been cited for this – pent-up demand from the lockdowns, Government support to date, ultra-low interest rates, and the composition of job losses to name a few.”

rising canadian home pricesCathcart noted that records were in the process of being broken at the start of the year, pre-COVID, due to record-tight overall market conditions.

“But I think another wildcard factor to consider, which has no historical precedent, is the value of one’s home during this time,” Cathcart added. “Home has been our workplace, our kids’ schools, the gym, the park and more. Personal space is more important than ever.”

Here’s a look at how some regional and local housing markets performed in September:

  • New Brunswick: $226,659 (+31.4%)
  • Ottawa: $529,900 (+22%)
  • Halifax: $381,792 (+19%)
  • Greater Montreal Area: $413,000 (+15.5%)
  • Greater Toronto Area: $897,700 (+11.6%)
  • Winnipeg: $286,600 (+7.1)
  • Greater Vancouver Area: $1,041,300 (+5.8%)
  • Victoria: $716,800 (+3.3%)
  • Calgary: $415,200 (-0.3%)

Signs of Cooling

Despite the headline-grabbing results, there were some segments of the market where growth was more muted.

Newly listed homes were down 10.2%, reversing the rise to record levels in August. CREA reported that new supply of homes was down in two-thirds of local markets, led by declines in the Greater GTA and GVA markets.

The single-detached home segment continued to show the most strength, with the Home Price Index showing a 12% year-over-year gain. Condo gains, on the other hand, rose by about half, 6.2%. Condo prices have mostly flattened in the Toronto, Vancouver and Hamilton markets to pre-pandemic levels, CREA added.

Reaction to September’s Housing Market

Many analysts, who had initially forecast a cooling of the housing market by now, continue to call for a slowdown in activity in the coming quarters.

“Several factors explain the stunning strength in sales observed in recent months, including low borrowing costs, the relative mix of employment/income losses, and the release of pent-up demand after a muted spring selling season,” noted TD economist Rishi Sondhi.

“The question now becomes whether this momentum is sustainable. In our view, home sales are set to cool from their unsustainable third-quarter pace over the next few quarters.”

RBC’s Robert Hogue suggested that the coming months will provide more clarity as to the market’s direction in the year ahead.

“We’ll see whether low interest rates and changing housing needs can keep demand boiling hot, or whether the exhaustion of pent-up demand and plummeting immigration will cool things down,” he wrote. “We’ll also learn how many current homeowners will be in trouble once mortgage payment deferrals expire and are forced to sell.”

BMO’s chief economist Douglas Porter agrees that a cool-down is in the cards, despite the persistent strength the market has displayed to date.

“As one outfit put it, not even a global pandemic managed to knock the Canadian housing market off its game, and it’s doubtful that even a serious second wave would have much more impact,” he wrote. “Still, we doubt that this recent sizzling strength can persist amid some of the building headwinds, which should at least somewhat tame market conditions in the months ahead. The underlying economic conditions simply do not support such a piping hot market over a sustained period.”