U.S. President Donald Trump wasted little time making his presence felt north of the border. With a stroke of a pen, Mr. Trump issued an executive order to begin renegotiating the North American Free Trade Agreement (NAFTA). Canadians (and their finances) are in wait-and-see mode.

Donald Trump has been President of the United States for less than a month, but has already influenced Canadian policy in significant ways. Volume 5 of Money Talks looks at the fragile state of the Canadian economy during these uncertain times.

Personal Finance

2017 will be a difficult year for Canadians, whose personal finances will be driven in large part by forces outside Canada. It all began on January 23 when U.S. President Trump issued an executive order to renegotiate the North American Free Trade Agreement (NAFTA), which has governed trade relations between the United States, Canada and Mexico since 1994. NAFTA has had a tremendous impact on the Canadian economy, with U.S. and Mexican investments in the country tripling since 1993.[1]

Not only is NAFTA up in the air, but so is the future of Canada-U.S. trade relations. The Bank of Canada (BOC) has already warned the economy could face a “material” blow from Washington’s protectionist policies.[2] Until we learn more, Canada remains in wait-and-see mode.

Real Estate

Canada’s major housing markets diverged in January, with Toronto continuing its boom and Vancouver showing further signs of correction. Sales in the Greater Toronto Area (GTA) surged at an annualized 11.8% in January, the Toronto Real Estate Board (TREB) reported last week. According to Jason Mercer of TREB, “that statistic, on its own, tell us that there is a serious supply problem in the GTA.”[3] The average home price in the GTA was $681,400.

Meanwhile, the Real Estate Board of Greater Vancouver reported that January home sales plunged 39.5% year-over-year. Sales in the Vancouver region were already moderating before the B.C. government implemented a 15% tax on foreign buyers last August. The new levy appears to have hastened the market’s correction. Metro Vancouver home prices averaged $896,000 last month.

Mortgages

Canada’s mortgage market remains highly fragmented at the start of 2017, with discount lenders continuing to offer highly competitive rates through mortgage brokers and alternative banks. However, average rates showed sharp upward mobility in January, with borrowers on either side of the 20% down payment threshold affected.

Mortgage rates are creeping higher for several reasons, the first being the government’s various attempts to cool the housing market. The new rules not only make it harder for certain borrowers to qualify for a loan, they also make it costlier to refinance a mortgage. The other major factor pulling rates up is upward movement in the bond market due to the belief U.S. President Trump will stoke economic growth and inflation.[4]

Interest Rates

To the surprise of no-one, the Bank of Canada held interest rates at 0.5% in January, citing significant slack in the labour market and overall economy. Recently, Deutsche Bank AG strategist Sebastien Galy speculated that Trump’s plans to boost infrastructure spending, reduce taxes and introduce tariffs may force the BOC to cut interest rates again.[5] This is hardly surmising, given that BOC Governor Stephen Poloz came close to hiking rates last October.

Several portfolio managers are under the belief the BOC will do everything it can to lower the Canadian dollar. That’s because a cheaper currency stimulates U.S.-bound exports. Although the U.S. dollar has shown unexpected weakness through the first six weeks of 2017, it is still forecast to break higher as the Federal Reserve continues to raise interest rates.

Sources

[1] Council on Foreign Relations. NAFTA’s Economic Impact.

[2] Rob Carrick (January 19, 2017). “Hang on tight: Your finances will face dramatic Trump-led

[3] David Hodges (February 3, 2017). “Canada’s key housing markets diver as Toronto booms, Vancouver falls.” CTV News.

[4] Rob Carrick (January 12, 2017). “Higher mortgage rates? They’re already here, and they hurt.” The Globe and Mail.

[5] Luke Kawa (February 2, 2017). “If Donald Trump does what he says he’ll do, the Bank of Canada may have to cut rates.” Financial Post.

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