Bank of Canada Interest Rate Decision - July 12, 2017

The Bank of Canada announced this morning that it is raising its target for the overnight rate by 25 basis points to 0.75 per cent. In the press release accompanying the decision, the Bank noted that Canada's economy has been robust and a significant amount of economic slack has been absorbed. While inflation data has been soft, the Bank expects that this is temporary and that inflation will return to its 2 per cent target by mid-2018.

The motivation for today's rate increase seems primarily to be that the Bank feels that the stimulus it injected into the Canadian economy in 2015 through two rate cuts is no longer required given a recent trend of strong economic and employment growth. If that is the case, a further 25 basis point increase before the end of the year will likely follow.  After that, the pace of rate increases relies heavily on the trend in Canadian inflation, which to date has been well below the Bank's 2 per cent target. If that trend does not reverse by early next year, the Bank may decide to stop at a 1 per cent overnight rate until higher inflation emerges. 

As bond markets reprice rate expectations, Canadian mortgage rates have returned to levels observed at the beginning of the year. We expect that mortgage rates will rise further in the second half of 2017, finishing near 3 per cent for a five-year fixed rate. 

Canadian Inflation - June 23, 2017

Canadian inflation, as measured by the Consumer Price Index (CPI), registered just 1.3 per cent in the 12 months to May. That is down from 1.6 per cent in April.   The Bank of Canada's new core measure of inflation, called CPI-common,  was also up 1.3 per cent for the fourth consecutive month.   In BC, provincial consumer price inflation was 1.9 per cent in the 12 months to May.

Given the Bank of Canada's recent hawkish turn on monetary policy, the trend in inflation will be even more important in coming months. So far, there is little in the inflation numbers to justify an interest rate increase, though the very strong economic growth over the past year could put some upward pressure on prices soon.

The total value of Canadian building permits declined 0.2 per cent to 7.1billion in April, the third consecutive monthly decline. Lower construction intentions for single-family homes, primarily in the Toronto CMA, was a main contributor to April's decline.

Permit activity bounced back in BC following a large decline in March, led by strong construction intentions for multi-family dwellings.  The total value of permits increased 22.9 per cent on a monthly basis and were essentially flat year-over-year. Residential permits rose 19 per cent on both a monthly basis but were 7.4 per cent lower year-over year while non-residential permits were up 34 per cent on a monthly basis and 24 per cent year-over-year.

Construction intentions were higher in three of BC's four census metropolitan areas (CMA). Permits in the Abbotsford-Mission CMA  more than tripled on a monthly basis while the Victoria CMA saw permit values increase 25per cent on a monthly basis and 28 per cent year-over-year. In the Kelowna CMA, permits were 8.9 per cent lower on a monthly basis but were 50 per cent higher than permit values in April 2016. In the Vancouver CMA, permit activity bounce back from a decline in April, posting a 25 per cent monthly increase but were 18 per cent lower compared to April 2016.

The Canadian economy expanded 3.7 per cent in the first quarter of 2017, led by an acceleration in household consumption spending as well as a nearly 3 per cent rise in business investment. The latter is a particularly welcome sign for the economy given that business investment had declined in eight of the previous nine quarters.  A build up of inventories, especially in the manufacturing sector was also a significant contributor to growth in the first quarter, but also signals a slowing in the second quarter as firms produce fewer goods and wind down that inventory.

Although the Canadian economy has grown much faster than the Bank's estimate of potential growth for three consecutive quarters, it is not expected that the economy will sustain that level of growth for much longer. We forecast that real GDP growth will fall back to an average of 1.5 per cent quarterly growth for the remainder of 2017. However, the strong start to the year means that annual growth for this year is likely to register close to 2.5 per cent, the strongest economic growth in three years. Despite faster growth, a significant amount of slack remains in the economy and there is therefore very little pressure on inflation. Without a signal that inflation is going to push higher, the Bank will remain sidelined at least until early 2018 when it expects remaining slack in the economy will be eliminated.

Bank of Canada Interest Rate Announcement - May 24, 2017

The Bank of Canada announced this morning that it is holding the target for its overnight rate at 0.5 per cent. In the press release accompanying the decision, the Bank noted that inflation is broadly in line with the Bank's projection, though intense retail competition is pushing inflation temporarily lower.  The Bank also noted that the tightening of mortgage regulations implemented in the Fall of 2016 have yet to have a substantial cooling effect on markets but it does expect those measures will contribute to a more sustainable debt profile for Canadian households.

Although the Canadian economy has expanded well above the Bank's estimate of potential growth for three consecutive quarters, including a first quarter that is tracking at close to 4.5 per cent growth in real GDP, the Bank is not optimistic that the economy will sustain that level of growth for much longer.  Moreover,  despite faster growth, a significant amount of slack remains in the economy and there is therefore very little pressure on inflation. Without a signal that inflation is going to push higher, the Bank will remain sidelined at least until early 2018 when it expects remaining slack in the economy will be eliminated.

The First Time Home Buyers' Program reduces or eliminates the amount of property transfer tax you pay when you purchase your first home. If you qualify for the program, you may be eligible for either a full or partial exemption from the tax.

If one or more of the purchasers don’t qualify, only the percentage of interest that the first time home buyer(s) have in the property is eligible.

For example, if you qualify and purchase a property with a fair market value of $400,000 with a person who doesn’t qualify you would still qualify. If you owned a 60% interest in the property, 60% of the tax amount would be eligible for the exemption.

The exemption doesn’t apply to the additional property transfer tax on residential transfers to foreign nationals or foreign corporations.

Do I Qualify?

To qualify for a full exemption, at the time the property is registered you must:

• be a Canadian citizen or permanent resident
• have lived in B.C. for 12 consecutive months immediately before the date you register the property or filed at least 2 income tax returns as a B.C. resident in the last 6 years
• have never owned an interest in a principal residence anywhere in the world at any time 
• have never received a first time home buyers' exemption or refund

and the property must:

• be located in B.C.
• only be used as your principal residence
• have a fair market value of:
  • $475,000 or less if registered on or before February 21, 2017, or
  • $500,000 or less if registered on or after February 22, 2017
• be 0.5 hectares (1.24 acres) or smaller

You may qualify for a partial exemption from the tax if the property:

• has a fair market value less than:
  • $500,000 if registered on or before February 21, 2017, or
  • $525,000 if registered on or after February 22, 2017
• is larger than 0.5 hectares
• has another building on the property other than the principal residence

Find out the amount of your exemption if you qualify.

If you don’t qualify because you are not a Canadian citizen or permanent resident, but you become one within 12 months of when the property is registered, you may apply for a refund of the property transfer tax. To apply for a property transfer tax refund in this case, call (250) 387-0604. However, if you’re a foreign national, foreign corporation or taxable trustee, you can’t be refunded any additional property transfer tax (PDF) you may have paid.

Apply

To apply for the First Time Home Buyers' Program you need to complete the First Time Home Buyers' Property Transfer Tax Return when you or your legal professional register the property transfer.

After you have applied you must meet additional requirements during the first year you own the property to keep the tax exemption.

Penalty for False Declaration

All applications are reviewed. You will be charged a penalty equal to double the tax if you falsely declare that:

• you have never owned an interest in a principal residence anywhere in the world at any time, or
• you have never received a first time home buyers' exemption or refund

First Year of Ownership

At the end of the first year you own the property you will receive a letter. The letter is to conditionally confirm that you meet the occupancy and property value requirements after you:

• purchased an existing home, or 
• purchased vacant land and built a home

Existing Home

To keep the tax exemption you must have:

• moved into your home within 92 days of the date the property was registered
• continued to occupy the property as your principal residence for the remainder of the first year

You may keep part of the exemption if you moved out before the end of the first year.

If the owner passed away, or the property is transferred because of a separation agreement or a court order under the Family Law Act before the end of the first year, you still qualify to keep the tax exemption.

Built New Home

If you registered a vacant lot and built your own home, to keep the tax exemption:

• the fair market value of the land when you registered the property plus the cost to build your home must be:
  • $500,000 or less if registered on or before February 21, 2017, or
  • $525,000 or less if registered on or after February 22, 2017
• you must have built and moved into your home within 1 year of the date the property was registered
• you must have continued to occupy the property as your principal residence for the remainder of the first year

You may keep part of the exemption if you moved out before the end of the first year.

If the owner passed away, or the property is transferred because of a separation agreement or a court order under the Family Law Act before the end of the first year, you still qualify to keep the tax exemption.

Bank of Canada Interest Rate Decision - December 7, 2016

The Bank of Canada announced this morning that it is holding the target for its overnight rate at 0.5 per cent. In the press release accompanying the interest rate decision, the Bank noted that uncertainty in the global economy is undiminished in recent months while Canadian economic growth is evolving as anticipated. On inflation, the Bank cited that although CPI and core inflation have picked up, both measures remain below the Bank's 2 per cent target. 

With long-term interest rates jolted upward by the US election, the Bank of Canada is likely content to keep its overnight rate on hold at 0.5 per cent over the next year.  That said, the stark unpredictability of the incoming Trump administration on everything from trade to taxes to financial markets means that risk in the economy is tilted to the downside.  Therefore, there remains the potential for a rate-cut by the Bank of Canada should economic conditions and the outlook for inflation deteriorate.