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3 Apr

Residential Market Update


Posted by: Adriaan Driessen



Industry & Market Highlights 

A Look At Rates, Inflation, Securitization News and More

Data released by Statistics Canada morning showed the annual pace of inflation accelerated to 2.2% compared to 1.7% the previous month.  Core inflation excluding volatile elements like gasoline prices climbed to 2.1% compared to 1.9% last month.

As you would imagine, inflation is a central piece of the information that influences the Bank of Canada’s interest rate decisions and, with both readings above the bank’s 2.0% target, another hike could come even sooner than previously expected.  Bond yields climbed 4-5 basis points on the news.

After leaving the target overnight rate unchanged at 1.25% back on March 7th, the implied probability of a 25 basis point hike at the April 18th meeting is about 40%.  Trade concerns with the US may yet weigh on that decision.

The Fed

Speaking of central banks, the Federal Open Market Committee (aka the Fed or FOMC) met on Wednesday and raised its benchmark target rate by 25 basis points for the sixth time since it began raising rates from near zero levels in December 2015.  The increase was widely expected and puts the new benchmark funds range at 1.50%-1.75%.  Along with the increase was another upgrade in the Fed’s economic forecast and the suggestion that the future path of rate hikes could accelerate.


MCAP announced its highly anticipated Residential Mortgage Backed Security (“RMBS”) this week.  In case you’re unclear on the difference, an RMBS is composed of low ratio (<80% LTV) uninsured mortgages where NHA MBS are made up of Insured mortgages.

The $247 million Pass-Through deal features a $233 million AAA tranche supported by 6% credit enhancement through subordinated notes.  Indicated spread is in the GoC+100 range which is great value for the investor.  The prime collateral (not to be confused with ‘alternative’ or ‘alt-a’ mortgages) was carefully curated, and those willing to do the work to understand the asset, should be well rewarded.  While it might seem counterintuitive as a competitor, I’m definitely rooting for MCAP on this one.  The development of an RMBS market in Canada would be a good thing.

Two of the main actors that the Bank of Canada likes to watch took centre stage last week.  Both inflation and U.S. monetary policy played lead roles, but our central bank continues to wait in the wings.

Headline inflation in Canada jumped to an annual rate of 2.2% in February.  That is up sharply from the 1.7% annual rate recorded in January and it puts inflation above the central bank’s target rate of 2.0%.  Even core inflation crept above 2.0%.  Statistics Canada uses the average of three different measures of inflation, to strip-out the influence of volatile components like energy and food, to determine its core number.

In the United States the Federal Reserve moved forward with its tightening policy, raising its trend setting rate by a quarter percentage point.  The U.S. Fed rate is now running between 1.50% and 1.75%.  The Fed is also projecting U.S. inflation will finally climb above 2.0%.  Most market watchers are predicting three more Fed hikes this year.  In addition, China has raised a key, short term, interest rate and the Bank of England has made it clear it intends to raise rates as soon as possible.  (Although the BoE held its rate steady at 0.5% at its Thursday setting.)

Either one of these events – rising domestic inflation or increasing U.S. interest rates – would normally be a cue for the Bank of Canada to boost its benchmark, overnight rate.  But these are not normal times and the BoC is not likely to rise to the bait, just yet.

Canada’s February inflation numbers largely reflect the strong economic pace at the end of last year.  The Bank has already made three rate increases, to head off inflationary pressures brought on by that growth.  Since then the economy has slowed, easing those underlying inflationary pressures.

The increase in the U.S. Fed rate comes amid a lot of uncertainty for Canada, chiefly: the fate of the NAFTA renegotiations and high household debt.  That debt is a key concern for the Bank.

One consequence of the strengthening American economy and the tightening monetary policy is an increase in bond rates.  This has led to interest rate increases here, without any action by the Bank of Canada.    U.S. government bonds serve as the benchmark for bond prices around the world – particularly in Canada.  The increases there have seen the yield on Government of Canada five-year bonds increase by more than half a percentage point in recent months.  That has essentially added a quarter-point to market interest rates here in Canada, affecting mortgages and other borrowing costs.

The BoC is very mindful of these externally driven increases.  Given that Canadian households, on average, are carrying $1.70 in debt for every dollar of disposable income, the Bank is being very cautious about raising rates too far, too fast to avoid pushing those households over the fiscal cliff.  By Jason Ellis, Senior Vice President and Managing Director, Capital Markets, First National Financial.

Consumer Banking and Investing Complaints Soar in 2017.

Consumer complaints against Canada’s banking and investment industry took a jump last year.  The annual report from the Ombudsman for Banking Services and Investments shows banking related complaints hit a five year high in 2017.

OBSI saw a 28% increase in the number of dissatisfied banking customers it heard from.  Overall, for both banking and investment, the body opened a total of 721 cases, a 13% increase over 2016.  Of those cases, 370 were banking related and involved credit cards, mortgages and personal accounts.

Of interest to brokers, there were 67 mortgage complaints, accounting for 18% of the total of all banking related cases – a reduction from 24% in 2016 and 27% in 2015.  Key problems included pre-payment penalties and incorrect or incomplete information.

The industry funded ombudsman closed 349 of the 370 banking related cases it opened.  Customers received monetary compensation in 79 – or less than a quarter – of those cases (23%).  Nine of the complaints were settled with non-monetary compensation.

Overall, the total pay-out to banking customers was $165,000 while investment complainants received a total of $2,427,000.  Two of the country’s biggest banks are not included in the OBSI annual report.  They have opted-out of the group and use a private, third-party, dispute resolution firm. By First National Financial.

Canadian Data Release: Existing home sales fall to a five-year low as anxious buyers remain on sidelines

·       Canadian existing home sales fell for the second consecutive month, down 6.5% m/m in February – or about half of the January slump. Sales are now 16.9% below last year’s level and near levels last seen in early-2013.

·       The decline was widespread with four out of five national markets below last year’s levels. On a month-over-month basis, declines were seen in three-quarters of markets with just two provinces, P.E.I. (+2.98%) and N.B. (+0.79%) seeing gains. B.C. led the declines, down 12.7%, with the GVA down 15.8% and Fraser Valley down 16.3%. Calgary (-8.6%), the GTA (-8.2%) and several GGH markets including Hamilton (-12.1%) and Oakville (-8.8%)  were also down sharply on the month.

·       On the other hand, new listings rose robustly, up 8.1% on the month. All provinces by Sask (-4.0%) and Alta. (-2.0%) saw gains, with the Atlantic Region (+17%), Ontario (12.4%) and B.C. (11.0%) experiencing gains of double-digits.

·       With sales and listings moving in opposite directions, the ratio of sales to new listings plummeted to 55% from 63.7% in the previous month. The current ratio suggests that the national market is by-and-large balanced with all but three provinces in the 40% to 60% range typically considered balanced-territory. Both P.E.I. (65.8%) and B.C. (61.9%) pulled back, down 27.6pp and 16.9pp, respectively, but they remain the tightest markets in Canada. On the other hand, Newfoundland & Labrador (32.4%) and Sask. (42.4%) round out the bottom of the table.

·       The average home price fell for the second month straight, down 2.8% in February, to an 18-month low. Six provinces exhibited gains, but this was offset by the declines in P.E.I. (-6.8%), B.C. (-1.9%), N.B. (-1.4%) and Ontario (-0.7%). Moreover, the decline in activity amongst the priciest markets acted to drag down the price given the compositional change.

·       On a year-over-year basis, the quality adjusted MLS home price index decelerated from 7.7% to 6.9% as acceleration in GVA (up 0.3pp to 16.9%), Fraser Valley (up 1.7pp to 24.1%), Vancouver Island (up 1.1pp to +20.7%) and Montreal (up 1.0pp to 6.2%) was offset by cool-off in GTA (down 2.0pp to 3.2%), Oakville (down 0.7pp to -1.9%), and Guelph (down 1.6pp to 9.3%).

Key Implications

·        While the give-back related to the pull-forward in activity experienced late last year, as buyers rushed to close deals prior to the updated B20 rules, appears to have been largely complete in January, the softness in sales nonetheless persisted this month. We believe that much of it has to do with lingering uncertainty, with additional regulations introduced in the B.C. budget adding further tensions, along with B20 impacts and rising rates.

·       Despite a less-than-stellar headline, there were some modestly encouraging details in the report. While sales did drop, the pace of decline eased considerably relative to January. New listings also perked up a little during the month, suggesting rising confidence on the part of sellers after recent B20-related volatility.

·       All in, we expect policy-related turbulence and higher rates to negatively impact sales in the near-term, before some stabilization in activity begins to take hold mid-year. We look for prices to drop, on average, this year, though balanced-market conditions across much of the country should mitigate the magnitude of the decline. We expect conditions to improve next year, with price growth returning to the market alongside a rise in transaction activity.

By TD Economics.  Read the full report Here.



Economic Highlights


Last week: Bank of Canada, what will they do next?

The major news last week, which you all know by now, is that the Bank of Canada decided to keep their overnight interest rate unchanged earlier in March. If you are keeping track, that’s an 0-for-2 on interest rate increases this year by the BoC. If you were wondering, that’s a surprisingly worse record than my March Madness bracket, which is currently 10-for-16.  Overall, the BoC decision to keep the interest rate level at 1.25% was interpreted as ‘small dovish’, meaning they are kind-of-sort-of-maybe being cautious with hikes going forward. The statement released had many plagiarized lines from their previous statements, so you would have to split hairs to find any sharp leanings one way or the other on their stance. Luckily, bank economists thrive on hair splitting.

In brief, the statement largely re-iterated their data dependent tone which means any further action taken by the BoC will be driven by hard stats on wages, growth and inflation.  Of the few changes to the statement, housing got a shout out as the BoC stated ‘time’ will be needed to judge the impact of new housing measures.   The Bank of Canada also noted their growing uncertainty on Canadian and global economic outlooks due to trade policies.

Trade policy was the topic du jour last week as the hypothetical trade war targeting Canada/Mexico was called off by the USA. The aluminum and steel tariffs which dominated the news wires a couple weeks ago also came with exemptions for Canada and Mexico, as the countries strived to get NAFTA worked out. The markets reacted favourably as the Loonie gained off the 8-month lows seen earlier last week. However, the CAD is still the worst performing major currency this year.

It’s worth mentioning that last week also had employment numbers for Canada. As the BoC is increasingly seen as being ‘data dependent’, the report was not much of a needle mover. Last Friday’s February job’s data was a rebound from the -88k loss in January, but still came in under expectations of 21,000 new jobs vs 15,400 actual.  The unemployment rate came in at 5.8%, which is a historical low.  All of this begs the question, “When will the next interest rate hike come?” Well, firing up the CANADA-OIS Model, the market is predicting a 30% chance of increase in April and only 47% chance in May. Yawn.

This week: BIS and CMB’s

The major news this week was probably missed by most as its ‘March Break’ for many and information seeking is at an all-time low on the beach. Thankfully, for all the beach goers and office dwellers alike, this week was relatively soft on the economic news front.

A report came out on Monday which swept across many a sleepy trade floor. The BIS or Bank for International Settlements, noted that Canada was among the three countries to be flagged for signs of a potential banking crisis. This was raised before I’m pretty sure, but the report highlighted our high aggregate credit-to-GDP and total debt-service ratios.  It’s also worth noting that the Bank of Canada disagrees with some aspects of the flag-raising, as they have us in the amber and not red category, which is nice.

More importantly for all the commercial mortgage people out there, the new 5 year CMB was priced this Wednesday.  The new 2.35% June 2023 was priced at 32.5 Bps over the GoC 5 year. Pricing was wider by 0.5bps compared to last December’s 5 year auction. However, the new bond was tighter by 12.5bps compared to last year’s March 5 year auction (+45 bps).  Let us know if you can figure out why. The auction size was only $5 billion which is lower than the last four auctions which were all $5.25 Billion. The program is now running $500 Million below pace, which can suggest higher issuance going forward. Overall, demand for the 5 year CMB was strong, which is a good thing if you’re in the business issuing mortgages.

Finally, Saturday brings us one of the most celebrated holidays of the year: St. Patrick’s Day.  The day where everyone wears green and can trace back their lineage to Ireland. I suggest you read up on the holiday, there is a storied history and many interesting facts I didn’t know that I was planning on mentioning. However, as I was writing this up I read something that awoke a moment of self-realization and enlightenment, something I assumed you achieved only after years of study in the Himalayas. A Romanian court just rejected a man’s claim that he is alive and that, legally, he is dead. Are we all in a simulation? Is this real life? I’ll need another pint of Guinness.  By First National Financial Analyst, Andrew Masliwec, Capital Markets.


Mortgage Interest Rates

No change to Prime lending rate currently at 3.45%.  Bank of Canada Benchmark Qualifying rate for mortgage approval is at 5.14%.  No change in fixed rates.  Deeper discounts are becoming available for variable rates making adjustable variable rate mortgages more attractive again.


Other Industry News & Insights

Canadian Consumer Debt Reaches New High

Canadian households’ credit market debt reached a record high in the second quarter of 2017. This is debt from mortgages, lines of credit, home equity lines of credit, car loans, credit cards, and other consumer credit.

In CMHC’s national Mortgage and Consumer Credit Trends report for the second quarter of 2017, we continue to follow key credit market indicators. Highlights from the report show that, for the second quarter of 2017:

•consumers’ average monthly obligations increased for all major credit products relative to the second quarter of 2016. In particular, average non-mortgage obligations reached their highest level compared to the same quarter in all previous years since 2013.

•the average credit card balance per consumer increased to $2,910. This was a 1.1% increase from a year earlier. Also, this indicator has been trending up since the second quarter of 2014.

There were more encouraging findings, as well:

•The share of mortgage loans of which payment was in arrears for 90 or more days was at its lowest in 5 years.

•The average mortgage arrears rate decreased in all age groups in the second quarter of 2017 compared to the same period in 2015 and 2016.

•The share of outstanding mortgage loans held by consumers with a very good or excellent credit score reached its highest point since this data became available in 2012.

Overall, the data shows that consumers have a lot of confidence in using credit to make large purchases. However, this dependence on credit, coupled with a declining household savings rate, is worrying. These factors, together, mean that households have a lower capacity to manage their debts.

By CMHC.  Read the full Consumer Trend Report here.


Adriaan Driessen

Mortgage Broker 

Dominion Lending Forest City Funding 10671

Cell:     519.777.9374

Fax:      519.518.1081

415 Wharncliffe Road South

London, ON, N6J 2M3

Adriaan Driessen

Sales Representative & Partner

PC275 Realty Brokerage

Cell:     519.777.9374

Fax:      519.518.1081

415 Wharncliffe Road South

London, ON, N6J 2M3