Everything You Need to Know on Wednesday: New Mortgage Rules Will Make A Mark in Canada, Says BMO

Good morning mooers! Here are things you need to know about today's market:

● S&P/TSX 60 Index Standard Futures are trading at 1,419.90, down 0.11% from previous close

● Bank of Canada welcomes 2% inflation, pivoting focus to growth

● Canada's housing starts tumble in August

● New mortgage rules will make a mark in Canada, says BMO

Today, the Canadian dollar is trading at 73.6 US cents, an increase from previous close.

The Bank of Canada's second-highest-ranking official welcomed the news that inflation is returning to 2%, stating that the focus is now on economic growth and managing downside risks.

Senior Deputy Governor Carolyn Rogers noted on Tuesday that while the inflation figures might show some volatility, the central bank is particularly monitoring core inflation, which continues to exceed the 2% target.

"There's still a bit of work to do," Rogers said in Toronto, at an event organized by Bloomberg. "I mean, we got to stick the landing," in reference to a soft landing -- in which interest rates are high enough to maintain and achieve 2% inflation without triggering a recession.

Canadian housing starts dropped sharply in August to 217,300 annualized units, a 22% decrease from July, TD reported. The six-month moving average also fell by 2.9% to 248,500 units, according to the Canada Mortgage and Housing Corporation. The decline was mainly in the multi-family sector, with urban starts decreasing by 29% to 154,300 units, while urban single-detached starts slightly rose by 3% to 45,200 units.

Regionally, the decrease was widespread, with urban starts falling in seven out of ten provinces. Ontario witnessed a significant decline, with urban starts dropping to 57,100 units, marking the weakest performance this year. In contrast, Quebec saw an increase of 6,300 units to 41,400. The Atlantic region saw a modest increase, helped by New Brunswick, while the Prairies experienced a decline across Manitoba, Saskatchewan, and Alberta.

TD noted that the sharp decline in August was unexpected following July's substantial increase but suggested a potential rebound in September. This rebound is expected to contribute positively to residential investment and overall economic growth in the third quarter. However, looking ahead to 2025, TD anticipates a slowdown in housing starts due to factors like weak pre-sale activity, slowing population growth, and rising construction costs, aligning with the downturn observed in August.

The Bank of Montreal (BMO) observed that the Bank of Canada's initial rate cuts have not significantly boosted housing demand, with home sales increasing only 1.3% month-over-month in August, and still showing a moderate decline from the previous year. According to the Canadian Real Estate Association, the market remains in a "holding pattern," awaiting further rate reductions. BMO anticipates that additional cuts could initiate a recovery, though likely a modest one initially, due to ongoing affordability challenges in Ontario and British Columbia. However, three forthcoming mortgage rule changes, effective December 15, could accelerate market activity, BMO suggests. These adjustments include extending the availability of 30-year mortgages to all buyers for new builds, allowing first-time buyers the same mortgage term for both new and existing properties, and raising the price limit for insured loans from C$1 million to C$1.5 million. This last change will enable smaller down payments and reduce borrowing costs compared to uninsured loans, potentially lowering monthly payments by about 9%. BMO warns, however, that if the Bank of Canada reduces rates more significantly than anticipated, the housing market might heat up too quickly. This could drive up prices, undermining the affordability improvements these new rules aim to provide, and potentially resetting progress to initial conditions.