WEEKLY RESIDENTIAL  MARKET UPDATE 

Industry & Market Highlights 

Bank of Canada Raises Rates

The Bank of Canada raised it’s overnight rate by 0.25% from 1.25% to 1.50%. This target overnight rate is what major financial institutions charge for one day loans, and is used to set Prime lending rate for consumers.  The overnight lending rate as been at 1.25% since the last raise in January.  In response to this, we can expect to see financial institutions to raise their prime rates in conjunction with the Bank of Canada. Prime rate will increase to 3.7%. This increase will affect all consumers with a variable-rate mortgage and will also have an impact on the bond market, with an expectation to see fixed rates rising in response.

Home Sales Strong in June, Despite Inventory Challenge

London and St Thomas Association of REALTORS® (LSTAR) announced 1,080 homes* were sold in June, down 14.6% over the same time last year, which saw a record-setting month for June with 1,264 homes sold since the Association began tracking sales data in 1978.

“The home sales in June continue the strong momentum we saw in May, setting the stage for a very robust season for resale homes this summer,” said Jeff Nethercott, 2018 LSTAR President. “Sales activity remains above the 10-year average, as the marketplace continues to manage the lowest inventory levels since 2009. Average home prices are making slight gains all across the region.”

By geographic area, London East made the biggest gains, with the average June sales price at $295,541, up 11.7% from June 2017 and up 34.7% compared to June 2016. London North also saw an increase of 11.6% from June 2017 with an average sales price of $479,237. That’s up 39.9% compared to June 2016. Meanwhile, the average sales price in London South was $372,881, up 9.2 percent from June 2017 and up 36.6% from June 2016.

Overall, the average June sales price in London and St. Thomas was $370,247, up 10.5% from June 2017 and up 32.7% from June 2016. Going further back, it’s a 72.0% increase compared to the average sales price 10 years ago.

“As the average sales price trends upward, inventory continues to decrease,” Nethercott said. “In June, there were 1,779 active listings, down 4.3% from this time last year and down 40.0% from June 2016. The sales-to-new listings ratio was 72.0%, which the Canadian Real Estate Association (CREA) says represents conditions in the marketplace that favour sellers (a ratio between 40% and 60% is generally consistent with a balanced market). So for those considering to sell their home, now would be an optimal time to get in touch with your local REALTOR® who can help you navigate through the process.”

St. Thomas saw a total of 99 homes sold in June, down 9.2% from the same period last year. For inventory, there were 76 active listings, down 32.7% from last June and down 53.1% from June 2016. The average home sales price in St. Thomas was $294,471, up 5.5% from June 2017 and up 25.7% from June 2016.  

*These statistics are prepared for LSTAR by the Canadian Real Estate Association (CREA) and represent a data snapshot taken on July 1, 2018, based on processed home sales activity between June 1 and 30, 2018.

Consumer confidence, or a lack thereof

The battle lines have now been clearly drawn in our burgeoning trade fight with the United States and one of the first casualties appears to be consumer confidence.

Two key indicators of consumer confidence, released just prior to Canada imposing retaliatory tariffs on the U.S., show sharp drops.

The Conference Board of Canada’s monthly measure is based on four, forward-looking questions put to a random sample of households.  Its June report registered a 4.5 point drop in consumer sentiment.  Optimism was down in the responses to all four questions and sentiment sagged in every area of the country except Manitoba and Saskatchewan.

The Nanos-Bloomberg confidence poll for the week ending June 22 fell to 55.3 points, down from 57.1 the previous week.  That is its lowest level since 2016 and it is the biggest drop in since weekly polling started in 2013.

Nanos-Bloomberg saw sentiment deteriorate for all four of its polling questions, with economic expectations taking the hardest hit.  Just 14.7% of respondents felt the economy would get stronger over the next six months.  About 38% felt things will get worse.

The pollsters say the heated rhetoric coming from the president of the United States is largely to blame, but rising interest rates and slowing housing markets are also contributing to the consumer funk.  By First National Financial.

RBC Sounds Alarm For Affordability in Canada

An RBC report says housing affordability in Canada worsened in the first quarter, ending a one-quarter reprieve, the first in two and a half years.

The proportion of median pre-tax household income needed for mortgage payments, property taxes and utilities rose 0.4 percentage points from the fourth quarter to 48.4 per cent.

The move reversed a 0.3 percentage point drop in the fourth quarter.

Mortgage rates increased in the previous two quarters, but a drop in home prices mainly in the Greater Toronto Area, trimmed ownership costs modestly.

The report added that an expected one percentage point increase in the Bank of Canada’s overnight rate to 2.25 per cent by the first half of 2019 is poised to worsen housing affordability.

Home ownership costs in the Greater Vancouver Area reached a record high of 87.8 per cent in the first quarter, rising 1.5 percentage points in the quarter to what is considered a crisis level. Victoria was also high at 62.7 per cent.

The Greater Toronto Area saw affordability improve slightly to 74.2 per cent as a dip in home prices counteracted higher interest rates.

Affordability eroded modestly in most other Canadian markets as higher interest rates outpaced stable housing prices.

Saskatoon, Ottawa, Halifax and St. John’s, N.L., saw the largest deteriorations in affordability in more than a year, but housing costs remained low at between 27 and 36.6 per cent.

The report says stress may be building in the Greater Montreal Area, which saw costs reach their highest point since 2011 at 43.7 per cent.  By The Canadian Press. 

Chinese inquired about US$1.45B worth of Canadian properties last year: Juwai

A website for buyers of overseas properties says Chinese nationals expressed interest in about US$1.45 billion worth of Canadian properties last year, with interest in Toronto and Vancouver slipping following the introduction of foreign buyers taxes.

Juwai.com says consideration of properties in Canada’s largest city dropped by 25 per cent in 2017 after nearly doubling between 2015 and 2016.

Vancouver inquiries fell 18 per cent last year after growing by 9.3 per cent the previous year.

Metro Vancouver has had a 15 per cent tax on foreign home purchasers since 2016. The new provincial government hiked the levy to 20 per cent and imposed it in the Victoria and Nanaimo areas, as well as the Fraser Valley and central Okanagan.

A 15 per cent tax was imposed in the Greater Golden Horseshoe area _ stretching from the Niagara Region to Peterborough _ on buyers who are not citizens, permanent residents or Canadian corporations. In the first month after the tax was imposed in late April, foreign buyers made up 4.7 per cent of home sales in the region, according to Statistics Canada.

With no tax in place, Montreal was the hot destination, growing by 84.5 per cent in 2017 and 43.3 per cent a year earlier.

A separate report says no additional foreign buyers taxes are expected to be imposed in Canada and Australia this year, with New Zealand being the only major investment destination considering one.

Juwai says Chinese were unfairly blamed for property price increases, even though data suggested it was due to other factors such as historically low interest rates.

More than half of Chinese buyers considering Canada were motivated to invest for their own use, nearly 26 per cent for investment and 17 per cent for education.  By The Canadian Press. 

Toronto home sales, prices edge higher

Home sales in the Toronto housing market showed some improvement in June along with the average selling price.

Toronto Real Estate Board members sold 8,082 homes through the MLS in June; 2.4% more than in June 2017 and a 17.6% jump from May 2018.

The market continues to be volatile following policy changes including the B-20 mortgage guidelines which tightened lending conditions for borrowers.

“Home ownership has proven to be a positive long-term investment. After some adjustment to the Fair Housing Plan, the new Office of The Superintendent of Financial Institutions (OSFI) stress test requirement and generally higher borrowing costs, home buyers are starting to move back into the market, with sales trending up from last year’s lows. Market conditions appear to be tightening, with sales accounting for a greater share of listings, as new listings have dropped compared to last year,” said new TREB president Garry Bhaura.

Average selling price rises

There was a 2% year-over-year rise in average selling price to $807,871 which means a 3.4% rise month-over-month following preliminary seasonal adjustment.

The HPI was flat month-over-month and down 4.8% year-over-year. TREB says that the difference between HPI and average selling price is likely to be due, in part, to a different mix of homes sold on a year-over-year basis. June 2018 saw a larger share of low-rise homes sold.

“The expectation is to see improvement in sales over the next year. Over the same period, however, it is likely that issues surrounding the supply of listings will persist. This suggests that competition between buyers could increase, exerting increased upward pressure on home prices. With a new provincial government in place and municipal elections on the horizon, housing supply should be top-of-mind for policy makers,” said Jason Mercer, TREB’s Director of Market Analysis and Service Channels.  By Steve Randall. 

Economic Highlights

Find out here what will happen with interest rates this week

There is a sense you could hear a pin drop in most offices around the country this week. This past week started off with the Canada Day Holiday, which is one of the best holidays, followed by the American July 4th holiday, in which everyone in the Great White North was glued to their TV’s watching Joey Chestnut devour 74 hot dogs. A world record. Surprisingly, his favourite condiment is water. I am more of ketchup and mustard guy myself. Needless to say, when marketing came knocking for commentary, I said, of course I’ll write it. It’s because I care. A lot.

Interest Rates

It’s been two weeks since the last commentary so it would be good to recap the major benchmark bond yields. The 5 year Government of Canada benchmark bond is currently yielding 2.06% which is only about 1 bp tighter from its yield of a week ago. The 10 year is yielding 2.13% and was about 2.16% about a week ago. For context, a year ago the 5 year was yielding 1.47% and the 10 year was yielding 1.88%, while there have been 3 overnight rate hikes totaling 0.75% by the Bank of Canada in the interim. Clearly, there is nothing game breaking in the moves in the interest rates in the last week, although it is worth reiterating that 5 and 10 year yields are not perfectly correlated to increases in the overnight rate. The last year had an increase of 0.75% in the short-term overnight rate, while the 5 year only increased +0.59% and the 10 year +0.26%. That’s worth keeping in mind if you are currently looking at borrowing money over GoC’s or CMB’s.

Bank of Canada Meeting Next Week

I’ve never taken a journalism course, but I do have twitter so I know how important it is not to bury a lead. So I won’t. Most market participants are pricing in and anticipating for, an interest rate hike by the Bank Of Canada of 0.25% next Wednesday.  Currently, the market (using overnight interest rate swaps) has the probability at 87.5% for a hike next week, which seems all but certain.  Mid-last week however there was still some uncertainty on what the Bank would do but some economic data came out that cleared the air.

Stephen Poloz, the Bank of Canada Governor, gave a speech last Wednesday on the topic, “Let me be clear: From Transparency to Trust and Understanding”. For something titled let me be clear, the market took it as anything but and everyone was notably frustrated about it. His speech gave rationale on why heavy-handed forward guidance (by the BoC) could dampen the information in financial markets if data surprises occur, although the title of the speech seemed like a bit of a misnomer.

What was clear came out last Friday in GDP numbers and the 2nd quarter Business Outlook Survey (BOS), which both moved the interest rate hike to a near certainty. We had GDP beat Month-over-Month consensus growth by 0.1%, which kept the year-over-year GDP growth number in line with the BoC’s estimates of 2.5%.  The Q2 Business Outlook Survey further cemented that the economy is doing well enough in the BoC’s eyes to warrant further interest rate increases. Firms surveyed were reporting robust sales outlooks which was supported by both foreign and domestic demand, which was shocking to me until I read that this survey was conducted before the May 31st U.S steel tariffs.  Also notably in the report, input prices are expected to increase while inflation expectations are also expected to increase.  This all pushed the BOS Index to near-record levels, which shows strong business optimism.

Finally, this morning brought the last major piece of economic data before the rate hike next Wednesday. Employment numbers were released which I saw summed up as ‘fine’. They weren’t the best, but they aren’t that bad either. Kind of like England’s current World Cup campaign – they may just get the job done next week.  Net change in employment grew by 31.8K compared to the 20.0K surveyed. On the flipside, unemployment was 0.2% higher than expected at 6% vs 5.8%. How that happens is there was a surge in the labour force participants which buoyed the unemployment rate higher. Initial reaction to the job numbers looked to be shrugged off and there was nothing in the numbers to change the course next week.

All this being said, I am not a mind reader so if the Bank of Canada doesn’t raise interest rates next week and you have a large basket of interest rate derivatives pricing in a hike, why are you reading this and you can send your complaints to:

Bank of Canada

234 Wellington Street

Ottawa, Ontario, Canada

K1A 0G9

By Andrew Masliwec, Analyst, First National FinancialCapital Markets.

Mortgage Interest Rates

No change to Prime lending rate currently at 3.45%.  Bank of Canada Benchmark Qualifying rate for mortgage approval is at 5.34%.  Fixed rates are holding steady, no change in fixed rates.  Deeper discounts are are available for variable rates making adjustable variable rate mortgages very attractive again.

Other Industry News & Insights

Homebuyers overestimate impact of foreign investors

Homeowners in Vancouver and Toronto believe that foreign investors are driving up home prices but that isn’t backed up by official figures.

A new Housing Market Insight from the CMHC shows that 68% of survey respondents in Vancouver and 48% in Toronto think foreign investors have a lot of influence on home prices in their cities.

However, official Statistics Canada data shows that total non-resident ownership is just 4.8% of homes in Vancouver and 3.4% in Toronto.

Vancouverites are more likely to believe that investors have more influence on home prices than supply restraints and demand-side factors.

Buyers are also spending more than planned in Canada’s two hottest housing markets; 48% of respondents in both cities said they had exceeded their budgets, twice as many as those who did so in Montreal.

“The survey allows us to better understand how home buying is influenced by attitudes and perceptions, giving rise to sustaining local narratives. As we can see, psychological drivers can be at odds with economic fundamental drivers,” said Guillaume Neault, Senior Manager, Analytics, Canada Mortgage and Housing Corporation. By Steve Randall.

Roundup of the latest mortgage and housing news.

From Mortgage Professionals Canada.

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

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

WEEKLY RESIDENTIAL  MARKET UPDATE 

Industry & Market Highlights 

Good News for Homeowners

A report by Canada Mortgage and Housing Corp. says a recent drop in Ontario home prices isn’t expected to persist.

It says moderate economic growth in the Greater Toronto Area and Ontario generally will provide support for provincial real estate prices in 2018 and 2019.

CMHC expects inflation-adjusted home prices in the province will remain relatively stable and close to the levels of last year’s fourth quarter.

It anticipates prospective buyers will face fewer bidding wars and feel less urgency to act, allowing them time for more informed decision making.

On the flip side, CMHC says home owners may see their properties on the market longer than usual.  By The Canadian Press.

The Spring Housing Market Continues To Be Weak

As we said last month, April is usually the start of a spring housing market ramp-up, but this year the new mortgage stress test and rising mortgage rates have continued to be a negative factor. Those expecting an early-stage pick-up marking an end to the payback for sales pulled forward into the fourth quarter of last year have been sorely disappointed. With another month of data released by the Canadian Real Estate Association (CREA) on Friday, it is evident that the disappointing housing picture continued in May. There is no indication of any real rebound in home resale activity through May.

National home sales via the Canadian MLS Systems remained little changed from April to May. Having slipped 0.1% lower, it marked the lowest level for national sales activity in more than five years. Slightly more than half of all local housing markets reported fewer sales in May compared to April, led by the Okanagan region, Chilliwack and the Fraser Valley, together with the Durham region of the Greater Toronto Area (GTA) and Quebec City. Declines in activity were offset by gains in Calgary, Thunder Bay, Brantford, London and St. Thomas, Oakville-Milton and the Quinte Region west of Kingston. A small increase in GTA sales also supported the national tally.

On a positive note, sales have stabilized suggesting that buyers could be adjusting to the impact of tighter mortgage rules and higher interest rates. After all, sales did climb 1.6% in Toronto, after falling to recession-era lows in April.

Still, CREA cut its 2018 sales forecast to 459,500 nationwide, which would represent an 11% decline from the 2017 pace. In March, the group had predicted a 7.1% slide.

Existing home sales in Canada remain stuck at a six-year low of 436,500 units on a seasonally adjusted annualized basis in May, representing the fifth consecutive monthly decline. The stress test, along with higher mortgage rates and new market-cooling measures in British Columbia continue to keep homebuyers on the sidelines. Not even a material rise in new listings (up 5.1%) enticed them back into play. Activity was at a virtual standstill last month in all three of Canada’s largest markets— Vancouver, Toronto and Montreal.

Actual (not seasonally adjusted) activity was down 16.2% compared to May 2017 and reached a seven-year low for the month. It also stood 5.5% below the 10-year average for the month of May. Activity came in below year-ago levels in about 80% of all local markets, led overwhelmingly by those in and around the Lower Mainland of British Columbia and the Greater Golden Horseshoe (GGH) region in Ontario.

“This year’s new stress-test became even more restrictive in May since the interest rate used to qualify mortgage applications rose early in the month,” said, Gregory Klump, CREA’s Chief Economist. “Movements in the stress test interest rate are beyond the control of policymakers. Further increases in the rate could weigh on home sales activity at a time when Canadian economic growth is facing headwinds from U.S. trade policy frictions.”

New Listings

The number of newly listed homes rose 5.1% in May but remained below year-ago levels. New listings rose in about three-quarters of all local markets, led by Edmonton, Calgary, Montreal, Quebec City, Ottawa and the GTA.

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 1.0% y/y (year-over-year) in May 2018, marking the 13th consecutive month of decelerating y/y gains. It was also the smallest annual increase since September 2009.

Decelerating year-over-year home price gains largely reflect trends among GGH housing markets tracked by the index. While home prices in the region have stabilized and begun trending higher on a monthly basis, rapid price gains recorded one year ago have contributed to deteriorating y/y price comparisons. If recent trends remain intact, year-over-year comparisons will likely improve in the months ahead.

Condo apartment units again posted the most substantial y/y price gains in May(+12.7%), followed by townhouse/row units (+4.9%). By contrast, one-storey and two-storey single-family home prices were down (-1.5% and -4.7% y/y respectively), very much in line with what we saw last month.

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

Composite benchmark home prices in the Lower Mainland of British Columbia continue to trend upward after having dipped briefly in the second half of 2016 (Greater Vancouver (GVA): +11.5% y/y; Fraser Valley: +20.6% y/y). Apartment and townhouse/row units have been mainly driving this regional trend while single-family home prices in the GVA have stabilized. In the Fraser Valley, single-family home prices have also started rising.

Benchmark home prices were up by 11.5% on a y/y basis in Victoria and by 18.1% elsewhere on Vancouver Island.

Within the GGH region, price gains have slowed considerably on a y/y basis but remain above year-ago levels in Guelph (+3.8%). By contrast, home prices in the GTA, Oakville-Milton and Barrie were down from where they stood one year earlier (GTA: -5.4% y/y; Oakville-Milton: -5.9% y/y; Barrie and District: -6.3% y/y). This reflects 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 in May (Calgary: -0.5% y/y; Edmonton: -0.9% y/y), while prices in Regina and Saskatoon were down more noticeably from year-ago levels (-6.2% y/y and -2.7% y/y, respectively).

Benchmark home prices rose by 8.2% y/y in Ottawa (led by a 9.5% increase in two-storey single-family home prices), by 6.7% in Greater Montreal (driven by a 7.3% increase in two-storey single-family home prices) and by 4.3% in Greater Moncton (led by a 4.8% increase in townhouse/row unit prices).

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. Home prices in the detached single-family space will remain soft for some time, and residential markets are now balanced or favour buyers across the country. The hottest sector remains condos where buyers face limited supply.

Owing to the housing slowdown, a general slowing in the Canadian economy and significant trade uncertainty, the Bank of Canada has taken a very cautious stance. However, at their last meeting, monetary policymakers have signalled that a rate hike is coming, likely when they next meet on July 11.

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.

In the Bank of Canada’s recently released Financial System Review, the central bank analysts observed that the updated Guideline B-20, which took effect at the beginning of this year, “is dampening credit growth and improving the quality of new mortgage lending, especially in regions with the highest house prices. For example, because of the new mortgage interest rate stress test, the size of a 5-year, fixed-rate mortgage with a 25-year amortization that a median-income borrower in Canada can qualify for dropped by about $82,000 to $373,000. The stress test will have more significant effects in markets such as the Greater Toronto Area (GTA) and Greater Vancouver Area (GVA), where house prices are higher relative to incomes and low-ratio mortgages are more common. By Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres.

CREA modifies forecast

The Canadian Real Estate Association is lowering its national home sales forecast for this year due to weaker sales in B.C. and Ontario.

The industry association says it now expects home sales this year to fall 11 per cent compared with a year ago to 459,900 units this year.

The prediction compared with a forecast for a 7.1 per cent decline the association released in March.

The updated forecast came as CREA reported actual home sales in May hit a seven-year low as they fell 16.2 per cent compared with a year ago.

The national average price for homes sold in May was just over $496,000, down 6.4 per cent from a year ago.

Excluding the Greater Toronto and Greater Vancouver areas, the average price was just over $391,100, down two per cent.  By The Canadian Press.

This Canadian housing price index is on the rise, as condo prices shoot upwards

A major Canadian housing price index continued to rise in May, boosted by strong condo sales in major markets.

The Teranet-National Bank Composite National Price Index rose 1 per cent in May, following a 0.2 per cent rise in April.

“May’s rise in the Teranet-National Bank HPI confirmed the stabilization of home prices that took place since the end of last year, following a correction in [the second quarter of 2017],” writes National Bank senior economist Marc Pinsonneault, in a recent note.

Ten of the 11 markets covered by the index saw price increases last month. Vancouver and Victoria led the charge with 15.4 and 10.3 per cent increases, respectively.

The reason for the boost? A new mortgage stress test introduced in January has taken a bite out of Canadian home buyers wallets, causing a surge of demand — and prices — in the country’s condo market.

“It is true that this stabilization was accompanied by a shift of price momentum in favor of condos in Toronto and Vancouver,” writes Pinsonneault. “Given the high price level for other types of dwellings in these cities, rising interest rates and tighter mortgage underwriting standards, this shift should not be surprising.”

Pinsonneault notes that the bump in prices could be a sign that the market has largely adjusted to the new mortgage rules, after its first quarter price drop.

“In other regions covered by the Composite index, prices have regained most of the ground lost in Q1 [of 2018],” he writes.

And while it’s possible that prices could fall again later in the year, Pinsonneault writes that they’re unlikely to dip too much farther in the coming months.

“Given that interest rates are likely to continue to increase, a relapse of home prices over the next few quarters cannot be ruled out,” writes Pinsonneault. “But their resilience so far suggests that price declines would then be limited in scope.”  By Sarah Niedoba.

Honeymoon Over for Homeowners

Through most of this decade, Canadians have taken advantage of historically low interest rates and splurged on housing. Except now rates are rising and new regulations are making qualification arduous.

In other words, the honeymoon is over and the hangover has begun.

According to the Bank of Canada, Canadians owe about $1.70 on every after-tax dollar of income they earn annually. It stands to reason, then, that rate hikes could be too much to bear for many homeowners in this country.

According to Neville Joanes, chief investment officer at WealthBar, that would be deleterious to the housing market.

“If interest rates increase and individuals are not able to service their debt, it will lead to an increase in supply over sales and foreclosures, and that will lead to a decrease in the housing market from a residential perspective because supply will increase,” he said.

He also believes that homeowners with significant home equity or mortgage insurance would enjoy a measure of protection.

However, should things go awry in the housing market—In April,  home values plunged 11.3% from a year earlier, according to Canadian Real Estate Association statistics—banks would reduce what they’re willing to lend against equity. Moreover, in a rising rate environment, borrowers attempting to refinance or access home equity to service household debt may find those options restricted.

“Selling may be their only solution,” said Joanes. “For an individual with a high level of consumer debt who’s unable to access the equity in their home and unable to meet their payment obligations, the only way to access equity may be to help refinance their personal circumstances or reduce their personal debt load. There are debt management services out there that help individuals reduce levels of high household debt.”

But Rakhi Madan, a Dominion Lending Centres Key Mortgage Partners broker, says household debt concerns are overblown in no small part because the Bank of Canada omitted a salient distinction.

“What the Bank of Canada is not addressing is how much of that $1.70 is unsecured and how much of it is from mortgages,” she said. “Secured debts you can get rid of. It’s an asset you’re holding. Every payment you make on a mortgage, depending on your interest rate, half is coming back to the equity in your house. You can sell secure debt but unsecured you pay from your income. That $1.70 is pretty nominal, so that’s why I feel like this is overblown.”

The ramifications of household debt levels, exorbitant as they may be, will likely remain shielded by steady housing appreciation.

“I don’t think Canada is headed for a housing-led recession simply because, even though household debt is high, housing prices are high and cities are transforming,” said Joanes. “If you compare major metropolitan hubs in Canada to those in the U.S. and those in Europe, they’re still not priced to that level and there’s still space for price appreciation in major Canadian cities.”   By Neil Sharma.

Economic Highlights

What is the latest interest rate and economic news?

All weeks are created equal. They all have seven days, 168 hours and 10,080 minutes. What isn’t equal, is the amount of groundbreaking mortgage and interest rate related news that comes out in said week. Unfortunately for someone who writes commentary on exactly those topics, this very well could be one of those weeks. However, fortunately for our loyal readers, our sophisticated research and writing methods will still allow me to disseminate all the pertinent information you didn’t know you needed to get you through this weekend. In the words of Superman, “No need to thank me, I’m only doing my job”.

Interest rates

All benchmark yields are lower today as bonds have been bid the last few days. The benchmark 5 year bond is currently yielding 2.08% and the 10 year is yielding 2.21%. Compare this to last Friday, where the 5 year closed at 2.16% and the 10 year closed at 2.32%.

Similarly, the Canada Mortgage Bonds have moved in a similar fashion. The current 5 and 10 year CMB’s are lower by 10 bps and 12 bps respectively since last Friday.  The 5 year CMB is yielding 2.37% and the 10 year CMB is yielding approximately 2.57%. It is worth highlighting, we are now sitting approximately 30 bps lower in all the bonds mentioned since a month ago. Clearly, it’s as good a time as ever to utilize the early rate lock option First National offers to take advantage of these low rates and no longer fret about any volatility to come.

Economic News

Canada’s data this week was what economists and pundits like to call ‘soft data’, where the outcomes of the data can be interpreted in various ways. Statistics Canada released their equivalent of tissue paper this morning with manufacturing sales and existing home sales. Manufacturing data came in weaker than expected. The manufacturing survey run by Statscan showed that April manufacturing sales slowed to -1.3% versus what the market was expecting of +0.6%.  Piling on the slow sales was manufacturing volumes, which were also down by 1.9%. Existing home sales only edged lower by 0.1% in May versus the expected -1.7%.  Currently, the year over year decline in national home sales is sitting at 16.2%, which was helped by the May release from a 19.7% decline. Interestingly, Toronto sales were up 1.6% month over month, this first time that has happened since December.  As an aside, if you recall, December was also the last time BitCoin was interesting. The cryptocurrency is down to ~6500 from the 18,000 (USD) it was in December. Ouch.

Currently, the market is pricing in about a 72% chance of a BOC rate hike on July 11th.  It would probably take a lot of poor economic data going forward to push the hike into September but the manufacturing numbers today was a start. Looking forward, before July 11th we have: Retail Sales, CPI (Inflation numbers), a speech by Poloz, wages, employment and the Business Outlook Survey. You will read about it all here first.

Other News

On Wednesday the Federal Reserve in the USA decided to increase their fed funds rate to a range of 1.75-2%. The last time the rate topped 2% was in the late summer of 2008, which was in the midst of the global economy shrinking due to the pending financial crisis. The US economy is firing on all cylinders. One statistic that stands out, is that for the first time, job openings in the USA actually outnumbers job seekers. Hence, many are expecting the fed to continue their course of monetary policy and increase their fed funds rates two more times this year. I would expect this can also push the BoC further towards hiking as well.

In other news, by now the tit-for-tat, war of the words with Trudeau and Trump has passed and you probably have read all about it.  So too has the momentous meeting between Kim-Jung Un and Trump in Singapore. The G7 meetings that also happened over the weekend also provided some great photos which I highly recommend googling. In my opinion, the most important information actually came out this morning, as the USA officially enacted tariffs of 25% on about $50 Billion of Chinese imports. To no one’s surprise, China immediately vowed to retaliate with measures of similar scale against the USA.  The headlines read this as being the beginning of a trade war and all major equity indices are lower as of writing.

Finally, the World Cup started yesterday and as an added bonus, Canada, the USA and Mexico were announced as the 2026 co-hosts. No word on if that’s going to help in the NAFTA negotiations but one thing is for sure, side of the road flag sales will be at a 4-year high this summer.  By Capital Markets Update First National Financial LP

Mortgage Interest Rates

No change to Prime lending rate currently at 3.45%.  Bank of Canada Benchmark Qualifying rate for mortgage approval is at 5.34%.  Fixed rates are holding steady, no change in fixed rates.  Deeper discounts are are available for variable rates making adjustable variable rate mortgages very attractive again.

Other Industry News & Insights

Progressive Conservatives decry B-20, push for study to examine effects

The Progressive Conservatives’ Deputy Shadow Minister for Finance has proposed creating a subcommittee to study B-20’s impact in a bid to have it overturned.

According to MP Tom Kmiec, the Liberal Party acted callously by subjecting Canadians to the mortgage stress test.

“The new stress test is going to block up to 60,000 Canadians from being able to buy a home,” Kmiec told MortgageBrokerNews.ca. “About 100,000 Canadians will probably fail the stress test and won’t be approved to borrow from a federally-regulated lender and that will push them to the unregulated lenders. We know from a CIBC Capital Market report that 47% of all mortgages need to be refinanced in 2018. In the year they knew there would be so many people refinancing, they still imposed the stress test. That was irresponsible and unfair.”

This is the second time Kmiec has proposed studying the mortgage rules after the first motion was voted down, however, he’s willing to play hardball this time.

“I will not approve travel of the committee until such time as we approve a study on mortgages,” said Kmiec. “I’m being reasonable—I’m willing to make amendments to my motion, I want to be collaborative, and that’s why I’m suggesting we make a subcommittee. I think it’s very reasonable. A home, whether it’s a townhouse, a condo or a detached house, is the most important financial decision a Canadian will make, and likely the biggest financial asset they’ll ever purchase. Therefore, it’s totally reasonable to look at this and I’m going to keep pressing.”

Kmiec says that his constituency in Calgary Shepard is replete with homeowners unable to requalify and who are stuck with lenders pushing 100 basis point increases. None of their stories surprise him, though.

“It’s important for the committee to look at the stress test because a report of theirs from a few years ago said the government should help first-time homebuyers and not introduce one-size-fits-all policy.

“If the problem is with indebtedness of Canadians, why are they making it more difficult for them to keep the homes that they’re in, especially for high-ratio mortgages, which also face the stress test. Those people put down more than 20% on their homes, but now the government is making it more expensive for them to carry their mortgages. That’s not just unjust and unfair—that’s bad policy making.”

Mortgage Outlet’s Principal Broker Shawn Stillman doesn’t believe Kmiec will be successful in imploring the Liberals to study the mortgage rules simply because it’s Politics 101.

“It’s unlikely he’ll be successful because government doesn’t like giving any credence to the opposition,” said Stillman. “They could have the best answer but they’ll never say ‘You’re right.’  If they believed it was an issue, they’d say ‘no’ to his suggestion and bring up their own motion a few weeks later.”

Also unlikely, he added.

“I truly believe the Liberal government doesn’t believe it’s an issue. They don’t see any real downside, although I think the Liberal loss in Ontario definitely shows there’s a downside.” By Neil Sharma.

Roundup of the latest mortgage and housing news.

From Mortgage Professionals Canada.

• Mortgage borrowing slides to lowest since 2014 (CBC)
• Canadian mortgage borrowing drops to lowest level since 2014 (BNN)
• Ontario home prices expected to rise moderately, declines unlikely to persist: CMHC (CBC)
• Are new mortgage rules starting to curb Canadians appetite for debt? This report says yes (BuzzBuzzNews

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

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

• The Bank of Canada held its key monetary policy interest rate at 1.25% this morning, as widely expected. The statement released with the decision had a hawkish tone, suggesting the next rate hike is not far off.
• Economic developments since April are seen as in line with the Bank’s view, albeit for the first half overall, given an expected Q1 outperformance. Housing activity is expected to improve as the year continues, helped by rising incomes. The Bank sees consumption continuing to play an important role, suggesting that household finances are not (in their estimation) particularly pinched by recent rate hikes.  
• Beyond our borders, some upside is seen for the U.S., but trade policy uncertainty remains a dampening factor. Emerging market stresses were also highlighted, while recent oil price moves were characterized as driven by geopolitical developments.  
• On the inflation front, there is little to get excited about. The Bank expects inflation to exceed its earlier forecasts due to gasoline prices, but reminded us that, as usual, they will look through this transitory factor.
• All told, the positives seem to outweigh the negatives. Gone was the reference to “caution” that typified the last few statements. Today’s statement instead chose the term “gradual” to describe the approach to policy adjustments. Importantly, interest rate sensitivity and the evolution of economic capacity remained areas of particular focus.

• No surprise here. With the economy set to outperform the Bank’s earlier expectations (Q1 GDP data is released tomorrow morning) and signs of life in all sectors bar housing, economic conditions favour another interest rate hike. While we may need a grammarian to distinguish between “cautious” and “gradual”, the message was nevertheless clear: get ready for another rate hike.
• Indeed, even more explicit than the adjective change was the dropping of the qualifier “over time” in regards to higher rates, and the only reference to labour markets was expectations for ‘solid’ income growth – gone are concerns about potential slack. This reinforces our view that as the economy continues to perform well into the middle of the year, the Bank will have the confidence it needs to raise its policy interest rate at its next scheduled decision, this July.  

WEEKLY RESIDENTIAL  MARKET UPDATE 

Industry & Market Highlights 

Mortgage Professionals Canada Housing Market Digest

We are excited to announce the newly revamped Housing Market Digests.  Providing a snapshot of current data on resale markets, housing stats, employment trends and interest rates, these comprehensive and easy-to-use digests are designed to offer a more streamlined perspective of national and regional information to use with your clients.

Mortgage Professionals Canada and its Chief Economist Will Dunning produce monthly Housing Market Digests to provide a snapshot and trend analysis of the Canadian – and respective regional – housing markets, content that includes information around housing starts, the resale market, employment trends, interest rates, and more.

Digests for Canada are produced every month, while reports on other provinces are produced roughly every quarter.

View the Housing Market Digest Here.

Poloz’s Holding Pattern on Canadian Rates Can’t Last Much Longer,  It’s no longer an issue of if, but when the Bank of Canada raises interest rates

Governor Stephen Poloz heads into a rate decision Wednesday where he’s expected to once again refrain from lifting borrowing costs, even as the economy shows signs of strength and is running up against capacity constraints. It’s a cautious stance driven by a wait-and-see approach to a long list of uncertainties — everything from Nafta to the housing market — rather than any concerns about fundamental economic momentum.

After the current pause, which came after three rate increases, most economists are expecting the Bank of Canada will return to a hiking path in July, followed by one more increase at the end of the year.

“It’s all about the timing,” said Jean-Francois Perrault, chief economist at Bank of Nova Scotia in Toronto and a former central bank researcher. “From our perspective rates are going up there’s no question about it, but it’s just when will they go up.”

As of late Friday, 21 of 24 economists predict Poloz will hold rates steady, with the rest calling for a quarter-point increase. Investors agree chances of an increase are slim; implied odds of a May 30 rate hike fell to 25 percent last week, from 35 percent about a month ago. An increase by July and another one by December are almost fully priced in.

The Bank of Canada’s announcement will be a shorter one-page statement — as opposed to the one in July, which will be accompanied by fresh quarterly forecasts and a press conference — and any new language on trade tensions, the housing market and economic slack will be important clues for assessing a July increase.

Lingering Headwinds

Trump’s threats this month on the North American Free Trade Agreement and possible tariffs on auto imports from Canada are the latest uncertainties Poloz needs to balance. Another lingering headwind is household debt. Poloz devoted a May 1 speech entirely to how consumers are more sensitive to higher rates.

Poloz has also been a big advocate of the idea Canada has moved to the “sweet spot” of the business cycle, where companies expand to meet demand and keep the economy at full output without rapid inflation. The Governor has said he has an “obligation” to nurture this process with stimulative borrowing costs.

The sweet spot theory is important, because it allows Poloz to reconcile the idea of a cautious policy stance with an economy growing above what is considered its typical non-inflationary speed limit. After a recent soft patch, consensus forecasts show the expansion will accelerate to an annualized pace of at least 2 percent and that should eat further into Canada’s dwindling spare capacity.

But the law of economics will eventually prevail, with plenty of signs of a resilient economy that needs higher rates, economists said. Unemployment is at record lows and executives are telling Poloz they remain largely unscathed from policy uncertainty emanating from the Trump administration.

Likewise, after five of years of below-target inflation, rising demand has consumer prices poised to meet or beat the bank’s 2 percent goal through the next year.

“With inflation at target and the labor market looking like it’s at full health, one rate hike wouldn’t be too much for the economy to handle, especially with growth rebounding,” after the first quarter, said Royce Mendes, a CIBC Capital Markets senior economist in Toronto. He predicts a July increase.

The big picture remains one of firm inflation and growth, said Silvana Dimino, an economist at JPMorgan Chase Bank in New York. Canada’s housing is headed for a soft landing and the U.S. has an interest in a striking a Nafta deal, she said.

“They feel like they have some room to let things ride out,” Dimino said, adding the hiking cycle will resume. “When inflation is stable at 2 percent, that’s when you expect to be raising interest rates, which is what they are doing. This is the big picture.” By Greg Quinn.

Massive Cohort of Buyers About to Enter Unprepared Housing Market, Warns Study

An Ontario Real Estate Association-sponsored study warns of a severe housing dearth that’s beginning to loom large.

The study, produced by Ryerson University and titled Millennials in the Greater Toronto and Hamilton Area: A generation Stuck in Apartments?, warns that 700,000 millennial-aged first-time homebuyers will be entering the housing market within the next decade, but that empty nesters won’t be ready to move out of desired single-family detached dwellings until at least 2040.

“The report points out that the best way to help ensure the Canadian dream of homeownership stays within reach is by increasing housing supply, particularly for starter homes and the missing middle,” said Tim Hudak, OREA’s CEO. “The missing middle is a neat solution because it is appealing to millennials and first-time homebuyers, given its affordability, but it’s also attractive to empty nesters because they can still stay in the city close to their grandkids, but free up the traditional family home for somebody else.”

All levels of housing are interdependent, and with boomers occupying single-family homes longer, a chain of disruption affects the entire market.

“Many assumed that empty nesters would put their house on the market, but, increasingly, they’re staying in their homes,” said Hudak. “Right now, it’s a game of musical chairs. Because we haven’t added onto the supply and somebody moves, musical chairs ensue where maybe a few people move up the ladder. That results in higher prices and doesn’t help millennials get a place of their own.”

But while enlarged housing supply will ease unaffordability to a degree, there are other impediments in first-time homebuyers’ way.  For one, mortgages are difficult to secure for mature purchasers, to say nothing of those trying to enter the market for the first time.

“Governments have piled on the back of millennials and first-time homebuyers, making it harder to get a mortgage and paying higher taxes,” said Hudak. “The study we released says the government should do just the opposite. Millennials are now entering the time where they’re getting promoted at work, making more money and thinking of raising families. They’re looking to get into the housing market, and government should be focusing on increasing supply and helping to get the costs down, like lowering the Land Transfer Tax.”

Over most of the last decade, a seemingly growing number of obstacles have made homeownership difficult to attain for would-be first-time buyers.

“Every year, starting six or seven years ago, it’s gotten harder and harder for first-time homebuyers to enter the housing market,” said James Laird, CanWise Financial’s president and broker of record. “Regulation has been big; going back to 2010, each year it’s become more difficult to qualify for mortgages, from reducing the maximum amortizations to increasing the minimum down payments, to increasing the cost of high-ratio insurance, and more recently, adding the stress test. The rapidly rising cost of real estate has also made it more difficult.”

Historically-low interest rates were a saving grace, but those days appear numbered—Laird bandied the possibility of fixed rates surpassing 4% by next year. But given their respective qualification figures, millennials will have to decide whether or not that backyard is worth living farther from employment.

“The millennial generation will probably shift their expectations a little bit, or face a long commute to the suburbs, or maybe even make a decision to live in a smaller community, but they’ll have to figure out where they can work in that community,” said Laird. “I think their expectations need to be reset. In major cities, with how much raw land costs, builders are, for the most part, only building high-rise, high-density housing. A far greater percentage of new housing units are condominiums.”  By Neil Sharma.

Are Rising Rates Raising the Bar?

Anyone trying to qualify for a typical mortgage in Canada has just had the bar raised another couple of notches.  The big banks have been bumping up their five-year fixed rates for the past couple weeks.  Now the Bank of Canada is following suit with an increase to its qualifying rate.

The central bank’s conventional, five year mortgage rate now stands at 5.34% up 20 basis points from 5.14%.  It is the fifth increase since May of last year.  The Bank’s benchmark interest rate has been raised just three times, over about the same period (since July ’17).

The qualifying rate is separate from consumer mortgage rates but it is an important benchmark in light of the B-20 stress test that was imposed on non-insured mortgage holders, back in January.  The new rules require that even home buyers with at least a 20% down payment must qualify for a mortgage at the BoC qualifying rate, or at 2% more than the rate they have negotiated with their bank, whichever is higher.

Market watchers point out that, as usual, the increase will hit first time buyers the hardest.  It will make borrowing more expensive and it will reduce the amount buyers can, ultimately, qualify for.

What remains to be seen is how the increase will affect renewals.  By one estimate 47% of mortgages are up for refinancing this year compared to the normal rate of 25% to 35%. By First National Financial.

Home price appreciation to fall 80% this year says RBC

The national rate of home price appreciation has averaged more than 10% in the past 2 years but that’s set to change significantly.

In its latest housing market forecast, RBC Economics predicts a rise in home prices of just 1.8% for 2018 as policy actions and interest rates conspire to cool the market.

Economists are also expecting that home resales will be weaker in 2018 than 2017 (down 4.5% following a 4.3% drop in 2017) making the second year of annual declines, something not seen in Canada since the mid-90s.

But while price appreciation is to soften, RBC Economics does not see a significant correction nationwide; this risk, it says, is contained.

Supply-demand balance is expected to be seen in most major markets including Ontario and British Columbia, with steady support coming from economic fundamentals.

The mortgage stress test’s long-term impact

The tighter lending rules created by the new mortgage stress tests introduced by OSFI at the start of 2018 “will ultimately dampen homebuyer demand in Canada” RBC Economics senior economist Robert Hogue believes.

He adds in the report that the stress test will impact homebuyers’ budgets leading to growth for the lower-priced housing types at the expense of pricier units. This, he notes, is already being seen in Toronto and Vancouver and is expected to extend to other cities.

Interest rates will also continue to impact the market, with four more hikes forecast through to mid-2019 taking the rate to 2.25%. Hogue says that this will start to have more pronounced impact later in 2018.

Healthy correction

Overall, the RBC Economics’ forecast is for Canada’s housing market to face significant headwinds in 2018 but that the easing of markets represents a “healthy correction” over the past two years from 2016’s “unsustainably strong” conditions.

Why Canadian are Interested in Becoming Landlords

Maybe it is the high cost of buying a home.  Maybe it is the feeling that wages are not keeping up with the cost of living.  Either way there is some new information that suggests increasing numbers of Canadians – in particular millennial Canadians – are looking to become landlords.

A recent survey by one of the big banks indicates 26% of Canadian homeowners are, or are planning to become, landlords.  That includes either a separate, income property or renting out space in a primary residence.

It is worth noting that millennials are far more interested in renting out properties than their older counterparts.  Of homeowners aged 18 to 34 who responded to the poll, 47% either are, or want to be, landlords.  Among millennial homeowners, 54% indicated that, if they were buying today, they would be looking for a home with a source of rental income.  Just 25% of boomers stated a preference for rental income potential.

More than half of millennial homeowners, who are already landlords, have a separate income property, while about 40% are renting out space in their primary residence on either a long-term (1 year) or short-term basis.

A key reason for wanting rental income – cited by 26% of respondents – is to off set mortgage and other housing costs.  About 30% of respondents said they wanted extra income to pay for non-essential items.

The survey suggests that the benefits of being a landlord are not insignificant.  Those with a separate rental property claim an average monthly income of about $2,200, with costs of about $1,500.  Those who rent out a portion of their primary residence report an average income of a little less than $1,300 a month on expenses of about $1,900.  Many also see the tax advantages of a rental income as a significant advantage.  By First National Financial LLP.

Economic Highlights

United States

·        Domestic equity markets shrugged off news that the U.S. administration is pulling out of the current Iran deal while leaving the door open to renegotiation.

·        WTI oil rose for a fifth consecutive week. Rising U.S. gasoline prices helped drive headline inflation to 2.5% y/y, the fastest pace of price growth since February 2017.

·        A loss of momentum in underlying inflation in April should help reduce concerns that the Federal Reserve isn’t moving fast enough to cool a hot U.S. economy. 

Canada

·        Crude oil prices hit a 3½ year high this week, with the WTI benchmark hitting US$71 per barrel. While expectations of a U.S. withdrawal from the Iran nuclear agreement have helped to bid up prices recently, the actual impact on the oil market is likely to be limited.

·        Housing starts slowed to 214k in April, while employment was flat. The unemployment rate held at 5.8%, while wage growth came in above 3% for a fourth consecutive month.

By TD Economics.  Read the full report Here.

Mortgage Interest Rates

Bank of Canada Expected to Raise Interest Rates Again.  Rate announcement to be made tomorrow.

Current Prime lending rate is 3.45%.  Bank of Canada Benchmark Qualifying rate for mortgage approval is at 5.34%.  Fixed rate increasing trend continues.  Deeper discounts are are available for variable rates making adjustable variable rate mortgages very attractive again.

Now’s the perfect time of year for a free mortgage check-up. With spring on its way and interest rates on the rise, it makes sense for us to revisit your mortgage and ensure it still meets your needs. Perhaps you’ve been thinking about refinancing to consolidate debt, purchasing a rental or vacation property, or you simply want to take a vacation. Whatever your needs, we can evaluate your situation and help you determine what’s right for you.

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

 

• Housing affordability rising, but Toronto prices near bottom: RBC (BNN)
• Houses became more affordable for 1st time in over 2 years, says RBC, but there’s a catch (CBC)
• Oakville homebuyers purchased at their own risk, housing minister says (Toronto Star)
• Haider-Moranis Bulletin: Canada needs more up-to-date data on mortgage fraud (Vancouver Sun)
• Rising rates and mortgage rules weighed on Vancouver’s housing market last quarter. Here are 11 facts to prove it (BuzzBuzzNews)
• Here’s what the Liberal’s proposed Toronto-Waterloo high-speed rail system would mean for the Waterloo housing market (BuzzBuzzNews)
• Canada’s mortgage market might be a cesspool, the federal government just warned (Maclean’s)
• Vancouver home sales continue to drop but the new mortgage rules aren’t the main cause (BuzzBuzzNews)
• Customer says BMO ignored her plea to cap limit on joint line of credit with ex: debt more than doubles (CBC)

• That sound you hear this week will be the thud of Canadian home sales (Globe and Mail)
• ‘Getting close to the bottom’: Housing affordability relief likely to be short-lived, says RBC (Financial Post)
• Investors in new Toronto condos face growing risk that rent won’t cover expenses (Globe and Mail)
• Toronto real estate market may be poised for a spring rebound (Globe and Mail)
• Condo owners make big gains, but nearly half in negative cash flow: report (Financial Post)

WEEKLY RESIDENTIAL  MARKET UPDATE 

Industry & Market Highlights 

A Look At Rates, Inflation, Securitization News and More

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

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

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

The Fed

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

Securitization

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

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

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

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

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

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

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

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

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

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

Consumer Banking and Investing Complaints Soar in 2017.

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

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

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

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

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

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

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

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

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

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

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

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

Key Implications

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

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

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

By TD Economics.  Read the full report Here.

Economic Highlights

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

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

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

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

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

This week: BIS and CMB’s

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

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

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

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

Mortgage Interest Rates

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

Other Industry News & Insights

Canadian Consumer Debt Reaches New High

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

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

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

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

There were more encouraging findings, as well:

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

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

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

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

By CMHC.  Read the full Consumer Trend Report here.

Adriaan Driessen

Mortgage Broker 

Dominion Lending Forest City Funding 10671

Cell:     519.777.9374

Fax:      519.518.1081

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