Enough already?

The bank rate swelled again by a half point Wednesday. No surprise there. The prime rate zips to 6.45% tomorrow. Yawn. Variable-rate mortgage angst grows. Yeah, we knew that would happen, too.

But here’s the big news.

The last time the Bank of Canada stepped on the gas and hiked the cost of money (October 26th), it said this:

Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further.

This time, here’s the official statement from Tiff & Co:

Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.

Can you spot the differences, kids?

You betcha. In October the monetary authorities said clearly, decisively and plainly that the rate “will need to rise further.” But today the bank stated it will “consider whether the policy rate needs to rise further.”

This is a big deal. It clearly underscores the fact our CB is at, or very near to, the terminal rate. The end. The apex. The orgiastic conclusion of stimulus withdrawal (that sounded strange…). It signals a pause in rate-humping will soon arrive after the country has endured a 1,600% increase. Thus the bankers must have data indicating the economy’s starting to roll over, that consumer spending will be slowing, unemployment increasing, asset values falling and the runway for that soft landing is indeed in sight.

Let’s review why this is absolutely inevitable, in one simple chart. Here is it. This is how much money a family in Kelowna must earn in order to afford the average house, given 5%+ mortgages. (And rest assured things are just as dire in Etobicoke, Oak Bay, Niagara and Kits.)

Income needed to buy in K-Town up $100k in 2 years

Click to enlarge. Source: Harbinger Data Analytics, Statistics Canada

On this chart, the blue line is average local household income. The black line is average Canadian household income. The scary red line is income required to carry a detached house in Kelowna, using the stress test and a 35% Gross Debt Service (GDS) ratio. What happened since 2021 is beyond stunning. Just 20 months ago a family bringing in $120,000 could buy. Now a family earning $200,000 cannot carry the same place. And while K-Town houses are falling in value, you can clearly see what’s happened as mortgages zipped from 2% to 6% (still cheap by historic standards).

This is what the central bank is facing. Disaster if the tightening continues. Collapsed markets. As we detailed here yesterday, already sales have crashed 50% in major markets. If the policy rate in Ottawa keeps popping, markets will seize – unless asset values fall at a pace unknown in modern history.

Is Tiff willing to take that gamble? Apparently not. Said he this morning:

There is growing evidence that tighter monetary policy is restraining domestic demand: consumption moderated in the third quarter, and housing market activity continues to decline. Overall, the data since the October MPR support the Bank’s outlook that growth will essentially stall through the end of this year and the first half of next year.

Meanwhile in the BC Interior, a great example of how monetary policy hits the real world. “Affordability has blown out,” reports Harbinger Data Analytics. “Those well-capitalized who can weather a long downturn until conditions become more favorable can avoid distress leading to forced sales and losses and potentially make gains if/when the market improves. Sadly, those not financially wise and/or in a position to ride out a downturn will be forced to lose some or all of their money invested into real estate. Again, this puts the market at risk for a crash depending on the amount of distressed volume at play. And we are getting to the point where we are about to find out.”

Indeed, we are.

But Tiff just blinked.

About the picture: “My sister just returned from friend’s home,” writes Leslie, “where the Big Four were snapped in training for the arrival of Santa Claus. Is this the future of Canadian homes, to the moon for our immigration numbers?”