Poor Pepe. He made his cause célèbre blaming the Bank of Canada for creating inflation, called for Tiff Macklem’s head on a stick and shouting that the central bank should be politicized.
Meanwhile this pathetic blog ran into a below-decks mutiny for suggesting the Tiffster was actually doing the right thing, that we don’t have hyperinflation, stagflation, constipation or recession and, finally, that the recent 30% real estate correction may well be all she wrote.
Well, here’s the news.
Canada’s inflation rate just took the biggest dump in three years and is now just a titch above 5% after being a titch below 6% in January. Recall that a year ago prices were romping higher at the y/y rate of 8.1%, so this is progress. We’re actually now a little ahead of the CB’s own rate-crushing sked. And since inflation is global, not national, look at how well we compare…
Canada – 5.2%
America – 6%
Australia – 7.2%
Eurozone – 8.5%
Britain – 10.1%
Russia – 11%.
Yes, food is still out of control, and a large part of that is due to fuel, fertilizer and transportation costs as well as the Ukraine war. Mortgage interest is at a 40-year high, up 24% y/y and the biggest driver of inflation at the moment. But despite that, the annual rate of increase has now dropped by 35% in twelve months.
What does this mean?
First, the BoC interest rate strategy worked. Big hikes out of the gate followed by more moderate ones, then a pause. In comparison, the US Fed went light off the bat then had to increase its tightening aggressively, which helped break a few banks. Now it still has rising prices and scant room to hike further.
Second, our interest rate romp is over. Finito. Totally done. The pause announced in January will last all of 2023, and we might even see a rate cut sooner than was expected weeks ago. “There’s really no underlying reason for the Bank to hike further, especially with the Canadian dollar finding a footing,” says BMO Economics. “Overall, the Bank’s pause looks prudent, and we expect them to stay at current levels for quite some time, barring a major flare-up in the banking turmoil.”
Third, a rate pause, lower cost pressures and easing fears about the banking biz are catnip to markets. Expect money to flow back into equities from bonds as risk appetite grows. As we said last week, if you’re a wuss and can still grab a 5% GIC, do it. Returns will fade soon. Also if you took advantage of the bank share price plop, you know a gift horse when it whinnies. Mostly, I hope that during this year-long, rate/inflation/war/bank gyration that you stayed calm and invested.
Fourth, bond yields have fallen fast as inflation fades, five-year mortgage money is now available in the 4% range (cuts are coming next week, we hear) and house prices have been inching back from their lows eight weeks ago. It may be a blip. Maybe not. But the data shows higher sales volumes, an improving sales-to-listings ratio and increasing average sales prices. Rates have stabilized. Inventory is still far below historic levels. Demand has built after a year in which transactions fell by half.
Of course, all housing is local. The big cities will have a spring market, given the above. Bunnypatch is another question. So are regional locations (Halifax springs to mind) where Covid created an historic contrast between incomes and prices. Confusing it all, as usual, are politicians who have banned foreign buyers, imposed new regional taxes, shattered zoning and are now pumping property taxes.
So long as inventory levels stay where they are, and Tiff sits on the pause button, prices will rise in urban Canada. It’s not what jilted buyers, houseless young couple, the macroeconomists in the comments section or governments desire. But this country has never had a real estate correction exceeding the one which just took place. For prices to continue a plunge, rates would have to climb substantially. Today you know they will not.
Time for Pierre to find a new bad guy. Drake would work.
About the picture: “This is the original Penny from whom I grabbed my handle Penny Henny,” writes Ed. “She is a rescue that we acquired from the U.S. back in 2009 in the midst of the GFC, dogs were being dropped off at kill shelters at an alarming rate. Luckily for us the staff at the shelter kept her out of harm’s way for three months until she was brought to Canada. We had moved to Welland in 2017 and hoped she would have a few more great years with us enjoying our retirement but she soon passed after that. (MSU) As I have mentioned before, thank you for the lessons and the courage to do my own DIY investing. This is her coming in for a kiss.”
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