What did you think of the federal budget that Chrystia Freeland delivered yesterday?  Did you note the increase in the alternative minimum tax or the drop in the criminal rate of interest that can be charged?  What about Health Care spending or Green initiatives?  Click the link below to get details of these items and more as discussed by Chief Economist Dr. Sherry Cooper.

Federal Budget 2023…Press the Snooze Button As promised, there would be nothing much in this year’s budget for fear of stimulating inflation. The federal government faces a challenging fiscal environment and a weakening economy. Ottawa promised it would err on the side of restraint. Instead, Finance Minister Chrystia Freeland announced a $43 billion increase in net new government spending over six years. The new expenditures focus on bolstering the rickety healthcare system, keeping up with the US on new clean-technology incentives, and helping low-income Canadians to deal with rising prices and a slower economy. Tax revenues are expected to slow with the weaker economy. The result is a much higher deficit each year through 2028 and no prospect of a balanced budget over the five-year horizon. The budget outlines significant increases to healthcare spending, including more cash for provincial governments announced earlier this year and a $13-billion dental-care plan that Trudeau’s Liberals promised in exchange for support in parliament from the New Democratic Party.Freeland is also announcing substantial new green incentive programs to compete with the Inflation Reduction Act signed into US law last year by President Joe Biden. The most significant new subsidy in the budget is an investment tax credit for clean electricity producers. Still, it also includes credits for carbon capture systems, hydrogen production, and clean-energy manufacturing. The budget promises $31.3 billion in new healthcare spending and $20.9 billion in new green incentive spending by 2028. On top of that is $4.5 billion in affordability measures, half of which is for an extension of a sales tax credit for low-income Canadians. The spending is partially offset by tax increases on financial institutions and wealthy Canadians and a pledge to reduce government spending on travel and outside consultants. Freeland is planning to raise billions of dollars from banks and insurance companies by changing the tax rules for dividends they get from Canadian firms. The new tax will apply to shares held as mark-to-market assets, not dividends paid from one subsidiary to another. Wealthy Canadians pay the alternative minimum or regular tax, whichever is higher. The government announced in the budget that it is increasing the alternative minimum rate to 20.5 percent from 15 percent starting in 2024. Ottawa is also imposing new limits on many exemptions, deductions and credits that apply under the system beginning in 2024. “We’re making sure the very wealthy and our biggest corporations pay their fair share of taxes, so we can afford to keep taxes low for middle-class families,” Finance Minister Chrystia Freeland said in the prepared text of her remarks.Canada’s debt-to-GDP ratio will worsen next year, despite the government’s reliance on this measure as a fiscal anchor. Debt-to-GDP will rise from 42.4% to 43.5% next year and is projected to decline very slowly over the next five year Canada’s debt-to-GDP ratio will worsen next year, despite the government’s reliance on ths measure as a fiscal anchor. Debt-to-GDP will rise from 42.4% to 43.5% next year and is projected to decline very slowly over the next five years. Not Much for Affordable Housing The budget included a laundry list of measures the federal government has taken to make housing more affordable for Canadians. Budget 2023 announces the government’s intention to support the reallocation of funding from the National Housing Co-Investment Fund’s repair stream to its new construction stream, as needed, to boost the construction of new affordable homes for the Canadians who need them most. But there was one initiative tucked away in a Backgrounder entitled “An Affordable Place to Call Home.” I am quoting this directly from the budget: A Code of Conduct to Protect Canadians with Existing Mortgages “Elevated interest rates have made it harder for some Canadians to make their mortgage payments, particularly for those with variable rate mortgages. That is why the federal government, through the Financial Consumer Agency of Canada, is publishing a guideline to protect Canadians with mortgages who are facing exceptional circumstances. Specifically, the government is taking steps to ensure that federally regulated financial institutions provide Canadians with fair and equitable access to relief measures that are appropriate for the circumstances they are facing, including by extending amortizations, adjusting payment schedules, or authorizing lump-sum payments. Existing mortgage regulations may also allow lenders to provide a temporary mortgage amortization extension—even past 25 years. This guideline will ensure that Canadians are treated fairly and have equitable access to relief, without facing unnecessary penalties, internal bank fees, or interest charges, which will help more Canadians afford the impact of elevated interest rates.” We will see what OSFI has to say about this, as the details are always of paramount importance. OSFI is scheduled to announce potential changes to banking regulation to reduce bank risk. We’ve heard a lot about banking risks in recent weeks. The budget also reduced the legal limit on interest rates.  The government intends to lower the criminal rate of interest from 47% (annual percentage rate) to 35%. According to the law firm Cassels, “’Interest’ is defined broadly under the Code and includes all charges and expenses in any form, including fees, fines, penalties, and commissions.” Bottom Line While this was not one of the more exciting budgets, it is important that our debt-to-GDP ratio is low in comparison to other G-7 countries. It is good news that Ottawa recognizes the financial burdens facing homeowners with VRMs. If the banks can extend remaining amortizations when borrowers renew, the pressure on their pocketbooks will be markedly lower.   Written by: Dr. Sherry Cooper, Chief Economist for Dominion Lending Centres

We have seen a pause in the successive Bank of Canada Interest rates hikes and inflation seems to be slowing coming down.  Is now the time to jump back into the housing market?  Are home prices finally hitting the bottom?  Storeys takes a look at whether the decline in home prices is losing steam and we are nearing the bottom.

Canadian home prices continued to tumble in February, according to new data, but there are signs that the bottom is near.

The Teranet-National Bank Composite House Price Index tracks observed or registered home prices across 11 CMAs: Victoria, Vancouver, Calgary, Edmonton, Winnipeg, Hamilton, Toronto, Ottawa-Gatineau, Montreal, Quebec City, and Halifax. All properties that have been sold at least twice are considered in the calculation of the index.

The latest index, released Friday, shows a 0.3% dip, before seasonal adjustments, between January and February. After adjusting for seasonal effects, the index was down 0.5%, marking the tenth consecutive monthly decline.

The index has been trending downwards for some time, but declines have progressively lost steam following a record-breaking drop of 3.1% in September. The decline observed in February was the most nominal yet. In fact, it was the slightest decline the index has seen since July 2022.

Prices depreciating at a slower pace supports the assertion that the bottom is likely near — something that has been corroborated by report after report. Last week alone, reports from the Canadian Real Estate Association, RBC, and Desjardins all came to a similar conclusion: prices are looking likely to bottom out soon, although there is still much debate as to when exactly that will be.

READ: Canadian Home Sales Have Slumped 40% From February Peak

Month over month, seven of the 11 CMAs examined by Teranet saw their indexes contract in February, including Toronto (-2.7%), Calgary (-2.4%), Halifax (-1.8%), Edmonton (-0.8%), Hamilton (-0.3%), Montréal (-0.3%), and Ottawa-Gatineau (-0.2%).

Additionally, price declines were observed in 11 of the 20 CMAs not included in the composite index, with Thunder Bay and Sherbrooke experiencing the steepest drops of 12.5% and 10.5%, respectively. The report also notes that Thunder Bay and Sherbrooke saw gains of 2.8% and 9% the month prior.

Conversely, prices increased during the month in Vancouver (+3.8%), Victoria (+1.9%), and Québec (+0.1%). Of the CMAs not included in the index, Trois-Rivières observed a gain of 7.7% in February, following a decrease of 9% the month prior, and Guelph saw a gain of 6.6%, following a decrease of 9.4% the month prior.

The index remained stable in Winnipeg.

Year over year, the national index fell 4.7% in February, marking the second straight month in which the metric was in “negative territory.”

Nonetheless, annual increases were observed in four of the 11 CMAs examined, with Calgary at the forefront with a gain of 8.8%. Quebec City trailed behind with a 5% gain and Edmonton also saw a 1.9% increase. Meanwhile, Hamilton, Toronto, and Vancouver dragged down the national composite, with declines of 14%, 8.8%, and 3.9%, respectively.

Amongst the 20 CMAs not considered in the index, positive annual gains were observed in five, with Trois-Rivières (+12.4%), and Saint John (+12.1%) leading the pack. Abbotsford-Mission, Guelph, and Thunder Bay saw the steepest declines, dropping 15.1%, 16.6%, and 17.5%, respectively.

Written by: Rob McLister, The Globe and Mail- March 9, 2023

Finally a pause after eight consecutive Bank of Canada rate increases.   Why now, and where do we go from here?  Dr. Sherry Cooper, Chief Economist for Dominion Lending Centres provides here expert insight to answer those questions and more. 

Bank of Canada Pauses Rate Hikes As US Fed Promises Further Tightening.

As expected, the central bank held the overnight rate at 4.5%, ending, for now, the eight consecutive rate increases over the past year. The Bank is also continuing its policy of quantitative tightening. This is the first pause among major central banks.

Economic growth ground to a halt in the fourth quarter of 2022, lower than the Bank projected. “With consumption, government spending and net exports all increasing, the weaker-than-expected GDP was largely because of a sizeable slowdown in inventory investment.” The surge in interest rates has markedly slowed housing activity. “Restrictive monetary policy continues to weigh on household spending, and business investment has weakened alongside slowing domestic and foreign demand.”

In contrast, the labour market remains very tight. “Employment growth has been surprisingly strong, the unemployment rate remains near historic lows, and job vacancies are elevated.” Wages continue to grow at 4%-to-5%, while productivity has declined.

“Inflation eased to 5.9% in January, reflecting lower price increases for energy, durable goods and some services. Price increases for food and shelter remain high, causing continued hardship for Canadians.” With weak economic growth for the next few quarters, the Bank of Canada expects pressure in product and labour markets to ease. The central bank believes this should moderate wage growth and increase competitive pressures, making it more difficult for businesses to pass on higher costs to consumers.

In sum, the statement suggests the Bank of Canada sees the economy evolving as expected in its January forecasts. “Overall, the latest data remains in line with the Bank’s expectation that CPI inflation will come down to around 3% in the middle of this year,” policymakers said.

However, year-over-year measures of core inflation ticked down to about 5%, and 3-month measures are around 3½%. Both will need to come down further, as will short-term inflation expectations, to return inflation to the 2% target.

Today’s press release says, “Governing Council will continue to assess economic developments and the impact of past interest rate increases and is prepared to increase the policy rate further if needed to return inflation to the 2% target. The Bank remains resolute in its commitment to restoring price stability for Canadians.”

Most economists believe the Bank of Canada will hold the overnight rate at 4.5% for the remainder of this year and begin cutting interest rates in 2024. A few even think that rate cuts will begin late this year.

In Congressional testimony yesterday and today, Federal Reserve Chair Jerome Powell said that the Fed might need to hike interest rates to higher levels and leave them there longer than the market expects. Today’s news of the Bank of Canada pause triggered a further dip in the Canadian dollar (see charts below).

Fed officials next meet on March 21-22, when they will update quarterly economic forecasts. In December, they saw rates peaking around 5.1% this year. Investors upped their bets that the Fed could raise interest rates by 50 basis points when it gathers later this month instead of continuing the quarter-point pace from the previous meeting. They also saw the Fed taking rates higher, projecting that the Fed’s policy benchmark will peak at around 5.6% this year.

Bottom Line

The widening divergence between the Bank of Canada and the Fed will trigger further declines in the Canadian dollar. This, in and of itself, raises the Canadian prices of commodities and imports from the US. This ups the ante for the Bank of Canada.

The Bank is scheduled to make its next announcement on the policy rate on April 12, just days before OSFI announces its next move to tighten mortgage-related regulations on federally supervised financial institutions.

To be sure, the Canadian economy is more interest-rate sensitive than the US.  Nevertheless, as Powell said, “Inflation is coming down, but it’s very high. Some part of the high inflation that we are experiencing is very likely related to a very tight labour market.”

If that is true for the US, it is likely true for Canada. I do not expect any rate cuts in Canada this year, and the jury is still out on whether the peak policy rate this cycle will be 4.5%.

Written by: Dr. Sherry Cooper, Chief Economist for Dominion Lending Centres