The Bank of Canada raised rates by another 50bps this past week, pushing prime rate to 5.95% and inflicting more pain on variable rate mortgage holders. We’ll circle back to that in a second.

What’s important to note here is markets were fully pricing in a 75bps rate hike from the Bank of Canada and yet they only delivered 50. Tiff had a layup and he didn’t take it. But why? For the first time in awhile, the Bank of Canada has now flagged financial stability concerns. From the October Monetary Policy Report:

“As monetary policy tightens in many countries, long-standing global financial vulnerabilities could amplify the impacts on the global economy. Many countries have high levels of sovereign, non-financial corporate and household debt.

Some funding markets have become more fragile due to lower levels of liquidity. An abrupt repricing of risk could trigger funding strains for higher-risk borrowers and a prolonged period of deleveraging. The result could lead to a more severe global slowdown and lower commodity prices.

The Canadian economy could be affected through weaker foreign demand, lower terms of trade and spillovers into its financial system. The resulting tighter financial conditions and higher unemployment could undermine homebuyer sentiment and lead to a larger-than-expected drop in house prices. This in turn could reduce household wealth, access to credit and consumer confidence.”

In simpler terms, for the first time since the rate hiking cycle began, The Bank of Canada is now considering the impacts of tighter financial conditions on the housing market. There is at least some concern this could result in a painful deleveraging process if they don’t balance the risks of over tightening.

While this doesn’t surprise me, it does surprise me it took the Bank of Canada this long. For several months we have been highlighting the pervasive weakness in the nations housing market. Since peaking earlier this year, national house prices are down 14%, the steepest correction on record dating back to the creation of the house price index in 2005.

Yes the housing market was in desperate need of a correction, but corrections can turn into runaway freight trains when you grease the tracks and then remove the brakes. (ie, Load households up with cheap debt then jack rates by 350bps in eight months)

If you floated your mortgage, your payments are up big time since start of the year. Assuming a 30 year amortization:

$500k mortgage = $1k monthly payment increase

$1M mortgage= $2K monthly payment increase.

This isn’t just crippling households, it’s crushing home builders. Just look at new home sales in the GTA and Greater Vancouver.

Toronto new single-family home sales fell 96% year-over-year in September. In a major metro with nearly six million people there were just 45 new single family home sales. Yes, forty-five.

Furthermore, new condo sales in the GTA were down 89% year-over-year in September. On the west coast, Metro Vancouver new home sales were down 72% year-over-year in the third quarter of this year, the lowest count since 2012. These are truly horrific numbers.

This level of housing activity is not sustainable when nearly 25% of GDP is derived through the FIRE sector (Finance, insurance, Real Estate). Yes it would be nice if we built a more prosperous and productive economy away from real estate, but the reality is we are a nation that recruits people from all over the world then we build and sell them homes. There is no plan B in place.

This past week was perhaps an omission from the BoC of said realities. Just don’t call it a pivot. Not yet.