Inflation, Interest Rates, and Your Wallet; is the Bank of Canada Helping?

Buckle up, my friends: this week, the FF blog welcomes some commentary from our very own Jason Dodd. Along with his sometimes lively opinions, JD also brings 20 years of experience in the mortgage and housing industry so when he's talking: I'm listening.

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"It has taken me awhile to write a post about the Bank of Canada and rising rates, mostly because there is so much to put forward about this topic. It really was also hard to filter out the contradictory advice and prognostication done by our Federal agencies. In Canada institutions like the Bank of Canada seem to have a bulletproof persona, an air of knowledge second to no one and who might question this superior overseer of divine rate mastery. The answer should be to question everything and everyone especially since the end consumer is always the one picking up the tab. Let's dive a little deeper.

https://globalnews.ca/news/9143989/inflation-covid-stimulus-bank-of-canada/

There are really about 40 articles I read through and absorbed that I could bring up, all from various news outlets or financial linked magazines. The reality is publicly the Bank is now saying if they had begun to tighten taps, reign in lower rates sooner, we would not be faced with the massive inflation and pressures we see now. Of course they go on to blame global pressures, maybe Russia is thrown in, some supply chain for good measure all of which are contributing but we are concentrating on our own Bank here in Canada.

Let's recap some of the items mentioned in the year 2021 by our Government masters of Inflation and Rate controls. Paraphrasing but I can pull up these direct quotes from articles.

• Rates will remain lower for longer. On this our own Tiff Macklem said for borrowers not to worry about rising interest rates. Well that sure has changed.
• Unlikely to raise rates until 2024. Hmmm what year is it?
• We believe recession is unlikely. Now most major economic news outlets are predicting some form of recession to North America.
• Inflation is transitory and not a problem. Houston we have a problem.
• Personal favorite: Inflation should fall to 2% in 2022. WOWZER.

Recently we had an Alberta based economist give an economic update. Bless her because she is uber smart and I liked how she took a Alberta centric approach. It takes courage to be an economist and speak to a huge gathering of opinionated Mortgage Brokers. Some good things are happening here that would be better without certain government interference, but I'll stick to Bank of Canada and leave our ruling party aside on this. The jobs number are improving which given our economic entirety is positive. I would say Labour participation is still not at what we need it at though, companies are finding it hard to get workers in positions. Companies are moving here and we are seeing decent net migration numbers and we have one of the highest private sector growth numbers in the country (more on that later). Hey, even our recent surge in housing values has held steady over the last 4 months and there is decent traffic, albeit we are seeing a slowdown and inventory levels are still well below balanced.

Now the rest of Canada is not in the same line as our employment. A majority of employment in Canada (outside of Alberta) since COVID has been largely government employment. Since about Feb of 2020 its been roughly about 80% of the jobs created were through government agencies. Im trying to find a clever way to describe that job creating issue, so far it is YIKES!!!!.

https://www.msn.com/en-ca/news/canada/nearly-9-of-10-canada-jobs-created-in-2020-21-were-in-public-sector-report/ar-AA11TYyL

Even if this Fraser institute data is off 25%, a decent slack for error I would say, even 60% government hiring of the jobs created in Canada is not a good thing or sustainable. The private sector and self employed starts must increase if we are to drive competitiveness, ease price pressures and recalibrate the economy.

https://www.mpamag.com/ca/news/general/are-bank-of-canada-rate-hikes-risking-a-housing-crash/409159

There are some brave economists who stray from the comforts of their media pals and are concerned this foot to floor approach for rates risks a housing crash and more. This path also has the adverse mid term recover issue to consider. Developers and builders will freeze development with lack of demand and cost coverage with accelerated rates. When the economy begins to spin back to life (time undetermined) it takes time to ramp up condos and development for living, suddenly we will find ourselves in a supply side issue 2 years or more down the road with better rates and recovery of economy. What do you get with less supply and higher demand? rapid price increases. Seemingly a weird Canadian cycle which can better be moderated with agencies with foresight and the ability to utilize the wealth of knowledge on this topic that exists in our country outside the government. We can leave the serious planning of government agencies to Passport offices, payroll systems and Airports as they have proven they are legends in this domain. Keep them out of housing.

So what does the end-paying consumer do right now? Well, there's only so much you can do, since we can't control the big spend government machine until they are sidelined. Control household spending, think of essentials and each purchase counts in the long run. Search out deals, have a budget and stick to it with steadfast resolve. Save your money, try to have cash fall back especially if you are a variable rate mortgage holder. If you have a mortgage renewal hop on that fast, we are happy to have a discussion on terms and strategy over next few years. We are in this together so please reach out for help if you need it.

We have recently witnessed a small downward pressure on 3 to 5 year fixed rates, I do recommend the 3 year as a way to hedge against typical reversal of rates downside once inflation eases. This way you are not locked into a 5 year scenario if rates move down in the next 24 to 36 months, 3 year allows you to be more agile and renegotiate new terms with smaller or no penalty if timing is right.

"The friend in my adversity I shall always cherish most. I can better trust those who helped to relieve the gloom of my dark hours than those who are so ready to enjoy with the sunshine of my prosperity" :Ulysses S. Grant