Sunday Dock Read – Interest Rates Drop?!, Capital Gains Swell, Northern Lights Amaze!
Lets evaluate the Bank of Canada’s 5 most prominent factors when deciding whether to adjust policy rates – HuronMortgages.ca
It’s been a while since my last blog, but for a good reason. HuronMortgages.ca has now become part of the Mortgage Powered Financial Group. Rest assured, there are no changes to our client base or operations—it’s business as usual, only with more resources at our disposal.
With the early arrival of spring, my weekend trips to the cottage began sooner than expected as construction continues on our next family project. Despite slathering on gallons of 1960s Muskol (200% Deet) and Calamine lotion, it was worth it to witness the jaw-dropping Northern Lights on Friday, May 10th. It’s a family experience I’ll always cherish.
While cottage life is wonderful, my true passion lies in mortgages and real estate. So, let’s get down to business and talk interest rates, inflation numbers and more.
In this blog, I’ll delve deeply into the economics behind our current mortgage and real estate markets.
However, I want to make one thing clear. I firmly believe that this summer’s real estate purchasers will be economically rewarded for years to come. This perspective may not be for everyone, but if you have even a hint of curiosity, this blog is for you!
Interest Rate Announcement and Analysis – June 5, 2024
As we did in the early April Sunday Dock Read, we are going to continue evaluating the relevant factors impacting the Bank of Canada’s June 5th Monetary Policy (Interest) announcement. Again, instead of stating my opinion, we will identify and evaluate the major factors and relative indices that will impact the Bank of Canada’s decision. Let’s evaluate the impact of the data and speculate on what might occur. After a solid run of 6 straight correct predictions, I suffered an incorrect prediction in March then rebounded in April. Let’s see if we can’t resurrect that winning streak with two in a row.
Let’s evaluate the Bank of Canada’s 5 most prominent factors when deciding whether to adjust policy rates:
- Inflation Numbers: The Consumer Price Index release dates are scheduled usually 2 weeks after the referenced month. Given the June announcement is on the 5th we miss the May figures by 7 days however basing our evaluation on the April figures still carry weight. At the time of publishing, we confirm April’s core inflation (excluding volatile items like gas and food) continues its downward trend registering at 2.66%. Circling back to January where the Core rate was at 3.12%; a drop of just shy of 15% is certainly a positive; encouraging investment to improve productivity and allowing businesses to prosper without raising prices.
- Impact on rate reductions: Somewhat Positive
- Job Market: As we documented in April, more jobs were added than expected since January, albeit most were part-time. Employment increased by 90,000 (+0.4%) in April, though the unemployment rate remained unchanged at 6.1%. The employment rate held steady at 61.4% after six consecutive monthly decline.
- Impact on rate reductions: Mixed Impact
- Wage Growth: Wage pressures have eased, indicating a balanced labor market. As the “price” of labor, wage measures help assess the balance between supply and demand. While wages lagged behind other labor market improvements in 2023, they have recently shown signs of moderation. Most measures now indicate wage growth below 4%. Additionally, about 1 percentage point of the current wage strength may be due to past high inflation rather than labor market strength. With the significant slowdown in inflation since early 2023, wage measures are expected to ease further.
- Impact on rate reductions: Somewhat Positive
- Economic Growth: GDP (Gross Domestic Product) measures economic activity. Canada’s economy did not rebound from last year’s slowdown as strongly as initially thought. StatsCan’s advance estimate for April indicates GDP likely rose by 0.3%, with gains in manufacturing, mining, oil and gas extraction, and wholesale trade partially offset by declines in utilities. This suggests the economy started the second quarter positively. The Bank of Canada expects a 1.5% annualized growth rate for the second quarter.
- Impact on rate reductions: Very Good News
- Bond Yields: The yield on the Canadian 10-year government bond fell below 3.67%, continuing its decline from the four-week high of 3.79% on May 29th. This drop followed the decline in US Treasury yields after recent data led investors to revise their outlook on Fed policy. In Canada, preliminary data for April showed solid GDP growth of 0.3%, but this was overshadowed by disappointing final figures for the first quarter, where GDP grew at an annualized rate of 1.7%, below the expected 2.2%.
- Impact on rate reductions: Very Good News
Prediction: Overnight Rate Drops to 4.75%
I want to expand a bit about the relationship between the 10-year bond yield and interest rates.
It is important to point out that the economy has been experiencing an inverted bond yield curve since April 1st, 2022. An inverted yield curve occurs when long-term bond interest rates are lower than short-term bond rates, often signaling economic trouble. This happens because markets may expect the economy to worsen. Alternatively, the inversion could indicate expectations of very low inflation or deflation, both negative for the economy.
Over the last 46 years this has occurred 7 times, all resulting in a recession. The average time between the 10-year spread turned negative to a declared recession has averaged 442 days or about a year and 2 months. Since our inversion 792 days or just over 2 years which some would indicate either improve policy measures, resiliency or just plain luck.
Finally, what is the impact on Real Estate?
Historically, an inverted yield curve has been a reliable predictor of economic recessions. According to the Bank of Canada and the Federal Reserve, all 7 recessions since 1950 have been preceded by an inverted yield curve. Consequently, the stock market tends to decline when the yield curve inverts, as investors fear an impending economic downturn. Since April 1, 2022, the S&P is up 904 points or 18%.
However, real estate often performs better than the stock market during recessions, as returns are more influenced by demand in the real economy rather than market sentiment. Additionally, real estate valuations are heavily impacted by interest rates. Current high interest rates and recession fears might create opportunities for forward-thinking real estate investors. Opportunistic buyers can generate returns by acquiring properties at attractive prices and selling them later when capital market conditions are more favorable and interest rates are lower.
New Capital Gains Legislation Effective June 25, 2024:
Last week, I conducted a case study for a Realtor and their client, analyzing a high-value transaction in the seven-figure range. The seller’s question was about the impact on her capital gains tax if she accepted a lower offer before June 25th versus a higher offer several months later. Without revealing too many details, I can say that the difference in tax liability was significantly larger than anticipated.
If you’re interested in a similar analysis, feel free to contact me at Matt@HuronMortgages.ca or visit https://huronmortgages.ca/contact/.
My professional insight is clear: if your closing date is near June 25th, get in touch with me to understand the potential tax implications of moving it forward.
‘Price is what you pay, value is what you get’ – Warren Buffet via Ben Graham
Thanks For Reading!
Have Questions?
Contact us today to schedule your personalized consultation and take the first step towards turning your homeownership dreams into reality or look into better investing opportunities by phone at 519.497.3667 or by email at Matt@HuronMortgages.ca.
Mathew Monks, Mortgage Agent Level 2
Licence #M18002043
Mortgage Intelligence FSRA
Licence #10428
