NATIONAL HOUSING MARKET RISK: HIGH!

High home prices and buyer expectations of continued price growth have put the country’s housing market at increased risk of a correction, Canada’s housing agency said on Tuesday.

The Canada Mortgage and Housing Corporation (CMHC) raised its national risk level to high from moderate in its third-quarter Housing Market Assessment report.

This is the second time the national risk level has been raised to high. Prior to May 2019, the indicator had flagged the country’s housing market vulnerability as “high” for preceding 10 straight quarters.

“Exceptionally strong demand and home price appreciation through the course of the pandemic may have contributed to increased expectations of continued price growth for homebuyers in several local housing markets across Ontario and Eastern Canada,” Bob Dugan, CMHC’s chief economist, said in a release. “This, in turn, may have caused more buyers to enter the market than was warranted.”

Improved housing fundamentals in the first half of the year, such as historically low interest rates, government support programs and the rollout of mass vaccination programs, led to an increase in purchasing power, disposable income and employment, CMHC noted. These factors, however, weren’t enough to justify the rapid price growth over this period.

The housing agency said the high vulnerability at the national level was “largely a reflection of problematic conditions in several local housing markets across Ontario and Eastern Canada.” This included Montreal’s vulnerability being raised to high from moderate.

Vancouver’s market vulnerability, on the other hand, was reduced to a “low” rating following a slowdown in price growth and home sales.

CMHC’s Regional Breakdown

Six of the census metropolitan areas (CMAs) tracked by CMHC are now in the high-risk zone, up from five in the second quarter.

Here’s a brief rundown of factors impacting some of those metro areas:

• Greater Toronto Area (high): “Despite existing home sales starting to ease and the pandemic-induced buying activity dissipating during the second quarter of 2021, the demand-supply … contributed to the persistence of price acceleration.”
• Montreal (high): “…home prices have risen sharply and are well above the level warranted by fundamentals, such as labour income.”
• Ottawa (high): “…home sales have trended down since April 2021, but sellers’ market conditions still prevail as listings remain at historic lows, pressuring price growth.”
• Moncton (high): “…prices have continued to grow in 2021 (23% year-to-date) reflecting the underlying disconnect between the supply and demand for housing.”

Saskatoon, Regina, Winnipeg and Quebec continue to show a “low” degree of vulnerability in their housing markets, CMHC said.

5 Year Fixed Rates Being Lowered Again!

RBC Royal Bank became the third Big 6 bank to lower its 5-year fixed mortgage rate over the weekend.

The bank dropped its uninsured 5-year fixed rate by 25 basis points to 2.19%

The move came days after similar cuts by CIBC and TD Bank last week.

On Friday, CIBC lowered its rates by 5 basis points, bringing its special-offer uninsured 5-year fixed rate to 2.39% and its 5-year variable rate to 1.35%.

TD Bank was the first of the banks to lower its on Thursday. TD’s moves were more significant, lowering its rates by 45 bps. That brings its insured (high ratio) 5-year fixed to 1.89% (from 2.34%) and its uninsured 5-year fixed to 1.99% (from 2.44%).

The moves follow a downtrend in bond yields in recent months. The 5-year bond yield has fallen from 1.01% in June/July to a range of between 0.80% and 0.90% since August. Bond yields typically lead fixed mortgage rates.

(Updated Sept. 20)

New Housing Starts Slowed in August, Says CMHC

All eyes are on housing supply these days given the historically low level of inventory, which is having trouble meeting the current strong demand.

That’s why the latest housing starts figures released this week were important, as they serve as a rough indicator for future supply.

Overall, seasonally adjusted starts fell to 260,239 units in August, down from 270,744 in July, the Canada Mortgage and Housing Corporation (CMHC) reported.

The annual rate of urban starts was down 4.7%, led by a 5.7% drop in starts for apartments, condos and other multi-unit housing. Single-detached urban starts were down 2% year-over-year.

Despite the decline, starts are still well above the long-term average, however.

“On a trend and monthly SAAR [seasonally adjusted annual rates] basis, the level of starts activity remains elevated by historical standards,” CMHC said. “Among Montreal, Toronto and Vancouver, Toronto was the only market to register growth in total SAAR starts in August, due to modest growth in the multi-family segment.”

Neo Financial Expanding into Mortgages

A Fintech company that bills itself as a “disruptive online bank” is widely expected to expand its product offering to include mortgages.

Calgary-based Neo Financial Technologies launched a year ago with a no-fee Mastercard and a high-interest savings account. It has since expanded nationwide and boasts over 4,000 retail partners where its cardholders can earn cashback.

The company has just completed a second round of fundraising worth $64 million—bringing the total funds raised by the company since its launch to $114 million.

The next stages of the company’s expansion are widely expected to include mortgages as it sets out to challenge the traditional big banks and gain a growing slice of that market share.

“With 90% of the Canadian market share owned by the Big Five banks, Neo was built to offer Canadians what they’ve been lacking: choice and innovation,” the company says on its website.

In a job posting for a Head of Mortgages role, the company said, “Neo is expanding our product offering to include innovative mortgage products backed by cutting-edge technology…You’ll play an instrumental role in scaling our mortgage business into a household brand in Canada.”

Published by Steve Huebl

A few possible trends and risks to keep in mind

From rising inflation and falling consumer confidence to changing real estate preferences, Canada’s mortgage market impacts from multiple fronts.

Ben Rabidoux, a real estate analyst and founder of Edge Realty Analytics, recently participated in a webinar hosted by Mortgage Professionals Canada where he outlined some of the key trends that could impact mortgage rates.

Below is a summary of part of that discussion.

An “inflation scare” is coming

Inflation is running hot right now, with the latest reading from July at 3.7%, according to data released by Statistics Canada, well above the Bank of Canada’s (BoC) target of 2%.

Despite the Bank’s insistence that inflation pressures should prove “transitory” and dissipate as supply chains ease up, Rabidoux believes an “inflation scare is coming.”

That’s partially based on a survey by the Canadian Federation of Independent Business, which measures price expectations among Canadian businesses. The percentage of businesses anticipating price increases of more than 5% this year has spiked to nearly 45%, up from 24% at the start of the year.

“We know that businesses are seeing a lot of price pressure. That’s going to translate into higher inflation and I have a suspicion it’s going to end up being a little stickier than central banks will have us believe,” Rabidoux said.

If that comes to pass and inflation remains high, markets would likely see a rise in the 5-year bond yield, which is the leading indicator for 5-year fixed mortgage rates.

“If people get nervous that inflation’s going to stick around, you could see this rate tick up, and that would be bad news for fixed-rate mortgages,” Rabidoux added.

Potential reversal of the “flight to the suburbs”

Over the course of the pandemic, there’s been a flight of homebuyers out of the cities looking for single-detached homes with more space and privacy.

As a result, places like Bancroft, North Bay, have seen annual home-price appreciations of more than 64% and 48%, respectively.

“A lot of these areas benefited from this dynamic from the pandemic where people wanted more green space and lower density. They wanted single-family homes and couldn’t get it in the city, so by and large they started to push out,” Rabidoux said. “They also wanted recreational properties, which I think is a more important dynamic. And so you’re seeing a lot of these recreational property markets boom.”

But Rabidoux points to signs of that trend starting to reverse. The latest housing reports are showing declines in the detached market, particularly in the 905 area code, while condo demand is rising again in the 416.

“This suggests to me that we’re starting to see the early signs that this migration out of the big cities and into the suburbs is starting to reverse,” Rabidoux said. “I would be a little bit concerned that as we begin to open back up, that we might start to see a bit of an unwinding.”

That goes especially for the more “illiquid” recreational property markets in cottage country, where there are now signs of a softening in prices.

But as Rabidoux noted, “After places run up 60% year-over-year, it wouldn’t be shocking to see them pull back 10 or 15% from those highs.”

Waning in consumer confidence

Now in the midst of a fourth wave of Covid-19, consumer confidence has marked the steepest decline since the early days of the pandemic, according to the weekly consumer confidence index published by Nanos.

While confidence remains high, “we’ve seen a pretty significant softening in recent weeks,” Rabidoux noted. “This is something to watch, because the economy is ultimately a confidence game.”

He added that if the fourth “Delta” wave of the pandemic proves significant, it “could matter a lot for the economy and it could matter a lot for housing.”

Nanos also publishes a sub-index to measure how people perceive real estate to be performing, which has also seen a steady drop-off in recent weeks.

“This is maybe an early warning sign that people’s sentiment on real estate is starting to get a little bit soft,” Rabidoux said. “And that could translate into some soft home sales later this year and early next year. But a lot, I think, will depend on how this virus plays out.”

End of government income support measures

Now more than a year and a half into the pandemic, there are still 1.7 million Canadians on wage subsidy programs, which are scheduled to expire on October 23.

“That’s a huge number,” Rabidoux said, noting that during the financial crisis of 2008, there were 800,000 on employment insurance. “We’re at twice as many people still on government support compared to the height of the financial crisis.”

At the same time, the share of businesses reporting a shortage of workers is at a record high. Rabidoux notes that while the situation isn’t a huge deal at the moment, “we don’t know how this is going to play out.”

Housing affordability a key election issue

All of the major political parties have promised to make housing more affordable as part of their election platforms.

And for good reason, as there is currently a massive cohort of prime homebuying people in Canada, Rabidoux notes.

The most common age to purchase a home is now between 28 and 37. And with millennials now outnumbering boomers, housing affordability is an increasingly important election issue.

“Canadian politicians have to cater to this huge demographic of potential homebuyers,” Rabidoux said.

But on the flip side, housing now represents the overwhelming majority of the Canadian economy, accounting for two thirds of GDP since the bottom of last year’s recession, and over 50% over the past four years.

“We have a record share of our economy in Canada that’s driven by housing, so the government is going to have to tread really lightly here,” Rabidoux added. “As much as politicians want to make housing affordable, they want to be careful not to upend the economy in the process.”

This is why he believes most policies will be focused on incentivizing new housing supply.

Potential new regulations on the way

Mortgage debt has been growing at a record pace over the past year, and if that continues, Rabidoux suspects new mortgage regulations could come down the pipeline later this year or in early 2022.

He noted that regulators have been dropping hints and often emulate policies that have already been tested in other markets. He pointed to New Zealand, which faces a similar housing market characterized by supply constraints and high demand. The government there just announced a tightening of underwriting practices for secondary properties, which now require a higher down payment.

“I think you could see OSFI (the Office of the Superintendent of Financial Institutions) start to follow suit,” Rabidoux said. “It wouldn’t surprise me if we start to see higher down payment requirements for secondary properties or some form of restricting eligible down payment, so they might say you can’t borrow from a HELOC, you can’t finance an existing property to buy a secondary property, whether a recreational home or an investment property.”

Higher debt-to-income limits could also be considered, he added.

Wealth inequality a growing issue in Canada

In 2021, renters saw their household net worth increase by $8,000 over the first three months of the year, whereas homeowners saw a $73,000 increase.

“That’s an enormous inequality gap, and it’s driven by the dollar increase in house value in Canada,” Rabidoux said. Over the past year, homeowners have seen their values increase on average over $133,000.

“This is a topic of extreme importance to this government and I think the longer this dynamic goes on, it’s asking for some kind of radical intervention.”

While Rabidoux isn’t certain what that response might be, he said he would be “shocked” to see a capital gains tax on primary residences, except perhaps on the ultra-luxury market of houses valued over $5 million, for example.

Published by Steve Huebl

It’s good to be prepared when dealing with one of the most important purchases of your life. Have the knowledge and understanding to overcome sudden tough financial times

    For the majority of mortgage borrowers, missing a single mortgage payment is not a concern. But have you ever wondered what would happen if, for some reason, you couldn’t make your payment?

    Below I’m going to share with you the process that would follow, and also some options that are available to folks to hopefully avoid ever missing a payment. As I mentioned, most borrowers are very diligent and go to great lengths to make sure their mortgage payments are made each month.

    For many, that means using the same account their paycheque goes into or setting up automatic transfers the day before their payment to ensure the funds are always available. Even those who experience difficult times typically do everything possible to make their payments, including using lines of credit or even temporary loans from family members to get them through the tough times.

    But for some, hard financial times or a forgotten transfer do result in missed mortgage payments.

    When a payment is missed, your lender will generally call or send a letter notifying you of the missed payment and remind you of your contractual obligation to ensure it gets paid.

    In the case of a forgotten payment, as long as you can send your payment within 30 days of when it was due, you’ll generally get away with a warning and a late fee from your lender.

    If you don’t have the funds to continue your payments or are late by more than 30 days, more serious consequences can follow. This may start with a downgrade to your credit score, followed by collection efforts by the lender.  But it doesn’t need to get to this point.

Talk to Your Lender, there are Options Available to You

If you foresee financial issues on the horizon that may prevent you from making your mortgage payments, whether due to a job loss or illness, etc., the best course of action is to contact your lender right away and explain the situation.

Many lenders offer an annual skip-a-payment feature, allowing you to miss one payment annually. For some financial situations, lenders can offer solutions such as interest-only payments, amortization increases or mortgage deferrals.

By reaching out to your lender as soon as possible, you increase the chances of being able to work out a solution that avoids late payments and negative impacts on your credit score, or worse yet, a potential foreclosure.

We’re all human and understand that unexpected events can and do happen. But being proactive about the situation always results in a better outcome vs. avoiding or delaying an inevitable missed payment.

Should you find yourself in a similar situation and need advice on how to proceed, please don’t hesitate to reach out. I’ll be more than happy to assist in finding a solution.

Published by Katy Mackenzie

Canadian Job Front still on an Upward Trend!

August Employment Report Showed Continuing Recovery

This morning, Statistics Canada provided us with some much-needed good news on the economic front following last week’s surprisingly dismal Q2 GDP report. Canada’s labour market continued its recovery in August, especially in the hardest-hit food services and accommodation sectors. The August Labour Force Survey (LFS) data reflect conditions during the week of August 15 to 21. By then, most regions of Canada had lifted many of the Covid-related restrictions. However, there were capacity restrictions in such indoor locations as restaurants, gyms, retail stores and entertainment venues. Also, for the first time since March 2020, border restrictions were lifted for fully vaccinated non-essential travellers from the US.

However, the reopening of the Canadian economy has been creeky, owing to supply constraints and difficulty in filling job vacancies in sectors that require high-contact interfaces, especially with the concern regarding a fourth wave of the delta variant. Nevertheless, today’s LFS indicated that employment grew last month by 90,200, the third consecutive monthly gain, further closing the pandemic gap. Employment is now within 156,000 (-0.8%) of its February level, the closest since the onset of the pandemic. Moreover, most of the net new jobs were in full-time work. Increases were mainly in the service sector, led by accommodation and food services.

The jobless rate fell from 7.5% in July to 7.1% in August. The unemployment rate peaked at 13.7% in May 2020 and has trended downward since, despite some short-term increases during the fall of 2020 and spring of 2021. In the months leading up to the pandemic, the unemployment rate had hovered around historic lows and was 5.7% in February 2020.

The adjusted unemployment rate—which includes discouraged workers–those who wanted a job but did not look for one—was 9.1% in August, down 0.4 percentage points from one month earlier.

Employment increased in Ontario, Alberta, Saskatchewan and Nova Scotia in August. All other provinces recorded little or no change. For the third consecutive month, British Columbia was the lone province with employment above its pre-pandemic level. Compared with February 2020, the employment gap was largest in Prince Edward Island (-3.4%) and New Brunswick (-2.7%). The table below shows the jobless rates by province.

Bottom Line

The Bank of Canada this week once again suggested that it would not begin to tighten monetary policy until the economy returned to full capacity utilization, which they estimate will not be until at least the second half of next year. Employment will need to surpass pre-pandemic levels before complete recovery is declared because the population had grown since the start of the crisis 18 months ago.

Although August was another solid month for the jobs market, there is a wide disparity across sectors of the job market in the degree to which they have recovered from the effects of the pandemic. The table below shows the employment change in percentage terms by sector compared with February 2020.

Sectors where remote work has been widespread–such as professional, scientific and technical services, public administration, finance, insurance and real estate–have seen a net gain in employment. However, in high-touch sectors that were deemed nonessential, the jobs recovery has been far more constrained. This is especially true in agriculture, accommodation and food services, and recreation.

Published by Dr. Sherry Cooper & The DLC Marketing Team

Rates remain low for now, but it sounds like it’s not forever!

The Bank of Canada delivered a status quo rate decision today, keeping its target rate and bond purchases unchanged.

This was expected, in part due to the Bank’s longstanding tradition of keeping a low profile during election campaigns so as to remain apolitical.

The overnight lending rate remains at 0.25%, where it’s been since March 2020, and the Bank’s bond-buying program (a.k.a., “Quantitative Easing” or QE) was left at $2 billion per week.

Despite some bumps in the economic recovery, including a surprise 1.1% decline in GDP in the second quarter, the BoC said today the recovery should continue to pick up steam towards the end of this year.

“The Bank continues to expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery,” it said in a release.

Inflation is also being closely monitored, as it remains above 3%, “as expected,” by the Bank, but well above the BoC’s 2% target.

The factors leading to higher inflation, such as base-year effects, gas prices and pandemic-related supply bottlenecks, “are expected to be transitory, but their persistence and magnitude are uncertain and will be monitored closely,” the Bank noted.

The interest rate outlook hasn’t changed, as the BoC reiterated that it “remains committed” to holding the policy rate at its effective lower bound until 2% inflation can be sustainably achieved, which the Bank expects to happen in the second half of July 2022.

Where Does the BoC Go From Here?

While the Bank of Canada was largely expected to take a breather this month, it will be closely watching incoming data over the next month and a half before its next rate decision meeting on October 27.

“Assuming the recovery is able to regain its footing over the coming seven weeks, we think the Bank will be looking to step down its pace of QE at the late-October meeting,” wrote economists from National Bank of Canada. “As always though, data dependency is the name of the game. Two jobs reports and another month of GDP data in the interim will be critical in informing the outlook.”

Sri Thanabalasingam, a senior economist with TD Economics, agrees that continued job gains and alleviating price pressures would leave the Bank on track to further reduce monetary stimulus in the coming quarters.

“However, if the employment report disappoints or inflation picks up further, the Bank’s Governing Council will face a more difficult trade off,” Thanabalasingam wrote.

“Boosting monetary stimulus could further aid the recovery, especially given the Delta variant risk, but runs the risk of accelerating price growth,” he added. “With hiccups almost certain to come in one form or another, clear central bank communication will be required to carefully guide the economy to the other side of this pandemic.”

As for interest rate forecasts, the Bank has made clear that borrowers should expect rates to start rising by the second half of next year. Looking out over the next three years, markets are currently forecasting four to five quarter-point rate hikes, which would take the overnight rate from its current all-time low of 0.25% to between 1.25% and 1.50%.

Published by Steve Huebl

Are ultralow interest rates to blame?

More than three-quarters of Canadians (77%) believe home prices in suburban and rural areas have risen to unsustainable levels, and most feel that ultra-low interest rates are to blame.

A full 8 out of 10 people say low borrowing costs are to blame for the recent run-up in home prices, according to a survey from Zoocasa.

The findings reveal disagreement about the impact of low interest rates, with 47% saying they believe it has increased affordability, while 34% disagree with that statement.

The survey also found that more than a third (38%) agree that low interest rates have impacted their desire to buy a property.

With the average home price in Canada as of July at more than $661,000, according to the Canadian Real Estate Association, buyers are needing ever higher incomes in order to afford their purchase. The Zoocasa survey found that half of buyers (50%) have a household income of over $100,000, while 32% reported a household income of under $100,000 and another 20% reporting a household income of over $160,000.

In terms of demographics, the largest cohort of first-time buyers identified as Millennials (born between 1981 and 1996). The next largest segment was Gen X (1965-`1980) at 23% and Baby Boomers (1946-1964) at 6%. Just 3% of Gen Z (1997-2012) self-identified as first-time homebuyers.

Online home sale auctions are now a thing

An Ottawa-based start-up has brought the concept of online auctions to Canadian real estate sales.

Unreserved, which is aiming to reinvent how homes are bought and sold, recently launched its auction platform.

“Our plan is to run a real-time transparent process and it starts by rolling out the red carpet for buyers,” CEO Michael Ryan O’Connor said in the company’s promotional material. “Our goal is to increase buyer confidence by providing full transparency in every step of the process…Also, by removing 4-5% commissions paid by sellers this essentially allows buyers to pay less and for sellers to keep more.”

O’Connor added that by using its platform, buyers can see the other bids, meaning they’re not over-paying by tens of thousands of dollars in a blind-bid process.

“We looked at the current environment, the blind bidding, the pre-emptive bully offers, zero home inspections, and we said ‘its time to bring transparency into the entire process,’” O’Connor noted.

The company is piloting its platform in Ottawa but plans to expand to other cities going forward.

National Bank invests $103 million in Flinks

National Bank of Canada announced that it has invested $103 million in Flinks, a Montreal-based fintech company that enables businesses to connect to their clients’ financial accounts.

Flink recently launched in the U.S., and this investment will allow it to continue its growth to serve “asset managers, credit unions and banks with tools that enable innovation with financial data in North America,” the company said.

“Leveraging financial data still today requires technical know-how,” said Yves-Gabriel Leboeuf, CEO of Flinks. “We want to empower service providers of all sizes to drive positive outcomes for their customers, using financial data.”

Updates from FSRA

The Financial Services Regulatory Authority of Ontario (FSRA) said it is seeking feedback on its proposed licensing exemption for certain businesses engaging in mortgage transactions.

The exemption would apply to select businesses that do not deal with individual consumers. The move is part of the agency’s work—in collaboration with industry partners and the Ministry of Finance—to implement proposed recommendations to the Mortgage Brokerages, Lenders and Administrators Act, 2006, based on a 2019 government review.

To review the proposed guidance and submit your feedback by October 8, 2021, visit FSRA’s website.

FSRA also recently unveiled a new process for criminal background checks as part of its mortgage broker licence applications.

FSRA will have to outsource criminal reference checks to remain compliant with the Police Record Checks Reform Act (PRCRA). Among other things, this process will involve a fee of $40 and require the applicant to initiate a Canada Police Information Centre (CPIC) check through an approved third-party criminal record check provider. To learn more, click here.

published by Steve Huebl