Industry & Market Highlights 

CMHC 2018 Consumer Survey

CMHC’s 2018 Consumer survey provides insights to what consumers are doing in the mortgage and real estate industry.

Link here.

MPC Mortgage Professionals Canada Q3 Housing Market Digest

Get third quarter housing market information for Canada and each region including resale market data, housing stats, employment trends and interests rates from the latest Housing Market Digests.

Link here.

CMHC issues forecast for next two years

The Canada Mortgage and Housing Corporation forecasts a balanced market in the GTA through 2020, with fewer sales expected because of rising interest rates.

“As much as sales are going to come down slightly, we’ll see house price growth be more or less in line with inflation, not the double-digit kind we were accustomed to a few months ago,” said CMHC’s Manager of Market Analysis (Toronto) Dana Senagama. “We’ll likely see higher price growth in the downtown cores of some major GTA areas, like Toronto, Markham and Mississauga, where there are higher concentrations of condominiums.”

Resales will also dip through the end of 2020, added Senagama, due to rising mortgage rates.

The region’s low-rise housing market is forecasted to see a downturn primarily because of land scarcity. However, in suburban areas, like Peel, Durham and York Regions, there will be higher concentrations of single-family detached sales and listings, and that will slow price appreciation.

“There’s not enough serviceable land out there for low-rise homes for singles and townhomes,” said Senagama. “The vast majority of units under construction—about 55,000 of 71,000 units—are high-rise, and that means there are only a finite number of resources, both in terms of machinery and skilled labour. That’s going to affect delivery; the logistics won’t allow it.

“In terms of new construction, the story is going to be more and more condos, and that seems to be where the push is both in terms of policy shift in government and higher house prices dictating demand towards high-rise construction because low-rise is out of reach for first-time buyers, and when the average price is over $1 million, it’s not an easy entry point for any buyer.”

Through this year, Vancouver has born witness to softening home prices across all market segments, and that trend is expected to continue, according to CMHC.

“Over the next two years, we expect the resale market will be characterized by lower sales, higher inventories of homes for sale, and lower home prices compared with the recent market highs in the last two years,” said Eric Bond, CMHC’s principal market analyst for Vancouver. “With the resale market,

expect housing starts to decline in the Vancouver CMA over the next two years, and the majority of the decline will be in the multi-family segment, and specifically in high-rise.” By Neil Sharma.

Interest rate signs point up

As expected the Bank of Canada has boosted its trend-setting overnight rate by a quarter of a percent to 1.75%.  It is the 5th hike since rate increases began in mid-2017.  The bank rate is now above 1.5% for the first time since December 2008.

The central bank has also signalled its intention to continue raising rates.  In the statement that accompanied the October 24th setting the Bank dropped the word “gradually” from its description of the pace of future increases.

That change has some market watchers forecasting that the BoC is planning a string of consecutive increases, which could start as early as December.  The Bank also says its rate will have to rise to its “neutral stance” in order to keep inflation in check.  Right now the Bank estimates “neutral” as being 3%.  A “neutral” rate is one that is neither stimulating nor suppressing the economy.

The central bank also addressed one of its key concerns about the Canadian economy: the imbalance in the household debt-to-income ratio.  It still stands at about 170%, or $1.70 of debt for every $1.00 of take-home pay.  However, the Bank says those imbalances – while still elevated – are edging lower as Canadians make adjustments to earlier interest rate increases and tougher mortgage rules.

The Bank expects consumer spending to remain strong, but says it will be supported by rising wages and confidence rather than low interest rates and debt.  By First National Financial.

Canadian Home Sales Weakened In October

Statistics released today by the Canadian Real Estate Association (CREA) show that national home sales declined for the second consecutive month in October, edging back by 1.6% month-over-month (m/m) and down 3.7% from year-ago levels. Year-over-year sales in October are now about in line with their 10-year monthly average (see chart below). Existing home sales activity has picked up from levels early this year, but it is still considerably below the boom days of 2016 and early-2017 before the foreign purchase tax was introduced in Ontario (in April 2017), the new OSFI rules were implemented (in January 2018), and Bank of Canada tightening gained momentum.

Home transactions last month declined in more than half of all local markets, led by Hamilton-Burlington, Montreal and Edmonton. Although activity did improve modestly in many markets, it was offset by a decline in sales elsewhere by a factor of two. On a year-over-year (y/y) basis, sales were down in slightly more than half of all local markets as lower sales in Greater Vancouver and the Fraser Valley more than offset the rise in sales in the Greater Toronto Area (GTA) and Montreal by a wide margin.

New Listings

The number of newly listed homes edged down 1.1% between September and October, led by the GTA, Calgary and Victoria. The decline in new supply among these markets more than offset an increase in new supply in Edmonton and Greater Vancouver.

As for the balance between sales and listings, the national sales-to-new listings ratio in October came in at 54.2% — close to September’s reading of 54.4% and its long-term average of 53.4%. Based on a comparison of the sales-to-new listings ratio with the long-term average, about two-thirds of all local markets were in balanced market territory in October 2018.

There were 5.3 months of unsold inventory on a national basis at the end of October 2018. While this remains in line with its long-term national average, the number of months of inventory is well above its long-term average in the Prairie provinces and in Newfoundland & Labrador, where downward pressure on home prices is likely to continue. By contrast, Ontario and Prince Edward Island are the two provinces where the measure remains more than one standard deviation below its long-term average pointing to stable prices or modest gains. In other provinces, the number of months of inventory is closer to its long-term average and suggests that sales and inventory are well balanced.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) was up 2.3% y/y in October 2018 with similar gains posted in each of the three previous months.

Following a well-established pattern, condo apartment units posted the largest y/y price gains in October (+7.4%), followed by townhouse/row units (+3.9%). By comparison, one-storey single-family homes posted a modest increase (+0.6%) while two-storey single-family home prices held steady.

Trends continue to vary widely among the 17 housing markets tracked by the MLS® HPI. In British Columbia, home price gains have been diminishing on a y/y basis (Greater Vancouver: +1%; Fraser Valley: +6.8%; Victoria +8.5%; elsewhere on Vancouver Island: +11.8%). Vancouver’s market balance is the weakest in almost six years, and prices for both condos and single-detached homes are now falling outright (the former were previously sturdy).

By contrast, MLS® HPI benchmark price comparisons are improving on a y/y basis among housing markets in the Greater Golden Horseshoe (GGH) region of Ontario that are tracked by the index. Home prices were up from year-ago levels in Guelph (+9.3%), Hamilton-Burlington (+6.8%), the Niagara Region (+6.3%), the GTA (+2.6%) and Oakville-Milton (+2.2%). While home prices in Barrie and District remain slightly below year-ago levels (-0.9%), declines there are shrinking; if current price momentum persists, home prices in December are on track to turn positive compared to December 2017.

Across the Prairies, benchmark home prices remained below year-ago levels in Calgary (-2.6%), Edmonton (-2.4%), Regina (-3.6%) and Saskatoon (-0.9%).

Home prices rose by 6.6% y/y in Ottawa (led by a 7.4% increase in two-storey single-family home prices), by 6.3% in Greater Montreal (driven by a 9.8% increase in townhouse/row unit prices) and by 4.2% in Greater Moncton (led by a 12.4% increase in townhouse/row unit prices) (see table below).

Bottom Line

Housing markets continue to adjust to regulatory and government tightening as well as to higher mortgage rates. The speculative frenzy has cooled, and multiple bidding situations are no longer commonplace in Toronto and surrounding areas. The housing markets in the GGH appear to have bottomed. However, prices still look soggy at the higher end of the single-family home market.

The slowdown in housing markets in the Lower Mainland of BC accelerated last month as the sector continues to reverberate from provincial actions to dampen activity, as well as the broader regulatory changes and higher interest rates.

We are likely in store for a prolonged period of modest housing gains in the Greater Golden Horseshoe, stability or softening in British Columbia and further weakening in the Prairies, Albert, and Newfoundland & Labrador.

Montreal and Ottawa remain the areas of relative strength among the biggest cities. Sales dipped in both cities month-over-month in October, but they are both up a solid 11% from a year ago. In Montreal, we’ve seen some evidence that increased foreign buying activity is mixing with strong domestic fundamentals, pushing benchmark prices up 6.3% y/y. Ottawa has been boosted by a wave a federal government spending and hiring, with price growth similarly running at 6.6% y/y, though now softening from its recent high.

The Bank of Canada is expected to continue gradually tightening monetary policy. Residential mortgage credit growth has slowed to a 17-year low and, for the first time in a decade, borrowers will be refinancing 5-year fixed rate mortgages at higher interest rates.

Bank Of Canada Reports Dramatic Drop in Highly Indebted Borrowers

In a separate report, the Bank of Canada announced this week that the quality of new mortgage lending in Canada had improved markedly owing to tighter mortgage qualification rules and higher interest rates, both of which have pushed marginal buyers out of the market. This was Ottawa’s intention all along in its multiple initiatives to dampen the housing market over the past several years.

The share of new mortgages going to highly indebted borrowers–those with loan-to-income ratios of above 450%–dropped to 13% in the second quarter of this year, down from more than 18% last year. Hence, the Bank believes that there is strengthening resiliency in the financial system, aided in part by an improving economy that has prompted five rate increases since the middle of last year.

The Bank of Canada report on the mortgage market found that not only are the number of new mortgage borrowers declining, but the riskiest ones are being weeded out. The number of new uninsured borrowers considered highly-indebted fell by 39% in the second quarter from year-ago levels, with Toronto posting the most significant declines.

The Bank also commented that the tighter regulations have had one side effect–shifting market share away from the country’s six biggest banks to other institutions such as credit unions and private lenders, which they see as a potential new source of risk. The overall riskiness of new mortgages has decreased “because the proportion of risky borrowers has declined across cities,” the report found. “As well, the regional composition has shifted, with a somewhat larger share of new mortgages recently coming from areas outside Toronto and Vancouver.”

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

 

Economic Highlights

CMHC issues forecast for next two years

The Canada Mortgage and Housing Corporation forecasts a balanced market in the GTA through 2020, with fewer sales expected because of rising interest rates.

“As much as sales are going to come down slightly, we’ll see house price growth be more or less in line with inflation, not the double-digit kind we were accustomed to a few months ago,” said CMHC’s Manager of Market Analysis (Toronto) Dana Senagama. “We’ll likely see higher price growth in the downtown cores of some major GTA areas, like Toronto, Markham and Mississauga, where there are higher concentrations of condominiums.”

Resales will also dip through the end of 2020, added Senagama, due to rising mortgage rates.

The region’s low-rise housing market is forecasted to see a downturn primarily because of land scarcity. However, in suburban areas, like Peel, Durham and York Regions, there will be higher concentrations of single-family detached sales and listings, and that will slow price appreciation.

“There’s not enough serviceable land out there for low-rise homes for singles and townhomes,” said Senagama. “The vast majority of units under construction—about 55,000 of 71,000 units—are high-rise, and that means there are only a finite number of resources, both in terms of machinery and skilled labour. That’s going to affect delivery; the logistics won’t allow it.

“In terms of new construction, the story is going to be more and more condos, and that seems to be where the push is both in terms of policy shift in government and higher house prices dictating demand towards high-rise construction because low-rise is out of reach for first-time buyers, and when the average price is over $1 million, it’s not an easy entry point for any buyer.”

Through this year, Vancouver has born witness to softening home prices across all market segments, and that trend is expected to continue, according to CMHC.

“Over the next two years, we expect the resale market will be characterized by lower sales, higher inventories of homes for sale, and lower home prices compared with the recent market highs in the last two years,” said Eric Bond, CMHC’s principal market analyst for Vancouver. “With the resale market,

expect housing starts to decline in the Vancouver CMA over the next two years, and the majority of the decline will be in the multi-family segment, and specifically in high-rise.”  By Neil Sharma

Mortgage Interest Rates

Prime lending rate increased to 3.95%.  Bank of Canada Benchmark Qualifying rate for mortgage approval remains at 5.34%.  Fixed rates are slowly increasing.  Deep discounts are offered by some lenders for variable rates making adjustable variable rate mortgages very attractive.

 

Terms	Posted Rates	Payment   Per $100k	Our Rates	Payment   Per $100k	Savings
6 Months	3.34%	$490.86	3.30%	$488.77	$2.09
1 Year	3.59%	$504.03	3.49%	$490.86	$13.17
2 Years	3.74%	$512.02	3.54%	$496.11	$15.91
3 Years	3.89%	$520.07	3.65%	$501.38	$18.69
4 Years	3.94%	$522.77	3.64%	$506.69	$16.08
5 Years	5.59%	$615.64	3.50%	$499.27	$116.37
7 Years	5.80%	$627.97	4.04%	$528.19	$99.78
10 Years	6.10%	$645.76	4.14%	$533.64	$112.13
Variable	2.95%	$470.68	2.85%	$465.58	$5.10
Prime Rate	3.95%
Please Note: Payment per $100K and possible savings shown above are based on a 25-year ammortization. Rates are subject to change without notice and the rate you receive may vary depending on your personal financial situation. *OAC E&OE. Please reply to this email and I will be happy to provide you with greater detail and determine the best rate available for you.

 

Please Note: Payment per $100K and possible savings shown above are based on a 25-year ammortization. Rates are subject to change without notice and the rate you receive may vary depending on your personal financial situation. *OAC E&OE. Please reply to this email and I will be happy to provide you with greater detail and determine the best rate available for you.

This edition of the Weekly Rate Minder shows the latest rates available for Canadian mortgages. At Dominion Lending Centres, we work on your behalf to find the best possible mortgage to suit your needs.

Explore mortgage scenarios using helpful calculators on my website: http://www.iMortgageBroker.ca

Other Industry News & Insights

Roundup of the latest mortgage and housing news.

From Mortgage Professionals Canada.

•Toronto rental boom drives record-breaking sales in apartments (BNN Bloomberg)

•Homeowners worried about paying down debt as interest rates go up (CBC)

•The average detached Vancouver house for $2.8 million? An analyst sees it happening, and maybe sooner than you think (Livabl)

•Majority of first-time home buyers maxed out budgets: CMHC (BNN Bloomberg)

•A rise in Canadian home listings is finally giving buyers some choice (Livabl)

•First half of October brings rising home sales to the GTA: Report (Livabl)

•Home search giant Zillow adds Canadian listings to online marketplace (CBC)

•B.C. government moves ahead with speculation tax on vacant homes (CBC)

•Canadian home prices no longer among the fastest growing in the world: Knight Frank (Livabl)

•National Housing Market Flat in September, CREA Data Shows (Canadian Mortgage Trends)

•85% of Canadians won’t grow pot at home as property value concerns weigh, survey finds (BNN Bloomberg)

•Forget home sales — this metric foreshadows where the Canadian housing market is headed (Livabl)

•52% Of Canadians Less Likely To Buy Homes Where Legal Pot Was Grown: Zoocasa Study (Huffington Post)

There is never a better time than now for a free mortgage check-up.  It makes sense to revisit your mortgage and ensure it still meets your needs and performs optimally.  Perhaps you’ve been thinking about refinancing to consolidate debt, purchasing a rental or vacation property, or simply want to know you have the best deal?  Whatever your needs, we can evaluate your situation and help you determine what’s the right and best mortgage for you.

Adriaan Driessen
Mortgage Broker
Dominion Lending Forest City Funding 10671
Cell:     519.777.9374
Fax:      519.518.1081
riebro@me.com
www.iMortgageBroker.ca
415 Wharncliffe Road South
London, ON, N6J 2M3

Lori Richards Kovac
Mortgage Agent & Administrator
Dominion Lending Forest City Funding 10671
Cell:     519.852.7116
Fax:      519.518.1081
loriakovac@icloud.com
415 Wharncliffe Road South
London, ON, N6J 2M3

Adriaan Driessen
Sales Representative & Senior Partner
PC275 Realty Brokerage
Cell:     519.777.9374
Fax:      519.518.1081
adriaan@pc275.com
www.PC275.com
415 Wharncliffe Road South
London, ON, N6J 2M3

WEEKLY RESIDENTIAL  MARKET UPDATE 

Industry & Market Highlights 

CMHC releases Sept. housing starts data

The annual pace of Canadian housing starts fell to their lowest level in nearly two years in September.

Canada Mortgage and Housing Corp. says the seasonally adjusted annual rate came in at 188,683 units last month, down from 198,843 in August.

Thomson Reuters Eikon says economists had expected an annual rate of 210,000 for September.

September marks the third straight monthly decline.

The slowdown in the pace of housing starts comes amid rising interest rates from the Bank of Canada, and more restrictive mortgage rules.

“The September housing starts report fits with the relative calm and return to normality in sales, market balance and price growth that we are seeing across most of the country this year, in particular Toronto, following speculative excesses in Southern Ontario earlier last year and a moderate correction in response to policy measures earlier this year,” wrote Sal Guatieri, a senior economist with BMO Capital Markets, in a note.

“Demand continues to be supported by the fastest population growth in 27 years and new millennial-led households. A calmer housing market is just what the doctor ordered, and won’t discourage the Bank of Canada from raising rates on Oct. 24.”

CMHC says the pace of urban starts fell by 5.9 per cent to 175,653 units. The slowdown was dragged down by an 8.9 per cent drop to 122,656 units in urban multiple-unit projects such as condos, apartments and townhouses. Single-detached urban starts increased by two per cent to 52,997.

Rural starts were estimated at a seasonally adjusted annual rate of 13,030 units, while the six-month moving average of the monthly seasonally adjusted annual rates was 207,768 for September, down from 213,966 in August.

British Columbia led the declines with a drop of 43.3 per cent due to stiffer mortgage rules and growing lack of affordability, particularly in the Greater Vancouver area. Alberta also saw a drop of 34.8 per cent, amid a weakening in the oil-producing economies.

Meanwhile, Ontario housing starts increased 21.3 per cent, led by Toronto condos and Quebec was up 15.4 per cent.  By The Canadian Press.

First-time homebuyers are maxed out, but confident

Canadians are not holding back when it comes to buying their first home.  The annual mortgage consumer study by Canada Mortgage and Housing Corporation finds that 85% of first-time buyers are maxing-out their home-buying budgets.

The CMHC study indicates that affordability is the most important factor for both first-timers and repeat buyers, ahead of things like the condition of the home, the neighbourhood and distance to work.

More than half of recent homebuyers say other key concerns include unforeseen costs, paying too much for their property and rising interest rates.  Still, 76% of first-time buyers are confident they will be able to meet their mortgage payments.  Sixty percent of first-time buyers and 69% of repeat buyers claim to have sufficient assets, such as investments or other properties, which they could use to fund their mortgage if they needed to.

There is some support for this consumer confidence.  Recent reports by the credit monitoring firms Equifax and TransUnion indicate the growth of consumer debt (non-mortgage) is slowing and delinquency rates are declining.  At the same time the Office of the Superintendent of Financial Institutions reports the quality of mortgage loans is improving.

Rising interest rates, foreign buyer taxes and tougher mortgage qualification rules appear to be cooling real estate sales and prices across the country but the Canadian Real Estate Association is maintaining a positive forecast.

The Bank of Canada is expected to bump-up its benchmark interest rate by a quarter-point – to 1.75% – on Wednesday.  By First National Financial.

The temperature may be dropping, but Montreal is heating up

Never mind Vancouver.  Do not bother with Toronto.  Canada’s hot housing market du jour is Montreal.

While Toronto and Vancouver have been getting all the attention as the busiest, most expensive and most volatile markets in the country, Montreal has been on a sales and price appreciation roll for 43 consecutive months.

In September, Montreal home sales hit a nine year high; 3,220 units (led by 1,206 condominium transactions), up 8% compared to a year ago.  Year-over-year prices climbed 7% for single-family homes ($336,000), 6% for plexes ($504,000) and 4% for condos ($263,000).

In Vancouver, year-over-year sales declined from February through August.  In Toronto, gains have been modest.  September sales were up just 1.9% compared to 2017.  Prices were up about 2%.

High prices, rising interest rates and foreign buyer taxes appear to be weighing down the two top markets.  Montreal, meanwhile, is enjoying the benefits of good immigration, economic growth, consumer confidence and public infrastructure projects, according to the local real estate board.  By First National Financial. 

 

Economic Highlights

 

Interest rate rise “a done deal” but impact is showing says TD

There is little dispute among economists that the Bank of Canada will increase interest rates again this week.

Wednesday’s hike will be accompanied by explanation as to why this is necessary in the context of better-than-expected economic growth in the third quarter and core inflation is on target.

TD Economics senior economist Fotios Raptis says the hike is “a done deal” but notes in a report that the impact of rising interest rates is starting to bite.

He highlights weaker retail and consumer spending data with nominal spending declining in Saskatchewan, Quebec, Alberta, and British Columbia.

National home sales were also weaker in September and growth in home prices was weaker. TD is forecasting a slower pace of home activity in the months ahead as mortgage costs and affordability weigh.

Headline inflation, Raptis points out, was also down sharply in September with the CPI rising 2.2% year-over-year, well below the expected 2.7%.

However, with a strong business outlook, tight labour market, and rising wages, he believes that the BoC has reason to believe the economy can withstand another rate rise.

Rate rises will remain gradual

Meanwhile, CIBC Economics’ Avery Shenfeld says the BoC will remain cautious on rate rises following this week’s near-certain hike.

Apart from the NAFTA-replacement USMCA trade deal, not much has changed since the central bank last spoke of gradual rate rises.

Although Shenfeld expects Governor Poloz to avoid too much forward guidance although there should be positive talk regarding growth in 2018 and 2019.  By Steve Randall.

Did the new USMCA effect rates?

It’s been rough week for bonds. Since we closed the books last Friday, 2 year yields are up 10 basis points to 2.31%, 5 year yields are up 15 basis points to 2.48%, and 10 year yields are up 16 basis points to 2.58%.

Of course the question isn’t where rates are, but rather WHY are rates here?  The most obvious answer was Canada’s agreement to join the US-Mexico trade agreement (now the “USMCA”) last weekend.  Canada made some key concessions on dairy but the US agreed to protect Canada from potential tariffs on autos.  The reduction of uncertainty and de-escalation of a possible trade war was bullish for Canadian economic growth expectations and rates move higher.  The initial down trade (prices) was highlighted by momentum/negative gamma type selling (or put another way, more sellers than buyers).  Easy peasy.

The selling is presently being punctuated by a stronger than expected jobs report this morning.  Canadian employment popped by 63,300 jobs in September, more than reversing the drop reported last month.  The unemployment rate dropped a tick to 5.9%.  We also can’t underestimate the impact of the new NHL season kicking off with a potentially historic run in the cards for the Leafs.  With the removal of trade overhang (and two goals by Auston Matthews in the season opener) the market has now priced in two 25 basis point hikes by the BoC by January.

Commercial Break

We’ll pause here to highlight First National’s excellent early rate lock program for all your commercial mortgage borrowing needs.  If you’ve already hedged your fixed rate borrowing, congratulations.  If you haven’t, it’s not too late.  Help me help you.  Call your favourite First National underwriter, lock-in, and sleep better!  Two sure things in life are the benefits of sunscreen and hedging your fixed rate mortgages.  By Jason Ellis, Senior Vice President and Managing Director, Capital Markets, First National Financial.

Mortgage Interest Rates

Prime lending rate is 3.7%.  Bank of Canada Benchmark Qualifying rate for mortgage approval is at 5.34%.  Fixed rate increased across the board on average 25 basis points.  Deep discounts are offered by some lenders for variable rates making adjustable variable rate mortgages very attractive.

Terms	Posted Rates	Payment   Per $100k	Our Rates	Payment   Per $100k	Savings
6 Months	3.14%	$480.46	3.10%	$478.39	$2.07
1 Year	3.34%	$490.86	3.29%	$488.25	$2.61
2 Years	3.74%	$512.02	3.44%	$496.11	$15.91
3 Years	3.89%	$520.07	3.54%	$501.38	$18.69
4 Years	3.94%	$522.77	3.64%	$506.69	$16.08
5 Years	5.59%	$615.64	3.54%	$493.48	$122.16
7 Years	5.80%	$627.97	4.04%	$528.19	$99.78
10 Years	6.10%	$645.76	4.14%	$533.64	$112.13
Variable	2.70%	$457.99	2.70%	$457.99	$0.00
Prime Rate	3.70%
Please Note: Payment per $100K and possible savings shown above are based on a 25-year ammortization. Rates are subject to change without notice and the rate you receive may vary depending on your personal financial situation. *OAC E&OE. Please reply to this email and I will be happy to provide you with greater detail and determine the best rate available for you.

This edition of the Weekly Rate Minder shows the latest rates available for Canadian mortgages. At Dominion Lending Centres, we work on your behalf to find the best possible mortgage to suit your needs. Explore mortgage scenarios using helpful calculators on my website: http://www.iMortgageBroker.ca

 

 

WEEKLY RESIDENTIAL  MARKET UPDATE 

Industry & Market Highlights 

The short break in interest rate increases may be over

Over the past few months rates have held steady and gave home owners a reprieve in the increasing mortgage interest rate market.  After the official announcement of a trilateral trade agreement with Canada, the U.S. and Mexico, and the US Federal Reserve Bank raising interest Rates – most Economists agree that the Bank of Canada is next to make a rate announcement, and we may start to see some slow, but steady interest rate increases again. Of course no one can say for sure, but the signs seem to point in that direction. If you’re feeling nervous about rates increasing contact your broker to review your options to look out for your best interest.

If you are currently in a variable rate mortgage with a lower risk tolerance, this may be the time to consider locking in.  If you have a high risk tolerance and are used to the ebb and flow of markets, it’s business as usual. 

Increases in the U.S. and the potential ripple effect

Market watchers who are forecasting another Bank of Canada rate increase next month have been handed more backing for their prediction.

Last week the U.S. Federal Reserve pushed up its policy rate for the eighth time since December of 2015.  The Fed increased its benchmark rate by 25 basis points (a quarter of a percent) to a range of 2% to 2.25%, the same level it was at in April 2008, before the height of the global financial crisis.  The U.S. central bank also made it clear it intends to continue along that path.

The Fed says it expects one more increase this year and is projecting at least three hikes in 2019.  It has also changed some of the language in the accompanying statement, eliminating the phrase “the stance of monetary policy remains accommodative.”

The effects of U.S. rate increases routinely ripple across the border influencing bond rates and the value of the Canadian dollar.  A declining loonie could trigger further inflation, as the cost of imported goods increase.

The Bank of Canada is already facing an inflation rate that is running on the high side of its 1% to 3% target range.  Unemployment is at generationally low levels in Canada, and working people exercising their spending power can also fuel inflation.

Given these pressures and the BoC’s stated desire to normalize interest rates another quarter-point increase seems very likely on October 24th.  By First National Financial.

SOLD Date Coming to Realtor.ca

CREA’s Board of Directors has voted to add sold and historical data to the property listings on Realtor.ca without the need for a login.

In a message to real estate boards across the country, CREA says the move comes “in order to meet consumer demand and at the request of Realtors and boards.”

It says, “In addition to responding to requests from members, this will ensure we continue to offer leading edge services on the best real estate website in Canada.”

A Competition Tribunal decision in July 2016 found that by not including sold and other data in its VOW feed to members, TREB had engaged in anti-competitive acts. An appeal court upheld the decision and on Aug. 23 of this year, the Supreme Court of Canada announced that it would not hear TREB’s appeal. CREA supported TREB at the tribunal and had intervenor status in the proceedings.

TREB is now supplying the disputed data to its member VOWs.

CREA media relations officer Pierre Leduc says that before the sold data can be displayed on Realtor.ca, each real estate board must request that the information be added. CREA will then work with the boards, the provincial associations and the regulators to ensure that it complies with all laws and regulations.

“We’ll have to check with the boards to see what historic sold data they have access to, and how far back that data will go,” says Leduc.

Only historic sold prices will be posted and not pending solds, he says. Pending solds were part of the Competition Tribunal order for VOWs, but consumers and Realtors are concerned about privacy issues on deals that have yet to close.

Leduc says CREA hopes to have the sold data rolled out on Realtor.ca as soon as possible.  By REMonline.com

CREA: National home sales post modest sales gain

Growth in Canada’s housing market in August was modest as the effects of the mortgage stress test continues, although is beginning to fade.

The latest sales data and forecast from the Canadian Real Estate Association released Monday shows a small rise for sales in August, a 0.9% increase month-over-month.

Actual (not seasonally-adjusted) activity was down 3.8% year-over-year while prices nationally increased 1% from a year earlier. Sales activity is weaker than most months over the last 4 years.

“The new stress-test on mortgage applicants implemented earlier this year continues to weigh on national home sales,” said CREA President Barb Sukkau. “The degree to which the stress-test continues to sideline home buyers varies depending on location, housing type and price range.”

There were 5.2 months of inventory on a national basis at the end of August 2018, right in line with the long-term average for the measure.

The Aggregate Composite MLS® Home Price Index (MLS® HPI) was up 2.5% y-o-y in August 2018.

The largest y-o-y price gains in August were for apartments (+9.5%), followed by townhouse/row units (+4.3%). But prices for one-storey and two-storey single family homes were little changed on a y-o-y basis in August (+0.4% and -0.4% respectively).

Where the gains were

Around half of all local markets recorded an increase in sales from July to August, led again by the GTA.

TD Economics’ analysis of the data shows the largest gains were in Toronto (+2.2%), Montreal (+2.8%) and Edmonton (+5.4%) while sales were lower in Halifax (-8.2%), London (-1.2%) and Winnipeg (-1.0%).

Activity picked up in several markets in B.C. including 2.9% in Vancouver – the first gain this year – along with the Fraser Valley (+0.6%), Okanagan-Mainline (+1.7%), and Victoria (+2.7%).

“Our view is that sales and prices will continue to grow, but that rising borrowing costs will restrain the pace of expansion. This is particularly true for more expensive markets in Ontario and B.C. where affordability pressures are acute,” TD economist Rishi Sondhi says.

Activity had fallen too far

In his assessment of the CREA data, RBC Economics’ senior economist Robert Hogue says that the figures show that the recent drop in activity was part of the market finding its normal level following B-20.

“The fact that home resales snapped back by 8.1% in the four months since reaching a seven-year low in April tells us that activity had fallen too far. This is typical following a major policy change that pulled some activity forward,” he said.

He added that the latest figures reflect a new, slower phase of recovery.  By Steve Randall.

Decreasing certainty for an increase in rates

Market watchers have now fixed their gaze on October 24th as the most likely date for the next rate move by the Bank of Canada.  As of the setting last week, that saw no change, the betting was about 75% in favour of a hike in October, but that certainty seems to be slipping.

The latest employment numbers from Statistics Canada will likely have the Bank carefully considering any move toward an increase.  The August unemployment rate popped-up 0.2 of a percentage point to 6.0%, on a net loss of 51,600 jobs in August.

The August jobs report is sending mixed messages though.  Most of the losses came in part-time positions, which fell by 92,000.  Full-time jobs actually increased by 40,400.  Year-over-year employment in Canada is up 0.9%.  While 155,000 part-time positions have disappeared, there has been a gain of 326,000 full-time jobs for a net gain of 171,000 positions.

Another factor that could hold back an October rate increase is a softening of wage growth.  The rate of increase in hourly pay slowed to 2.9% in August, down from 3.2% – year-over-year – in July and a 3.6% in June.

The bigger issue, though, remains the NAFTA re-negotiations.  Uncertainty about the outcome of the talks is a drag on the Canadian economy.  It is hampering the Bank of Canada’s efforts to move economic growth away from debt-fueled consumer spending to business investment and export growth.

The Bank continues to use words like cautious and gradual to describe its approach and with inflation remaining well inside the Bank’s target range there is no urgency for a rate increase.  By First National Financial. 

Canadian Mortgage Credit Growth Grinds To A Halt, Worst Growth In 18 Years

The Canadian real estate market is slowing down, and it’s hitting mortgages. Bank of Canada (BoC) numbers show mortgage credit grinded to a halt in July. The annual rate of mortgage growth fell to the lowest level in nearly 18 years, and is set up to go lower.

Canadians Owe Over $1.52 Trillion In Mortgage Debt

Canadians set a new dollar record for outstanding mortgage credit at institutional lenders. The outstanding balance stood at $1.52 trillion in July, up $4.95 billion from the month before. Households sent the total $54.22 billion higher than the same time last year. On the upside, lenders are primed to receive a whole lot of interest payments. On the other  hand, if we look closely – we see the rate of growth is actually shrinking very quickly.

Canadian Mortgage Credit Falls To Lowest Growth Since July 2001

The growth of mortgage credit fell to its lowest levels in almost two decades. The $54.22 billion increase from last year comes in at just 3.7% growth. That still sounds pretty decent, until you realize it’s only 0.68% in real terms. The annual pace of growth is now the lowest it’s been since July 2001. For historical context, a then new artist named Shaggy topped the charts with It Wasn’t Me when mortgage growth was last this low. Of course most of you have no idea who he is, so ask your mom for the best explanation. Then tell her mortgage levels fell to Shaggy-era levels of growth, and email us her take.

Mortgage Growth Likely To Head Lower

Looking at the short-term trend, these numbers will likely come in lower for at least a few more months. Annualizing growth over the past 3 months, we get just 1.7% – lower than inflation. This means if the annual growth rate came in at the same pace as the past 3 months, the rate would fall to 1.7%. Until this number rises above the annual pace for a while, expect the rate to continue to fall.

Canada is coming off of record sales years, and interest rates are quickly climbing. That’s dropping demand for new loans, and tightening credit requirements. It shouldn’t be a huge surprise that mortgage growth is on the decline, and likely to slide further.  By betterdwelling.com

Reviewing the Stress Test and B-20 Lending rules hindering the Canadian Housing Market

Back in 2013, the B-20 rules as underwriting guidelines for residential mortgages came into effect. The rules were put in place as a direct response to the financial issues in the United States caused by “poor mortgage lending practices” (mortgagebrokernews.ca).

Now, 5 years after these rules have come into effect, Canada’s housing market is said to be facing affordability issues. It is widely believed that it is become increasingly more difficult for first time home buyers to purchase a property. To deal with the affordability issues and the stress test, some young people are borrowing from parents to help with a down payment.

Recently, it has been reported that there is a decrease in mortgage originations from the Millennial and Generation Z cohort and a rise amongst the Pre-War Generation (those between the ages of 73-93). Findings have shown an increase of mortgage originations of 63% in the last quarter from the Pre-War Generation (theglobeandmail.com).

This begs the questions: are those who are trying to get into the housing market seeking help from their grandparents and asking them to take out mortgages for their grandchildren? Is the current generation asking and receiving help from their aging grandparents? If so, what else are they willing to do to achieve their goal of home ownership

The Conservative party as made a motion to the House of Commons to institute a subcommittee to review the stress test and B-20 rules to determine if it is helping or hindering the Canadian housing market.  By CMBA, Canadian Mortgage Brokers Association.

 

Economic Highlights

 

Canadian Jobs Plunge in August As Unemployment Rises

In a real shocker, Statistics Canada announced this morning that employment dropped by 51,600, retracing most of the 54,100 gain in July. Economists had been expecting a much stronger number, but the Labour Force Survey is notoriously volatile, and job gains continue to average 14,000 per month over the past year. Full-time employment growth has run at about twice the pace at an average monthly increase of 27,000. Labour markets remain very tight across the country.

The unemployment rate returned to its June level of 6.0%, ticking up from 5.8% in July. July’s jobless figure matched a more than four-decade klow. At 6.0%, the unemployment rate is 0.2 percentage points below the level one year ago.

All of the job loss last month was in part-time work, down 92,000, while full-time employment rose by 40,400. The strength in full-time jobs is a sign that the labour market is stronger than the headline numbers for August suggest.

On a year-over-year basis, employment grew by 172,000 or 0.9%. Full-time employment increased (+326,000 or +2.2%), while the number of people working part-time declined (-154,000 or -4.3%). Over the same period, total hours worked were up 1.6%.

Statistics Canada commented that monthly shifts in part-time employment could result from movements between part-time and full-time work, the flux of younger and older workers in and out of the labour force, changes in employment in industries where part-time work is relatively common, or deviations from typical seasonal patterns.

By industry, the decline was broadly based and included a loss of 16,400 jobs in construction and 22,100 in the professional services sector. The number of people working in wholesale and retail trade declined by 20,000, driven by Quebec and Ontario.

Job losses were huge in Ontario as employment increased in Alberta and Manitoba. Employment was little changed in the other provinces.

After two consecutive monthly increases, employment in Ontario fell by 80,000 in August, which was the province’s most significant job loss since 2009. All of the decline was in part-time work. On a year-over-year basis, Ontario employment increased by 79,000 (+1.1%). The Ontario unemployment rate rose 0.3 percentage points in August, to 5.7% (see table below).

In Ontario, full-time employment held steady compared with the previous month, with year-over-year gains totalling 172,000 (+3.0%). Part-time jobs fell by 80,000 in August, following a roughly equivalent rise in July. In the 12 months to August, part-time work decreased by 93,000 (-6.7%).

Employment in Alberta rose by 16,000, and the unemployment rate remained at 6.7% as more people participated in the labour market. Compared with August 2017, employment grew by 53,000 (+2.3%), mostly in full-time work.

In Manitoba, employment rose by 2,600, driven by gains in part-time work, and the unemployment rate was 5.8%. On a year-over-year basis, employment in the province was unchanged, while the unemployment rate increased 0.8 percentage points as more people looked for work.

In British Columbia, employment edged up and the unemployment rate increased 0.3 percentage points to 5.3% as more people searched for work. Compared with a year earlier, employment was virtually unchanged.

Wage gains decelerated to their lowest level this year as average hourly earnings were up 2.9% y/y, the slowest pace since December.

There is no real urgency for the Bank of Canada to hike interest rates as the economy shows little risk of overheating. So far in 2018, the economy has shed 14,600 jobs, but the number masks a 97,300 gain in full-time work. Part-time employment is down by 111,900 this year.

The economy is running at or near full-employment as job vacancies continue to mount. If a NAFTA agreement comes to fruition, it is still likely the Bank of Canada will raise interest rates once again at the policy meeting in October. The Bank of Canada guided in that direction yesterday when Senior Deputy Governor Carolyn Wilkins said the central bank’s top officials debated this week whether to accelerate the pace of potential interest rate hikes, before finally choosing to stick to their current “gradual” path.  

By Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres.

WEEKLY RESIDENTIAL  MARKET UPDATE 

Industry & Market Highlights 

Market improvements as expected

Improvements in the housing market that were forecast for the second half of this year appear to be materializing.

The July numbers from the Canadian Real Estate Association show a sales increase of 1.9% in July over June.  June was up more than 4% from May.  Year-over-year, however, July sales were off 1.3%, pulled down by fewer sales in major urban centres in British Columbia.  The decline in B.C. was offset by increases in the Greater Toronto Area, which saw an 18.6% jump from a year ago.

Home prices were down compared to June, but up modestly from a year ago.  The MLS Home Price Index recorded a 2.1% increase while the national average price was up by 1%.  Condominium apartments and townhouses led the way with increases of 10.1% and 4.7% respectively.  One and two-storey single family homes saw price declines of 0.7% and 1.5% respectively.

The average price for a home in Canada stands at $481,500.  With Toronto and Vancouver taken out, the average drops to $383,000.

In the GTA home prices dipped 0.6%.  In B.C. price increases slowed but still posted remarkable gains well into the double digits in some areas. (GVA: +6.7%; Fraser Valley: +13.8%; Victoria: 8.2%; elsewhere on Vancouver Island: +13.7%)

Calgary and Edmonton recorded small year-over-year declines of 1.7% and 1.3%.  Montreal posted a moderate increase of 5.7%.

The number of new listings was down by 1.2% putting the sales-to-new listings ratio at 55.9%.  The ratio’s long-term average is 53.4%.  By First National Financial.

Stats indicate adjustment to B-20

Real estate sales in Canada are trending upward and it’s likely an indication that consumers have come to grips with B-20.

Canadian Real Estate Association sales statistics for July show  national home sales rose 1.9% over the previous month—and according to REMAX’s regional executive vice president, that means buyers have finally adjusted to stricter qualification rules.

“It certainly looks like consumers are slowly becoming accustomed to the B-20 mortgage qualification guidelines,” said Elton Ash. “It’s occurring a little later than we thought, and that seems to be the reason why inventory levels are dropping in the Toronto area.”

While a tough pill to swallow for many, Canadians are realizing that in order to become homeowners, they’ll have to settle for less house.

“What’s occurring is they’re readjusting their expectations,” he said. “In other words, where they may have qualified previously to purchase an $850,000 home, they’re now looking at a $750,000 home. It’s not that they’re seeking secondary financing—because the only lenders not bound by B-20 are credit unions and private lenders—it’s reducing their overall expectations of what they can afford in the type of home they’re looking for.”

The real estate market, it would appear, has finally balanced, and Ash expects that to last through the first quarter of 2019. He added that last year’s record sales volume and price increases were an anomaly that people should be cognizant about before making drawing comparisons.

“When you measure against a record-setting year on a year-over-year basis, what appears to be negative is actually positive,” said Ash. “The whole B-20 mortgage qualification stress test was brought in to slow the market, and that is certainly what’s occurring, and what we’re getting into is more traditional market situation where it’s balanced overall. The days on market for homes are stretching out to what they were, and multiple offer situations have disappeared across the board, although in Toronto proper they occur in certain situations.”  By Neil Sharma.

CMHC introduces enhancements that provide flexibility for self-employed borrowers effective Oct. 1, 2018

I’m sure you’ve heard by now the CMHC has made some changes to how self-employed Canadians can access financing. The CMHC have kindly provided some details on the new guidelines:

Approximately 15% of Canadians are self-employed and may have difficulty accessing financing to buy a home, since their income sources may vary or be less predictable than employed borrowers. In line with the National Housing Strategy commitment to address the housing needs of Canadians along the housing continuum, CMHC is pleased to introduce enhancements that provide increased flexibility for satisfying income and employment requirements for self-employed borrowers.

 

The following table outlines enhancements to CMHC’s guidelines, which apply to transactional and portfolio insurance (1-4 unit residential properties):  Review it HERE.

The noted enhancements to CMHC’s guidelines for satisfying income and employment requirements for self-employed borrowers will become effective on October 1, 2018.

Please note that the establishment of these CMHC guidelines does not preclude Approved Lenders from observing their own lending practices.  As such, implementation of CMHC guidelines may vary among lenders.  By Dave Teixeira, Dominion Lending Centres.

Economic Highlights

 

Canadian Data Release: Existing home sales rose for 3^rd straight month in July

·       Existing home sales rose 1.9% month-on-month in July, marking the third straight monthly gain. However, sales were downwardly revised in June to show 3.4% growth (previously 4.1%). More than half of all local markets reported increased activity in July, led by a solid 7.7% gain in the GTA. Sales also rose in Saskatoon (+12.3%), Ottawa (+1.4%), London (+2.5%), Hamilton-Burlington (+2.3%), Fraser Valley (+5.6%) and Victoria (+1.5%). Conversely, activity was lower in Calgary (-3.5%) and Winnipeg (-3.2%) while being flat in the GVA.

·       New listings dropped by 1.2% in July, weighed on by declines in Calgary (-8.0%), Edmonton (-7.2%) and the GVA (-4.4%). Meanwhile, listings advanced 5.1% in the GTA.

·       With new listings dropping and sales rising, the sales-to-new listings ratio increased to 55.9 in July – still reflective of balanced market conditions though inching closer to seller’s territory. Provincially, the ratio was highest in New Brunswick (71.3), PEI (66.7) and Quebec (62.4). Conversely, the ratio was lowest in Saskatchewan (39.2), Alberta (45.6) and Newfoundland and Labrador (33.0) – indicating loose conditions in these markets. In Ontario, the ratio increased to 59.7, its highest level since January.  The ratio also increased to 52.3 in B.C., though it still sits below its 10-year average.

·       The average home price rose for the fourth straight month in July (+1.0%) and was flat on a year-over-year basis – an improvement compared to the 1.3% year-over-year drop recorded in June.

·       The quality-adjusted MLS home price index was up 2.1% from a year-ago – also an improvement versus June’s 0.9% gain. Quality-adjusted prices were higher in most markets, with exception of the Prairies. Price growth was robust in Ottawa (7.2% y/y) and Montreal (5.7%). Prices were slightly lower in the GTA (-0.6% y/y), though this was a notable improvement from June (-4.8% y/y). In the GVA, price growth decelerated to its softest pace since 2014 (6.7% y/y).

Key Implications

·       July’s was a good month for housing markets, as sales increased for the third straight month alongside another rise in prices. This lends further credence to our view that markets have shaken off the bout of policy-induced weakness in the earlier part of the year.

·       Since April, sales have increased in 7 of 10 Provinces, with sharp gains in Ontario and New Brunswick. However, activity remains notably weak in B.C., where markets are being impacted by provincial policy measures in addition to the revised B-20 underwriting guidelines and rising borrowing costs. The imposition of a new housing speculation tax should place additional downward pressure on markets in B.C. in coming months.

·       We expect Canadian resale activity to improve at a gradual pace going forward, buoyed by a decent economic backdrop and solid population growth, though some restraint should come from rising borrowing costs. This should help residential investment add to overall growth in the second half of the year.   By Rishi Sondhi, TD Economist.

United States

·        Concerns about Turkey drove market volatility this week, but U.S. equity markets managed a rebound.

·        Strong retail sales and historically-high small business optimism suggest a strong economic expansion in the U.S. this quarter.

·        Although concerns eased by week’s end, Turkey is not out of the woods yet. It remains in the early stages of a balance of payments crisis, and is likely to trigger further bouts of market volatility.

Canada

·        Canadian economic data continued to impress this week. A solid resale housing report, respectable manufacturing numbers and surprisingly strong inflation all paint a picture of a healthy economy.

·        Of particular note, home sales rose for a third straight month, as did average sale prices. Evidence continues to mount that, as expected, the impact of cooling measures early in the year have been short-lived, even if there remains lots of lost ground left for sales to make up.

·        Economic risks remain very real, but continued solid out-turns suggest that the next policy interest rate hike is not that far off.

By TD Economics.  Read the full report Here.

Mortgage Interest Rates

Prime lending rate is 3.7%.  Bank of Canada Benchmark Qualifying rate for mortgage approval is at 5.34%.  Fixed rates are holding steady, no change in fixed rates.  Deep discounts are offered by some lenders for variable rates making adjustable variable rate mortgages very attractive.

Terms	Posted Rates	Payment   Per $100k	Our Rates	Payment   Per $100k	Savings
6 Months	3.14%	$480.46	3.10%	$478.39	$2.07
1 Year	3.04%	$475.30	2.99%	$472.73	$2.57
2 Years	3.44%	$496.11	3.24%	$485.65	$10.46
3 Years	3.59%	$504.03	3.39%	$493.48	$10.55
4 Years	3.89%	$520.07	3.54%	$501.38	$18.69
5 Years	5.59%	$615.64	3.29%	$488.25	$127.39
7 Years	5.80%	$627.97	3.94%	$522.77	$105.19
10 Years	6.10%	$645.76	3.99%	$525.48	$120.28
Variable	2.70%	$457.99	2.41%	$443.50	$14.49
Prime Rate	3.70%
Please Note: Payment per $100K and possible savings shown above are based on a 25-year ammortization. Rates are subject to change without notice and the rate you receive may vary depending on your personal financial situation. *OAC E&OE. Please reply to this email and I will be happy to provide you with greater detail and determine the best rate available for you.

This edition of the Weekly Rate Minder shows the latest rates available for Canadian mortgages. At Dominion Lending Centres, we work on your behalf to find the best possible mortgage to suit your needs. Explore mortgage scenarios using helpful calculators on my website: http://www.iMortgageBroker.ca

Other Industry News & Insights

Why were so many borrowers renewing with the same lender last year?

According to a Canada Mortgage and Housing Corporation analysis, mortgage renewals with different lenders in Toronto declined dramatically in 2017 compared to the year before.

Tania Bourassa-Ochoa, a senior economic researcher with CMHC, theorizes that the 25.7% decline can be attributed to the B-20 rule changes in 2016.

“One of the reasons that could partially explain this is the mortgage rule changes in 2016,” Bourassa-Ochoa told MortgageBrokerNews.ca. “There was the stress test mortgages had to go through, but the problem is we’re not able to confirm this because we’re unable to observe the number of renewals with the same lenders. It’s hard to know if it’s really because of that.

“When you look at all of the major markets and you see the two most expensive markets in Toronto and Vancouver, that’s where the largest declines of renewals with different lenders was observed.”

While it is difficult to discount the role stress testing mortgages play in cooling activity—as well as the fact that lenders aren’t competitive with renewal rates to begin with—there could be another explanation for why so many borrowers decided to remain with their lenders.

“Historically speaking, lenders aren’t that competitive on renewal, especially if you look at 2016 to 2017 when they would come out with a subpar rate at best,” said Benjamin Sammut, a Mortgage Architects broker. “The only thing I can think of is they’re upping their game and starting to be a little more competitive in what they’re offering in terms of rate, and they’re probably contacting their clients a little earlier. What used to be 90 days out has turned into a 180 days out. We’ve even heard of instances where clients are being told a year in advance that they could do an early renewal.”

The decline in renewals with different lenders is confounding, though, because lenders don’t incent borrowers to stay with them.

“If they’re incentivized somewhere else and they can get the exact same product somewhere else, then they’re usually more inclined to do that,” said Sammut. “It’s like looking at Bell and Rogers: They’re the exact same product, but it’s a question of who’s going to screw you less.”

The CMHC analysis of Equifax data also determined that refinances declined in 2017 compared with a year earlier, and it’s likely because fewer homeowners were willing to leverage their properties, which is consistent with the decelerated price growth in some of the country’s major markets at the time.

“The only explanation I can think of is you have borrowers seeing a stricter environment,” said Bourassa-Ochoa. “People wanted to see what would happen because of the threat of rate increases and stricter and stricter regulation. They probably just wanted to hold off, and that included refinances for debt consolidation, renovations to their home or changing lenders and increasing the amount borrowed.”  By Neil Sharma.

Roundup of the latest mortgage and housing news.

From Mortgage Professionals Canada.

• Big banks set to reveal quarterly profits as NAFTA fears and rate hikes loom (CBC)
• And the top BC housing market for affordability is… (Livabl)
• The Canadian housing market is still waiting on a pickup in activity: RBC (Livabl)
• Insurance Premiums May Rise in 2019 (Canadian Mortgage Trends)
• New Housing Data Shows Strengthening Sales, Rising Prices (Canadian Mortgage Trends)
• The Amazon Era Is Making Vancouver the World’s Hottest Warehouse Market (Bloomberg Canada)
• A “much tamer” pricing environment is in the cards for the Canadian housing market: RBC (Livabl)
• This is how overvalued Vancouver housing is: Economist (Livabl)
• Average Canadian house sold for $481,500 last month, up 1% in past year (CBC News)
• Canadian home sales tick higher in July led by GTA market (BNN Bloomberg)
• Vancouver tops global increase in industrial lease rates (Vancouver Sun)
• What this summer’s Canadian home sales stats are masking (Livabl)
• Canada is third most overvalued country for real estate: Economist (Times Colonist)

There is never a better time than now for free mortgage check-up.  It makes sense for us to revisit your mortgage and ensure it still meets your needs and performs optimally.  Perhaps you’ve been thinking about refinancing to consolidate debt, purchasing a rental or vacation property, or simply want to know you have the best deal. Whatever your needs, we can evaluate your situation and help you determine what’s right for you.

 

Adriaan Driessen

Mortgage Broker 

Dominion Lending Forest City Funding 10671

Cell:     519.777.9374

Fax:      519.518.1081

riebro@me.com

www.iMortgageBroker.ca

415 Wharncliffe Road South

London, ON, N6J 2M3

Adriaan Driessen

Sales Representative & Partner

PC275 Realty Brokerage

Cell:     519.777.9374

Fax:      519.518.1081

adriaan@pc275.com

www.PC275.com

415 Wharncliffe Road South

London, ON, N6J 2M3

 

Terms	Posted Rates	Payment   Per $100k	Our Rates	Payment   Per $100k	Savings
6 Months	3.14%	$480.46	3.10%	$478.39	$2.07
1 Year	3.04%	$475.30	2.99%	$472.73	$2.57
2 Years	3.44%	$496.11	3.24%	$485.65	$10.46
3 Years	3.59%	$504.03	3.39%	$493.48	$10.55
4 Years	3.89%	$520.07	3.54%	$501.38	$18.69
5 Years	5.59%	$615.64	3.29%	$488.25	$127.39
7 Years	5.80%	$627.97	3.94%	$522.77	$105.19
10 Years	6.10%	$645.76	3.99%	$525.48	$120.28
Variable	2.7%	$457.99	2.70%	$457.99	$0.00
Prime Rate	3.70%

This edition of the Weekly Rate Minder shows the latest rates available for Canadian mortgages. At Dominion Lending Centres, we work on your behalf to find the best possible mortgage to suit your needs. Explore mortgage scenarios using helpful calculators on my website: http://www.iMortgageBroker.ca

• Buyers Return to Toronto’s Housing Market (Bloomberg)
• Toronto home sales surge 18.6% as summer demand heats up (BNN Bloomberg)
• Vancouver home sales sink to worst July since 2000 (BNN Bloomberg)
• Should Canadians be worried about the housing market’s effect on the economy? Experts weigh in (Livabl)
• Vancouver’s homes may be costly to buy, but they’re cheap to own (Vancouver Sun)
• Young Canadians are Giving Up on Home Ownership (Vice)
• Why detached home prices are falling in these Metro Vancouver areas (Livabl)
• Government intervention hurts housing markets (Calgary Sun)
• Canada Risks Creating ‘A Permanent Generation Of Middle-Class Renters’: Industry Group (Huffington Post) – featuring Mortgage Professionals Canada research report
• Calgary’s housing market takes step in right direction with declining vacancy rate (Livabl)
• Chinese investors are still attracted to Canada’s housing market — here’s why (Livabl)
• These 3 groups of homebuyers are causing condo prices to soar in Greater Vancouver (Livabl)
• New low-rise home sales drop 19%, as demand for condos rises (Livabl)
• 4 cities are keeping Canada’s housing market in “highly vulnerable” territory (Livabl)
• Stress Test Impacts Measured (CMT)
• Canada’s housing sector faces high degree of instability for eighth quarter: CMHC (Vancouver Sun)  
• Housing market improving in Hamilton: CMHC (Global)
• 60% of Canadians cut back spending amid rising rates: Poll (BNN)
• Over half of BC residents say government is doing a bad job handling housing affordability crisis (Livabl)
• Canadian residential renovation spending hit $78 billion in 2017 — here’s what it means for the housing market (Livabl)
• Housing intervention creating permanent generation of renters, association warns (BNN)
• Mortgage stress test has prevented 18% of Canadian homebuyers from purchasing the home they want (Livabl)
• Federal policies limiting housing activity: report (Remi)
• Industry Association Blames Government Policies For Weakening Canada’s Housing Market (Baystreet.ca)
• Mortgage stress test suppressing housing activity, says report (Troy Media)
• Here’s how a boom in tech jobs could affect the GTA housing market (Livabl)
• Inflation at a 6-year high is bad news for the Canadian housing market (Livabl)

WEEKLY RESIDENTIAL  MARKET UPDATE 

Industry & Market Highlights 

First Monthly Canadian Home Sales Gain This Year In June

National home sales rose by 4.1% in June compared to May, the first such rise this year. Even so, June’s sales activity remains well below the monthly pace of the past five years (see chart). The sales gains were led by the Greater Toronto Area (GTA) as 60% of all local housing markets reported increased existing home sales.

According to the Toronto Real Estate Board, sales were up 17.6% in the GTA on a seasonally adjusted basis between May and June.

In contrast, sales in British Columbia continued to moderate. The Real Estate Board of Greater Vancouver reported a 14.4% decline in home sales last month compared to the month before. June’s sales for the GVA were 28.7% below the 10-year June sales average. On a year-over-year (y/y) basis, sales declined a whopping 37.7%.

National home sales activity declined almost 11% y/y. Annual sales hit a five-year low and stood nearly 7% below the 10-year average for June. Activity came in below year-ago levels in about two-thirds of all local markets, led overwhelmingly by those in the Lower Mainland of British Columbia.

“This year’s new stress-test on mortgage applicants has been weighing on homes sales activity; however, the increase in June suggests its impact may be starting to lift,” said CREA President Barb Sukkau. “The extent to which the stress-test continues to sideline home buyers varies by housing market and price range.”

B.C. was hit with a double whammy as the province raised the foreign purchase tax as well. Also, mortgage rates have risen increasing the burden of the new stress tests.

Looking ahead, home sales and price gains will likely be dampened by higher interest rates as the Bank of Canada just hiked the benchmark rate once more last week. The prime rate rose from 3.45% to 3.70% in the wake of the rate hike, while the posted 5-year fixed mortgage rate–the critical stress-test yield–remained steady at 5.34%. Nevertheless, more upward pressure on mortgage rates is likely over the next couple of years as economic activity bumps up against capacity limits and inflation edges upward. The Bank made it very clear that further interest rate hikes are on the way but reiterated that it will be taking a gradual approach to future increases, guided by incoming economic data and a recognition that the economy is more sensitive to interest rate movements now than it was in the past.

New Listings

The number of newly listed homes fell in June by 1.8% and also remained below levels for the month in recent years. New listings declined in a number of large urban markets including those in B.C.’s Lower Mainland, Calgary Edmonton, Ottawa and Montreal.

With new listings up and sales virtually unchanged, the national sales-to-new listings ratio eased to 50.6% in May compared to 53.2% in April and stayed within short reach of the long-term average of 53.4%. Based on a comparison of the sales-to-new listings ratio with its long-term average, about two-thirds of all local markets were in balanced market territory in May 2018.

There were 5.7 months of inventory on a national basis at the end of May 2018. While this marks a three-year high for the measure, it remains near the long-term average of 5.2 months.

Home Prices

On a national basis, the Aggregate Composite MLS Home Price Index (HPI) rose only 0.9% y/y in June 2018, marking the 14th consecutive month of decelerating y/y gains. It was also the smallest annual increase since September 2009.

Decelerating y/y home price gains have reflected mainly trends at play in Greater Golden Horseshoe (GGH) housing markets tracked by the index. Home prices in the region have begun to stabilize and trend higher on a month-over-month basis in recent months.

Condo apartment units again posted the most substantial y/y price gains in June (+11.3%), followed by townhouse/row units (+4.9%); However, price gains for these homes have decelerated this year. By contrast, one-storey and two-storey single-family home prices were again down in June (-1.8% and -4.1% y/y respectively).

Benchmark home prices in June were up from year-ago levels in 8 of the 15 markets tracked by the index (see Table below).

Home price growth is moderating in the Lower Mainland of British Columbia (Greater Vancouver Area: +9.5% y/y; Fraser Valley: (+18.4%), Victoria (+10.6%) and elsewhere on Vancouver Island (+16.5%).

Within the GGH region, price gains have slowed considerably on a y/y basis but remain above year-ago levels in Guelph (+3.5%). By contrast, home prices in the GTA, Oakville-Milton and Barrie were down from where they stood one year earlier (GTA: -4.8%; Oakville-Milton: -2.9%; Barrie and District: -6.5%). The declines reflect rapid price growth recorded one year ago and masks recent month-over-month price gains in these markets.

Calgary and Edmonton benchmark home prices were down slightly on a y/y basis (Calgary: -1.0%; Edmonton: -1.5%), while prices declines in Regina and Saskatoon were comparatively more substantial (-6.1% and -2.9%, respectively).

Benchmark home prices rose by 7.9% y/y in Ottawa (led by a 9.1% increase in two-storey single-family home prices), by 6.4% in Greater Montreal (driven by a 7.4% increase in townhouse/row unit prices) and by 6% in Greater Moncton (led by a 6.5% increase in one-storey single-family home prices).

The actual (not seasonally adjusted) national average price for homes sold in June 2018 was just under $496,000, down 1.3% from one year earlier. While this marked the fifth month in a row in which the national average price was down on a y/y basis, it was the smallest decline among them.

The national average price is heavily skewed by sales in the Greater Vancouver and GTA, two of Canada’s most active and expensive markets. Excluding these two markets from calculations cuts almost $107,000 from the national average price, trimming it to just over $389,000.

Bottom Line

Housing markets continue to adjust to regulatory and government tightening as well as to higher mortgage rates. The speculative frenzy has cooled, and multiple bidding situations are no longer commonplace in Toronto and surrounding areas. The housing markets in the GGH appear to have bottomed, and supply constraints may well stem the decline in home prices in coming months. The slowdown in housing markets in the Lower Mainland of B.C. accelerated last month as the sector continues to reverberate from provincial actions to dampen activity, as well as the broader regulatory changes and higher interest rates.

Five-year fixed mortgage rates have already risen roughly 110 basis points, while rates for new variable mortgages rose by close to 40 basis points. Since the implementation of new mortgage standards, nonprice lending conditions for mortgages and home equity lines of credit have also tightened. Additional rate hikes by the Bank of Canada are coming, although the Bank will remain cautious particularly in light of continued trade tensions with the United States.

By Dr. Sherry Cooper. Chief Economist, Dominion Lending Centres

CREA releases June sales figures

The Canadian Real Estate Association says the number of homes sold in June was down 10.7 per cent from a year ago.

The result was a five-year low for the month of June.

However, sales volume was up 4.1 per cent when compared with May.

The association says it was the first substantive month-over-month increase this year.

The national average price for a home sold in June was just under $496,000, down 1.3 per cent from a year ago.

Excluding the Greater Vancouver and Greater Toronto markets, the average price was just over $389,000.  By The Canadian Press. 

Ontario markets outside Toronto see accelerated home price growth

While the Toronto residential market has seen the median cost of its housing shrink in Q2 2018, price growth accelerated in other major Ontario locales such as Kitchener, Waterloo, Cambridge, according to the latest Royal LePage House Price Survey and Market Survey Forecast.

The average price of a standard 2-storey home increased by 8.9% annually across the region (up to $515,733) in the second quarter of the year. Meanwhile, the median price of a bungalow grew by 6.2% year-over-year (up to $443,572), and the average price of a condominium rose by 5.1% in the same time frame (up to $287,080).

However, Royal LePage Grand Valley Realty broker and owner Keith Church stressed that “while prices are up across all housing categories year-over-year, the rate of appreciation has slowed compared to last quarter’s double-digit year-over-year gains. We are beginning to see a shift towards a balanced market where sales and prices are more stable.”

Church added that the region’s economic growth is pulling buyers from the Greater Toronto Area. Royal LePage is also predicting a healthy influx of first-time buyers and retirees looking to downsize into new condominiums.

The aggregate price of a home in the Kitchener/Waterloo/Cambridge area increased by 8.2% year-over-year in Q2 2018 (up to $485,946). Housing costs in the region are expected to continue increasing at a steady rate in the next quarter, the report noted.

On the national level, price appreciation slowed to a relative crawl in Q2 2018, a development influenced mainly by what was characterized as “softness” in the GTA, where many markets have suffered year-over-year declines in home prices. By Ephraim Vecina.

CMHC’s new rules

Canada Mortgage and Housing Corporation is making a couple moves that will send ripples through the mortgage market.  One could give lenders access to more confidential financial information about borrowers.  The other could ease frustrations for a group of borrowers that has consistently had problems securing loans.

According to documents obtained by Reuters, through a freedom of information request, the federal housing agency wants the Canada Revenue Agency to take a “more direct and formal role” in verifying income statements made on mortgage applications.  Right now the CRA does not verify income claims for lenders, even with the permission of the borrower/taxpayer.

A two-year plan drafted by CMHC shows the agency is concerned about a systemic risk posed by mortgage fraud.  The agency has said there is no evidence of widespread fraud in Canada, but it also says its information is limited.

The CMHC plan says paperless transactions, pressures to close deals quickly, rising prices and new regulations can “create strong incentives for individuals or mortgage professionals to engage in … fraud.”  A spokesperson also says CMHC is developing data-driven systems to screen for commission fraud, where a lender or a broker may have encouraged a borrower to exaggerate income claims.  The documents reveal the agency intends to start publishing statistics on mortgage fraud.

At the same time CMHC says it wants to make it easier for the self-employed to qualify for a mortgage.  The agency says it is giving lenders more guidance and flexibility to help self-employed borrowers.  The effort focuses on those who have been running their business – or have been in the same line of work – for less than 24 months.  The new policy is set to take effect October 1st.  By First National Financial

CMHC makes announcement regarding self-employed borrowers

Canada Mortgage and Housing Corp. is making changes intended to make it easier for the self-employed to qualify for a mortgage.

The national housing agency says it’s giving lenders more guidance and flexibility to help self-employed borrowers.

Self-employed Canadians may have a harder time qualifying for a mortgage as their incomes may vary or be less predictable.

CMHC is providing examples of factors that can be used to support the lender’s decision to lend to borrowers who have been operating their business for less than 24 months, or in the same line of work for less than 24 months.

It is also providing a broader range of documentation options to increase flexibility for satisfying income and employment requirements.

The changes, which apply to both transactional and portfolio insurance, will take effect Oct. 1.

CMHC chief commercial officer Romy Bowers said self-employed Canadians represent a significant part of the workforce.

“These policy changes respond to that reality by making it easier for self-employed borrowers to obtain CMHC mortgage loan insurance and benefit from competitive interest rates,” Bowers said in as statement.  By Canadian Press. 

Economic Highlights

 

Jasson Ellis looks at the latest in government bond yields

Greetings mortgage market participants,

Forgive me gentle readers.  It’s been a month since my last post and it feels like at least twice that long.

In my defense, I’ve been occupied by some ‘deep thoughts’ that have kept me distracted.  For instance, I’ve been thinking that maybe to understand mankind we have to look at the word itself: “Mankind”.  Basically, it’s made up of two separate words, mank and ind.  What do these words mean?  It’s a mystery, and that’s why mankind is too.

I’ve also been thinking that if dogs ever take over the world, and they choose a king, I hope they don’t just go by size, because I bet there are Chihuahuas out there with some good ideas.

Economic Data

Today’s data featured two top tier Canadian reports, Retail Sales and Consumer Price Index (“CPI”).

Month over month retail sales in May came in at +2.0% and +1.4% ex-autos, exceeding expectations of +1.0% and +0.5% respectively.  Headline CPI for June came in a little hot at 2.5% year over year vs. 2.3% expected and 2.2% last month  ‘Core’ CPI came in as expected a 1.9%, right around the BoC 2.0% target.

Rates

Rates have jumped about 4 basis points higher on today’s data but Government bond yields in Canada continue to be relatively range bound.  5 year GoC’s are around 2.06% and have traded between 2.00% and 2.10% the last five weeks.  10 year GoC’s are around 2.15% and have traded between 2.10% and 2.20% over the same horizon.  Yes…you read that right.  There are less than 10 basis points between the 5 and 10 year benchmarks.  In fact, there are only 20 basis points between the 2 year (1.95%) and the 30 year (2.15%) bond.  It’s a flat curve all right.  Flattest it’s been in a decade.  I don’t want to alarm you, but your first year Economics text book will tell you that a flat yield curve is an indication that investors and traders are worried about the macro-economic outlook.  A less pessimistic argument is that it’s only natural when a central bank is raising short-term interest rates.  Whatever the reason, if you’re getting a “glass half empty” feeling, just add vodka and stir.

Speaking of central banks, following the July 11th rate hike, the next BoC meeting is September 5th.  The implied probability of another then hike is a modest 10%.  No doubt lingering uncertainty with respect to NAFTA, auto tariffs and broader trade drama are creating headwinds.  Despite the small pop in rates this morning, the market won’t lean too heavily on the modestly stronger than expected retail sales and CPI data today.

Securitization news

On Wednesday, RBC priced a new offering of CMBS in the form Real Estate Asset Liquidity Trust, better known as REAL-T.  It’s the second Canadian CMBS transaction of 2018 and the sixth issuance of REAL-T since its post liquidity crisis return to the market in 2014.

The simple senior/subordinate sequential pass through structure featured a 3.5 year A-1 note and a 7.5 year A-2 note.  Both rated ‘AAA’ by DBRS and Fitch with 13.25% credit support from subordinate notes.  The A-1 priced at GoC +105 and the longer A-2 priced at GoC+155.  An attractive spread for a ‘AAA’ note considering the current delinquency rate on all outstanding Canadian CMBS issuance since 1998 is a microscopic 0.08%.  For context, the last REAL-T deal was issued in October 2017 and the A-1/A-2 notes were priced at +125/+175 or 20bps wider than this week’s deal.

The roughly $350 million pool was made up of 70 loans across 140 properties with loan to value < 60% and a weighted average remaining term of 6.67 years.

No new ‘syndicated’ NHA MBS deals to mention but the indicative spread for a new 5 year single family residential pool is around +48, virtually unchanged since January.  That’s impressive considering Bank Deposit notes have widened since January from about +65 to +90.  The outperformance by MBS can be partially explained by reduced issuance compared to last year and the special utility of MBS for Federally Regulated Financial Institutions (“FRFIs”) as Tier 1 High Quality Liquid Assets (“HQLA”).

Finally, CMHC’s call for allocation requests came out yesterday for next month’s 10 year CMB issue.  It will be the first opening (of three) for the new December 2028 maturity date.  Yes…it’s 124 months for the price of 120!  Send in your deals!

Heading into the weekend

Take it easy this weekend and remember, it’s always a good idea to carry two sacks of something when you walk around.  That way, if anybody asks “Hey, can you give me a hand?”, you can say, “Sorry, got these sacks”.

Sometimes I wish I were a nicer person…but then I laugh and continue my day.  By Jason Ellis, Senior Vice President and Managing Director, Capital Markets.

United States

·       Economic data was a mixed bag this week: retail sales were a bright spot, but housing starts unexpectedly plunged in June.

·       Trade developments continued to make headlines, with Donald Trump announcing he was prepared to extend duties on $500bn of imports from China – roughly the value of all China’s imports into the U.S.

·       In his testimony to Congress, Fed Chair Powell offered an upbeat view of the U.S. economy, and noted that the risks posed by trade protectionism would not push them off course on further rate hikes.

 

Canada

·       It was a good week for Canadian data releases, with positive surprises in retail, manufacturing, and housing, affirming last week’s upbeat tone set by the Bank of Canada.

·       Existing home sales were particularly positive, and, taken together with last week’s housing starts, support the view that the housing market is gradually stabilizing following the implementation of B-20 guidelines.

·       The U.S. announced that it will probe tariffs on uranium imports, increasing already-heightened global trade uncertainty risks. By TD Economics.  Read the full report Here.

Mortgage Interest Rates

No change to Prime lending rate currently at 3.7%.  Bank of Canada Benchmark Qualifying rate for mortgage approval is at 5.34%.  Fixed rates are holding steady, no change in fixed rates.  Deep discounts are are available for variable rates making adjustable variable rate mortgages very attractive for the right borrowers.

Terms	Posted Rates	Payment   Per $100k	Our Rates	Payment   Per $100k	Savings
6 Months	3.14%	$480.46	3.10%	$478.39	$2.07
1 Year	3.04%	$475.30	2.99%	$472.73	$2.57
2 Years	3.44%	$496.11	3.24%	$485.65	$10.46
3 Years	3.59%	$504.03	3.39%	$493.48	$10.55
4 Years	3.89%	$520.07	3.54%	$501.38	$18.69
5 Years	5.59%	$615.64	3.29%	$488.25	$127.39
7 Years	5.80%	$627.97	3.94%	$522.77	$105.19
10 Years	6.10%	$645.76	3.99%	$525.48	$120.28
Variable	2.70%	$457.99	2.66%	$455.97	$2.01
Prime Rate	3.70%
Please Note: Payment per $100K and possible savings shown above are based on a 25-year ammortization. Rates are subject to change without notice and the rate you receive may vary depending on your personal financial situation. *OAC E&OE. Please reply to this email and I will be happy to provide you with greater detail and determine the best rate available for you.

This edition of the Weekly Rate Minder shows the latest rates available for Canadian mortgages. At Dominion Lending Centres, we work on your behalf to find the best possible mortgage to suit your needs. Explore mortgage scenarios using helpful calculators on my website: http://www.iMortgageBroker.ca

We are Canada’s largest and fastest-growing mortgage brokerage! We have more than 2,600 Mortgage Professionals from more than 350 locations across the country! Our Mortgage Professionals are Experts in their field and many are ranked among the best nationally. We work for you, not the lenders, so your best interests will always be our number one priority. We have more than 100 mortgage programs, making it easy to choose the best fit for your unique situation. We close loans in all 10 provinces and 3 territories. We can process your mortgage in as few as 7 days. We are the preferred mortgage lender for several of Canada’s top companies. Dominion Lending Centres’ Mortgage Professionals are available anytime, anywhere, evenings and weekends – and we’ll even come to you!

Other Industry News & Insights

How Do Interest Rates Affect the Stock Market?

The investment community and the financial media tend to obsess over interest rates—the cost someone pays for the use of someone else’s money— and with good reason. When the Federal Open Market Committee (FOMC) sets the target for the federal funds rate at which banks borrow from and lend to each other, it has a ripple effect across the entire U.S. economy, not to mention the U.S. stock market. And, while it usually takes at least 12 months for any increase or decrease in interest rates to be felt in a widespread economic way, the market’s response to a change (or news of a potential change) is often more immediate.

Understanding the relationship between interest rates and the stock markets can help investors understand how changes might affect their investments and how to make better financial decisions.

 

The Interest Rate That Impacts Stocks

The interest rate that moves markets is the federal funds rate. Also known as the overnight rate, this is the rate depository institutions are charged for borrowing money from Federal Reserve banks.

The federal funds rate is used by the Federal Reserve (the Fed) to attempt to control inflation. Basically, by increasing the federal funds rate, the Fed attempts to shrink the supply of money available for purchasing or doing things, by making money more expensive to obtain. Conversely, when it decreases the federal funds rate, the Fed is increasing the money supply and, by making it cheaper to borrow, encouraging spending. Other countries’ central banks do the same thing for the same reason.

Why is this number, what one bank pays another, so significant? Because the prime interest rate—the interest rate commercial banks charge their most credit-worthy customers—is largely based on the federal funds rate. It also forms the basis for mortgage loan rates, credit card annual percentage rates (APRs) and a host of other consumer and business loan rates.

What Happens When Interest Rates Rise?

When the Fed increases the federal funds rate, it does not directly affect the stock market itself. The only truly direct effect is it becomes more expensive for banks to borrow money from the Fed. But, as noted above, increases in the federal funds rate have a ripple effect.

Because it costs them more to borrow money, financial institutions often increase the rates they charge their customers to borrow money. Individuals are affected through increases to credit card and mortgage interest rates, especially if these loans carry a variable interest rate. This has the effect of decreasing the amount of money consumers can spend. After all, people still have to pay the bills, and when those bills become more expensive, households are left with less disposable income. This means people will spend less discretionary money, which will affect businesses’ revenues and profits.

But businesses are affected in a more direct way as well because they also borrow money from banks to run and expand their operations. When the banks make borrowing more expensive, companies might not borrow as much and will pay higher rates of interest on their loans. Less business spending can slow the growth of a company; it might curtail expansion plans or new ventures, or even induce cutbacks. There might be a decrease in earnings as well, which, for a public company, usually means the stock price takes a hit.

Interest Rates and the Stock Market

So now we see how those ripples can rock the stock market. If a company is seen as cutting back on its growth or is less profitable—either through higher debt expenses or less revenue—the estimated amount of future cash flows will drop. All else being equal, this will lower the price of the company’s stock. (For related reading, see: Taking Stock of Discounted Cash Flow.)

If enough companies experience declines in their stock prices, the whole market, or the key indexes (e.g., Dow Jones Industrial Average, S&P 500) many people equate with the market, will go down. With a lowered expectation in the growth and future cash flows of the company, investors will not get as much growth from stock price appreciation, making stock ownership less desirable. Furthermore, investing in equities can be viewed as too risky compared to other investments.

However, some sectors do benefit from interest rate hikes. One sector that tends to benefit most is the financial industry. Banks, brokerages, mortgage companies and insurance companies’ earnings often increase as interest rates move higher, because they can charge more for lending.

Interest Rates and the Bond Market

Interest rates also affect bond prices and the return on CDs, T-bonds and T-bills. There is an inverse relationship between bond prices and interest rates, meaning as interest rates rise, bond prices fall, and vice versa. The longer the maturity of the bond, the more it will fluctuate in relation to interest rates. (For related reading, see: How Bond Market Pricing Works.)

When the Fed raises the federal funds rate, newly offered government securities, such Treasury bills and bonds, are often viewed as the safest investments and will usually experience a corresponding increase in interest rates. In other words, the “risk-free” rate of return goes up, making these investments more desirable. As the risk-free rate goes up, the total return required for investing in stocks also increases. Therefore, if the required risk premium decreases while the potential return remains the same or dips lower, investors might feel stocks have become too risky and will put their money elsewhere.

One way governments and businesses raise money is through the sale of bonds. As interest rates move up, the cost of borrowing becomes more expensive. This means demand for lower-yield bonds will drop, causing their price to drop. As interest rates fall, it becomes easier to borrow money, causing many companies to issue new bonds to finance new ventures. This will cause the demand for higher-yielding bonds to increase, forcing bond prices higher. Issuers of callable bonds may choose to refinance by calling their existing bonds so they can lock in a lower interest rate.

For income-oriented investors, reducing the federal funds rate means a decreased opportunity to make money from interest. Newly issued treasuries and annuities won’t pay as much. A decrease in interest rates will prompt investors to move money from the bond market to the equity market, which then starts to rise with the influx of new capital.

What Happens When Interest Rates Fall?

When the economy is slowing, the Federal Reserve cuts the federal funds rate to stimulate financial activity. A decrease in interest rates by the Fed has the opposite effect of a rate hike. Investors and economists alike view lower interest rates as catalysts for growth—a benefit to personal and corporate borrowing, which in turn leads to greater profits and a robust economy. Consumers will spend more, with the lower interest rates making them feel they can finally afford to buy that new house or send the kids to a private school. Businesses will enjoy the ability to finance operations, acquisitions and expansions at a cheaper rate, thereby increasing their future earnings potential, which, in turn, leads to higher stock prices.

Particular winners of lower federal funds rates are dividend-paying sectors such as utilities and real estate investment trusts (REITs). Additionally, large companies with stable cash flows and strong balance sheets benefit from cheaper debt financing. 

Impact of Interest Rates on Stocks

Nothing has to actually happen to consumers or companies for the stock market to react to interest-rate changes. Rising or falling interest rates also affect investors’ psychology, and the markets are nothing if not psychological. When the Fed announces a hike, both businesses and consumers will cut back on spending, which will cause earnings to fall and stock prices to drop, everyone thinks, and the market tumbles in anticipation. On the other hand, when the Fed announces a cut, the assumption is consumers and businesses will increase spending and investment, causing stock prices to rise.

However, if expectations differ significantly from the Fed’s actions, these generalized, conventional reactions may not apply. For example, let’s say the word on the street is the Fed is going to cut interest rates by 50 basis points at its next meeting, but the Fed announces a drop of only 25 basis points. The news may actually cause stocks to decline because assumptions of a 50-basis-points cut had already been priced into the market. (For related reading, see: 8 Pshychological Traps Investors Should Avoid.)

The business cycle, and where the economy is in it, can also affect the market’s reaction. At the onset of a weakening economy, the modest boost provided by lower rates is not enough to offset the loss of economic activity, and stocks continue to decline. Conversely, towards the end of a boom cycle, when the Fed is moving in to raise rates—a nod to improved corporate profits—certain sectors often continue to do well, such as technology stocks, growth stocks and entertainment/recreational company stocks.

The Bottom Line

Although the relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions: as a general rule of thumb, when the Fed cuts interest rates, it causes the stock market to go up; when the Fed raises interest rates, it causes the stock market as a whole to go down. But there is no guarantee how the market will react to any given interest rate change the Fed chooses to make. By Mary Hall.

Roundup of the latest mortgage and housing news.

From Mortgage Professionals Canada.

Canadians feel little pain of rate hikes – so far (Business Times) More people behind on mortgages in Sask. than any other province (CTV) Will BC’s new strata short-term rental fines help boost Vancouver’s vacancy rate? (Livabl) 3 unexpected ways Montreal’s housing market continues to heat up (Livabl)

Did You Fib On Your Mortgage Application? There May Be Trouble Ahead (Huffington Post) CMHC moves to make it easier for self-employed to get a mortgage (CBC) Here’s which housing type you can buy with your salary in Calgary (Livabl) The Canadian housing market is warming up — here’s why (Livabl)

National Home Sales at Five-Year Low (Canadian Mortgage Trends) These 4 Canadian cities could see a jump in housing activity (Livabl)

Canada housing agency pushes for better income checks to catch fraud (Reuters) No signs of cooling in hot housing market (Montreal Gazette) 9 in 10 seniors plan to stay in their homes while retired — that’s a problem for new homebuyers (Global) Moody’s upgrades credit rating outlook for Canada’s major banks (CBC) One in four Canadians say they face economic hardship: Survey (BNN) These economists expect a modest recovery in Canada’s housing market this year (Livabl)

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.

 

Adriaan Driessen

Mortgage Broker 

Dominion Lending Forest City Funding 10671

Cell:     519.777.9374

Fax:      519.518.1081

riebro@me.com

www.iMortgageBroker.ca

415 Wharncliffe Road South

London, ON, N6J 2M3

Lori Richards Kovac

Mortgage Agent & Administrator

Dominion Lending Forest City Funding 10671

Cell:     519.852.7116

Fax:      519.518.1081

loriakovac@icloud.com

415 Wharncliffe Road South

London, ON, N6J 2M3

Adriaan Driessen

Sales Representative & Senior Partner

PC275 Realty Brokerage

Cell:     519.777.9374

Fax:      519.518.1081

adriaan@pc275.com

www.PC275.com

415 Wharncliffe Road South

London, ON, N6J 2M3