WEEKLY RESIDENTIAL MARKET UPDATE
Industry & Market Highlights
Mortgage Professionals Canada Housing Market Digest
We are excited to announce the newly revamped Housing Market Digests. Providing a snapshot of current data on resale markets, housing stats, employment trends and interest rates, these comprehensive and easy-to-use digests are designed to offer a more streamlined perspective of national and regional information to use with your clients.
Mortgage Professionals Canada and its Chief Economist Will Dunning produce monthly Housing Market Digests to provide a snapshot and trend analysis of the Canadian – and respective regional – housing markets, content that includes information around housing starts, the resale market, employment trends, interest rates, and more.
Digests for Canada are produced every month, while reports on other provinces are produced roughly every quarter.
Poloz’s Holding Pattern on Canadian Rates Can’t Last Much Longer, It’s no longer an issue of if, but when the Bank of Canada raises interest rates
Governor Stephen Poloz heads into a rate decision Wednesday where he’s expected to once again refrain from lifting borrowing costs, even as the economy shows signs of strength and is running up against capacity constraints. It’s a cautious stance driven by a wait-and-see approach to a long list of uncertainties — everything from Nafta to the housing market — rather than any concerns about fundamental economic momentum.
After the current pause, which came after three rate increases, most economists are expecting the Bank of Canada will return to a hiking path in July, followed by one more increase at the end of the year.
“It’s all about the timing,” said Jean-Francois Perrault, chief economist at Bank of Nova Scotia in Toronto and a former central bank researcher. “From our perspective rates are going up there’s no question about it, but it’s just when will they go up.”
As of late Friday, 21 of 24 economists predict Poloz will hold rates steady, with the rest calling for a quarter-point increase. Investors agree chances of an increase are slim; implied odds of a May 30 rate hike fell to 25 percent last week, from 35 percent about a month ago. An increase by July and another one by December are almost fully priced in.
The Bank of Canada’s announcement will be a shorter one-page statement — as opposed to the one in July, which will be accompanied by fresh quarterly forecasts and a press conference — and any new language on trade tensions, the housing market and economic slack will be important clues for assessing a July increase.
Trump’s threats this month on the North American Free Trade Agreement and possible tariffs on auto imports from Canada are the latest uncertainties Poloz needs to balance. Another lingering headwind is household debt. Poloz devoted a May 1 speech entirely to how consumers are more sensitive to higher rates.
Poloz has also been a big advocate of the idea Canada has moved to the “sweet spot” of the business cycle, where companies expand to meet demand and keep the economy at full output without rapid inflation. The Governor has said he has an “obligation” to nurture this process with stimulative borrowing costs.
The sweet spot theory is important, because it allows Poloz to reconcile the idea of a cautious policy stance with an economy growing above what is considered its typical non-inflationary speed limit. After a recent soft patch, consensus forecasts show the expansion will accelerate to an annualized pace of at least 2 percent and that should eat further into Canada’s dwindling spare capacity.
But the law of economics will eventually prevail, with plenty of signs of a resilient economy that needs higher rates, economists said. Unemployment is at record lows and executives are telling Poloz they remain largely unscathed from policy uncertainty emanating from the Trump administration.
Likewise, after five of years of below-target inflation, rising demand has consumer prices poised to meet or beat the bank’s 2 percent goal through the next year.
“With inflation at target and the labor market looking like it’s at full health, one rate hike wouldn’t be too much for the economy to handle, especially with growth rebounding,” after the first quarter, said Royce Mendes, a CIBC Capital Markets senior economist in Toronto. He predicts a July increase.
The big picture remains one of firm inflation and growth, said Silvana Dimino, an economist at JPMorgan Chase Bank in New York. Canada’s housing is headed for a soft landing and the U.S. has an interest in a striking a Nafta deal, she said.
“They feel like they have some room to let things ride out,” Dimino said, adding the hiking cycle will resume. “When inflation is stable at 2 percent, that’s when you expect to be raising interest rates, which is what they are doing. This is the big picture.” By Greg Quinn.
Massive Cohort of Buyers About to Enter Unprepared Housing Market, Warns Study
An Ontario Real Estate Association-sponsored study warns of a severe housing dearth that’s beginning to loom large.
The study, produced by Ryerson University and titled Millennials in the Greater Toronto and Hamilton Area: A generation Stuck in Apartments?, warns that 700,000 millennial-aged first-time homebuyers will be entering the housing market within the next decade, but that empty nesters won’t be ready to move out of desired single-family detached dwellings until at least 2040.
“The report points out that the best way to help ensure the Canadian dream of homeownership stays within reach is by increasing housing supply, particularly for starter homes and the missing middle,” said Tim Hudak, OREA’s CEO. “The missing middle is a neat solution because it is appealing to millennials and first-time homebuyers, given its affordability, but it’s also attractive to empty nesters because they can still stay in the city close to their grandkids, but free up the traditional family home for somebody else.”
All levels of housing are interdependent, and with boomers occupying single-family homes longer, a chain of disruption affects the entire market.
“Many assumed that empty nesters would put their house on the market, but, increasingly, they’re staying in their homes,” said Hudak. “Right now, it’s a game of musical chairs. Because we haven’t added onto the supply and somebody moves, musical chairs ensue where maybe a few people move up the ladder. That results in higher prices and doesn’t help millennials get a place of their own.”
But while enlarged housing supply will ease unaffordability to a degree, there are other impediments in first-time homebuyers’ way. For one, mortgages are difficult to secure for mature purchasers, to say nothing of those trying to enter the market for the first time.
“Governments have piled on the back of millennials and first-time homebuyers, making it harder to get a mortgage and paying higher taxes,” said Hudak. “The study we released says the government should do just the opposite. Millennials are now entering the time where they’re getting promoted at work, making more money and thinking of raising families. They’re looking to get into the housing market, and government should be focusing on increasing supply and helping to get the costs down, like lowering the Land Transfer Tax.”
Over most of the last decade, a seemingly growing number of obstacles have made homeownership difficult to attain for would-be first-time buyers.
“Every year, starting six or seven years ago, it’s gotten harder and harder for first-time homebuyers to enter the housing market,” said James Laird, CanWise Financial’s president and broker of record. “Regulation has been big; going back to 2010, each year it’s become more difficult to qualify for mortgages, from reducing the maximum amortizations to increasing the minimum down payments, to increasing the cost of high-ratio insurance, and more recently, adding the stress test. The rapidly rising cost of real estate has also made it more difficult.”
Historically-low interest rates were a saving grace, but those days appear numbered—Laird bandied the possibility of fixed rates surpassing 4% by next year. But given their respective qualification figures, millennials will have to decide whether or not that backyard is worth living farther from employment.
“The millennial generation will probably shift their expectations a little bit, or face a long commute to the suburbs, or maybe even make a decision to live in a smaller community, but they’ll have to figure out where they can work in that community,” said Laird. “I think their expectations need to be reset. In major cities, with how much raw land costs, builders are, for the most part, only building high-rise, high-density housing. A far greater percentage of new housing units are condominiums.” By Neil Sharma.
Are Rising Rates Raising the Bar?
Anyone trying to qualify for a typical mortgage in Canada has just had the bar raised another couple of notches. The big banks have been bumping up their five-year fixed rates for the past couple weeks. Now the Bank of Canada is following suit with an increase to its qualifying rate.
The central bank’s conventional, five year mortgage rate now stands at 5.34% up 20 basis points from 5.14%. It is the fifth increase since May of last year. The Bank’s benchmark interest rate has been raised just three times, over about the same period (since July ’17).
The qualifying rate is separate from consumer mortgage rates but it is an important benchmark in light of the B-20 stress test that was imposed on non-insured mortgage holders, back in January. The new rules require that even home buyers with at least a 20% down payment must qualify for a mortgage at the BoC qualifying rate, or at 2% more than the rate they have negotiated with their bank, whichever is higher.
Market watchers point out that, as usual, the increase will hit first time buyers the hardest. It will make borrowing more expensive and it will reduce the amount buyers can, ultimately, qualify for.
What remains to be seen is how the increase will affect renewals. By one estimate 47% of mortgages are up for refinancing this year compared to the normal rate of 25% to 35%. By First National Financial.
Home price appreciation to fall 80% this year says RBC
The national rate of home price appreciation has averaged more than 10% in the past 2 years but that’s set to change significantly.
In its latest housing market forecast, RBC Economics predicts a rise in home prices of just 1.8% for 2018 as policy actions and interest rates conspire to cool the market.
Economists are also expecting that home resales will be weaker in 2018 than 2017 (down 4.5% following a 4.3% drop in 2017) making the second year of annual declines, something not seen in Canada since the mid-90s.
But while price appreciation is to soften, RBC Economics does not see a significant correction nationwide; this risk, it says, is contained.
Supply-demand balance is expected to be seen in most major markets including Ontario and British Columbia, with steady support coming from economic fundamentals.
The mortgage stress test’s long-term impact
The tighter lending rules created by the new mortgage stress tests introduced by OSFI at the start of 2018 “will ultimately dampen homebuyer demand in Canada” RBC Economics senior economist Robert Hogue believes.
He adds in the report that the stress test will impact homebuyers’ budgets leading to growth for the lower-priced housing types at the expense of pricier units. This, he notes, is already being seen in Toronto and Vancouver and is expected to extend to other cities.
Interest rates will also continue to impact the market, with four more hikes forecast through to mid-2019 taking the rate to 2.25%. Hogue says that this will start to have more pronounced impact later in 2018.
Overall, the RBC Economics’ forecast is for Canada’s housing market to face significant headwinds in 2018 but that the easing of markets represents a “healthy correction” over the past two years from 2016’s “unsustainably strong” conditions.
Why Canadian are Interested in Becoming Landlords
Maybe it is the high cost of buying a home. Maybe it is the feeling that wages are not keeping up with the cost of living. Either way there is some new information that suggests increasing numbers of Canadians – in particular millennial Canadians – are looking to become landlords.
A recent survey by one of the big banks indicates 26% of Canadian homeowners are, or are planning to become, landlords. That includes either a separate, income property or renting out space in a primary residence.
It is worth noting that millennials are far more interested in renting out properties than their older counterparts. Of homeowners aged 18 to 34 who responded to the poll, 47% either are, or want to be, landlords. Among millennial homeowners, 54% indicated that, if they were buying today, they would be looking for a home with a source of rental income. Just 25% of boomers stated a preference for rental income potential.
More than half of millennial homeowners, who are already landlords, have a separate income property, while about 40% are renting out space in their primary residence on either a long-term (1 year) or short-term basis.
A key reason for wanting rental income – cited by 26% of respondents – is to off set mortgage and other housing costs. About 30% of respondents said they wanted extra income to pay for non-essential items.
The survey suggests that the benefits of being a landlord are not insignificant. Those with a separate rental property claim an average monthly income of about $2,200, with costs of about $1,500. Those who rent out a portion of their primary residence report an average income of a little less than $1,300 a month on expenses of about $1,900. Many also see the tax advantages of a rental income as a significant advantage. By First National Financial LLP.
· Domestic equity markets shrugged off news that the U.S. administration is pulling out of the current Iran deal while leaving the door open to renegotiation.
· WTI oil rose for a fifth consecutive week. Rising U.S. gasoline prices helped drive headline inflation to 2.5% y/y, the fastest pace of price growth since February 2017.
· A loss of momentum in underlying inflation in April should help reduce concerns that the Federal Reserve isn’t moving fast enough to cool a hot U.S. economy.
· Crude oil prices hit a 3½ year high this week, with the WTI benchmark hitting US$71 per barrel. While expectations of a U.S. withdrawal from the Iran nuclear agreement have helped to bid up prices recently, the actual impact on the oil market is likely to be limited.
· Housing starts slowed to 214k in April, while employment was flat. The unemployment rate held at 5.8%, while wage growth came in above 3% for a fourth consecutive month.
By TD Economics. Read the full report Here.
Mortgage Interest Rates
Bank of Canada Expected to Raise Interest Rates Again. Rate announcement to be made tomorrow.
Current Prime lending rate is 3.45%. Bank of Canada Benchmark Qualifying rate for mortgage approval is at 5.34%. Fixed rate increasing trend continues. Deeper discounts are are available for variable rates making adjustable variable rate mortgages very attractive again.
Now’s the perfect time of year for a free mortgage check-up. With spring on its way and interest rates on the rise, it makes sense for us to revisit your mortgage and ensure it still meets your needs. Perhaps you’ve been thinking about refinancing to consolidate debt, purchasing a rental or vacation property, or you simply want to take a vacation. Whatever your needs, we can evaluate your situation and help you determine what’s right for you.
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