The Bank of Canada Holds Rates Steady Until Core Inflation Falls Further

Today (March 6, 2024), the Bank of Canada held the overnight rate at 5% for the fifth consecutive meeting and pledged to continue normalizing the Bank’s balance sheet. Policymakers remain concerned about risks to the outlook for inflation. The latest data show that CPI inflation fell to 2.9% in January, but year-over-year and three-month measures of core inflation were in the 3% to 3.5% range. The Governing Council projects that inflation will remain around 3% over the first half of this year but also suggests that wage pressure may be diminishing. The likelihood is that inflation will slow more rapidly, allowing for a rate cut by mid-year. 

The Bank also noted that Q4 GDP growth came in stronger than expected at 1.0% but was well below potential growth, confirming excess supply in the economy.

Employment continues to rise more slowly than population growth. During the press conference, Governor Macklem said it was too early to consider lowering rates as more time is needed to ensure inflation falls towards the 2% target.

Bottom Line

The Bank of Canada expects that progress on inflation will be ‘gradual and uneven.’ “Today’s decision reflects the governing council’s assessment that a policy rate of 5% remains appropriate. It’s still too early to consider lowering the policy interest rate,” Macklem said in the prepared text of his opening statement. The Bank is pushing back on the idea that rate cuts are imminent.

High interest rates are dampening discretionary spending for households renewing mortgages at much higher monthly payments. As the economy slows in the first half of this year, the BoC will signal a shift towards easing. This could happen at the next meeting on April 10, when policymakers update their economic projections. This could prepare markets for a June rate cut.

“We don’t want to keep monetary policy this restrictive longer than we have to,” Macklem said. “But nor do we want to jeopardize the progress we’ve made in bringing down inflation.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Canadian March Home Sales Posted Their Biggest Decline Since June

Statistics released today by the Canadian Real Estate Association (CREA) show that rising interest rates were already dampening housing activity well before the Bank of Canada’s jumbo spike in the key policy rate in mid-April. National home sales fell back by 5.4% on a month-over-month basis in March. The decline puts activity back in line with where it had been since last fall (see chart below).

New Listings

The number of newly listed homes fell back by 5.5% on a month-over-month basis in March, following a jump in February. The monthly decline was led by Greater Vancouver, the Fraser Valley, Calgary and the GTA.

With sales and new listings falling in equal measure in March, the sales-to-new listings ratio stayed at 75.3% compared to 75.2% in February. The long-term average for the national sales-to-new listings ratio is 55.1%.

About two-thirds of local markets were seller’s markets based on the sales-to-new listings ratio is more than one standard deviation above its long-term mean in March 2022. The other third of local markets were in balanced market territory.

There were 1.8 months of inventory on a national basis at the end of March 2022 — up from a record-low of just 1.6 months in the previous three months. The long-term average for this measure is more than five months.

Home Prices

The Aggregate Composite MLS® HPI was up 1% on a month-over-month basis in March 2022 – a marked slowdown from the record 3.5% increase in February.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up by 27.1% on a year-over-year basis in March. The actual (not seasonally adjusted) national average home price was $796,000 in March 2022, up 11.2% from last year’s same month.

Bottom Line

The March housing report is ancient history, as sharp increases in market-driven interest rates have changed the fundamentals. This report also precedes the 50 basis point hike in the overnight policy rate by the Bank of Canada. Anecdotal evidence thus far in April suggests that new listings have risen, and multiple bidding has nearly disappeared.

The rise in current fixed mortgage rates means that homebuyers must qualify for uninsured mortgages at the offered mortgage rate plus 200 bps–above the 5.25% qualifying rate in place since June 2021. This, no doubt will squeeze some buyers out of higher-priced markets. 

The federal budget introduced some initiatives to help first-time homebuyers and encourage housing construction–but these measures are hitting roadblocks. Labour shortages are plaguing the construction industry, and the feds do not control zoning and planning restrictions but at the local government level. The ban on foreign resident purchases will likely have only a small impact, so the fundamental issue of a housing shortage remains the biggest impediment to more affordable housing in Canada.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Bank of Canada Hikes Rates by 50 BPs, Signalling More To Come

The Governing Council of the Bank of Canada raised the overnight policy rate by a full 50 basis points for the first time in 22 years. This was a widely telegraphed action that will be followed by the US Federal Reserve next month. While the BoC was the first G-7 central bank to take such aggressive action, the Bank of New Zealand also hiked rates today by half a percentage point. Considering the surge in inflation and the strength of the Canadian economy, another jumbo rate hike may well be in the cards.

The Bank now realizes that inflation is coming, not just from supply disruptions but also from excessive demand. “In Canada, Growth is strong, and the economy is moving into excess demand. Labour markets are tight, and wage growth is back to its pre-pandemic pace and rising. Businesses increasingly report they are having difficulty meeting demand, and are able to pass on higher input costs by increasing prices.”

The Bank now says that “Growth looks to have been stronger in the first quarter than projected in January and is likely to pick up in the second quarter. Consumer spending is strengthening with the lifting of pandemic containment measures. Exports and business investment will continue to recover, supported by strong foreign demand and high commodity prices. Housing market activity, which has been exceptionally high, is expected to moderate”.

The Governing Council has, once again, revised up its inflation forecast. CPI inflation is now expected to average almost 6% in the first half of 2022 and remain well above the control range throughout this year. It is then expected to ease to about 2½% in the second half of 2023 and return to the 2% target in 2024. There is an increasing risk that expectations of elevated inflation could become entrenched. 

With the economy moving into excess demand and inflation persisting well above target, the Governing Council judges that interest rates will need to rise further. The Bank is also ending reinvestment and will begin quantitative tightening (QT), effective April 25. Maturing Government of Canada bonds on the Bank’s balance sheet will no longer be replaced, and, as a result, the balance sheet size will decline over time. This will put further upward pressure on interest rates further out the yield curve.

Bottom Line

Traders are betting that the overnight rate will approach 3.0% one year from today. In today’s Monetary Policy Report (MPR), the Bank revised upward its estimate of the neutral overnight rate to a range of 2.0% to 3.0%–up 25 bps from their estimate one year ago. This is the Bank’s estimate of the overnight rate that is consistent with the noninflationary potential growth rate of the economy.

The rise in interest rates has already shown signs of slowing the Canadian housing market. The MPR states that “Resales are expected to soften somewhat in the second quarter as borrowing rates rise. Low levels of both builders’ inventories and existing homes for sale should support new construction and renovations in the near term”.

Bond yields have risen in anticipation of the Bank of Canada’s move taking the five-year fixed mortgage rate up to between 3.5% and 4%. This could be a pivotal time, as mortgage borrowers must qualify for loans at the maximum of 5.25% or 2 percentage points above the offered contract rate. We are now beyond the  2 ppts threshold, which reduces the buying power of many.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

 

In an aggressive response to the rise in inflation, the Bank of Canada issues a hawkish press release affirming it is ending its bond-buying program (quantitative easing–QE) and accelerating its plans for the first hike in the overnight rate to Q2 or Q3 of next year. This would be the Bank’s first rate hike since September 2018–well before the pandemic began.

The Bank of Canada surprised markets today with a more hawkish stance on inflation and the economy. The Bank released its widely anticipated October Monetary Policy Report (MPR) in which its key messages were:
The Canadian economy has accelerated robustly in the second half.
Labour markets have improved, especially in the hard-to-distance sectors. Despite continuing slack, many businesses can’t find appropriate workers quickly enough to meet demand.
Disruptions to global supply chains have worsened, limiting production and leading to both higher costs and higher prices.
The output gap is narrower than projected in July. The Bank now expects slack to be absorbed in Q2 or Q3 of next year, one quarter sooner than earlier projected.
Given persistent supply constraints and the increase in energy prices, the Bank expects inflation to stay above the control range for longer than previously anticipated before easing back to close to the 2 percent target by late 2022.
The Bank views the risks around this inflation outlook as roughly balanced.
In response to the Bank’s revised view, it announced that it is ending quantitative easing, shifting to the reinvestment phase, during which it will purchase Government of Canada bonds solely to replace maturing bonds. The Bank now owns about 45% of all outstanding GoC bonds.

The Bank today held its target for the overnight rate at the effective lower bound of 1/4 percent. While this was widely expected, the Bank adjusted its forward guidance. It moved up its guidance for the first hike in the overnight rate target by three months, from the second half of 2022 to the middle quarters–sometime between April and September.

Bottom Line

Since the Bank last met in early September, the Government of Canada five-year bond yield has spiked from .80% by a whopping 60 basis points to a 1.40%. That is an incredible 75% rise. A year ago, the five-year bond yield was only .37%.

The Bank believes the surge in inflation is transitory, but that does not mean it will be brief. CPI inflation was 4.4% y/y in September and is expected to rise and average around 4.75% over the remainder of this year. Macklem now believes inflation will remain above the Bank’s 1%-to-3% target band until late next year.

There is also a good deal of uncertainty about the size of the slack in the economy. This is always hard to measure, especially now when unemployment remains elevated at 6.9%, while sectors such as restaurants and retail are fraught with labour shortages. Structural changes in the labour force are afoot. Many former restaurant employees have moved on or are reluctant to return to jobs where virus contagion risks and poor working conditions. There was also a surge in early retirements during the pandemic and a dearth of new immigrants.

Concerning housing, the MPR says the following: “Housing market activity is anticipated to remain elevated over 2022 and 2023 after having moderated from recent record-high levels. Increased immigration, solid income levels and favourable financing conditions will support ongoing strength. New construction will add to the supply of houses and should help soften house price growth”.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drcooper@dominionlending.ca

 

Industry & Market Highlights

Surge in outstanding residential mortgage credit’: CMHC sees risk of delinquencies jumping

Canadians piled on mortgage debt even as COVID-19 forced the country into lockdowns, and Canada Mortgage and Housing Corporation (CHMC) worries many will eventually struggle to keep up with payments.

The national housing agency says total outstanding mortgage debt accelerated at the beginning of 2020 and into the first months of COVID-19 lockdowns in April and May. CMHC says the jump followed a relatively stable period in 2019.

”We observed a surge in outstanding residential mortgage credit in the first five months of 2020.

“This mortgage credit acceleration is a result of an increase in newly extended mortgages, given residential property sales were up late last year and early this year, and a record number of homeowners deferring their mortgage payments from impacts of pandemic-related economic shutdowns,” said Tania Bourassa-Ochoa, senior specialist, housing research at CHMC.

CMHC says six-month deferrals, offered in response to the pandemic, have resulted in 760,000 deferred or skipped mortgage payments across chartered banks. It estimates $1 billion per month has been deferred.

As the deferral period ends, CMHC says there is a higher risk of mortgage delinquencies in the third and fourth quarters.

It also says a string of interest rate cuts by the Bank of Canada has sparked an increased interest in variable rate mortgages.

Uninsured mortgages are getting more popular too and 63 per cent of mortgages from chartered banks were uninsured.

By Jessy Bains, Yahoo Finance Canada. Follow him on Twitter @jessysbains.  

Five reasons Canadians have little reason to fear a housing crash

Whether they take place during a pandemic-fuelled recession or during a period of sustained economic expansion, record-shattering home sales in Canada always seem to be accompanied by the same phenomenon: talk of the country’s “inevitable” housing crash.

Questioning the logic of homebuyers who engage in wild bidding wars in the midst of historic job losses is hardly unreasonable, but saying that behaviour will trigger a catastrophic fall in home prices, like the 18 percent decline projected as a potential outcome by the Canada Mortgage and Housing Corporation in May, is a train of thought Nick Kyprianou, president of RiverRock Mortgage Investment Corporation, is encouraging Canadians to abandon.

Talk of a crash in home prices has been persistent since CMHC first floated its dire 18 percent figure, even though neither CMHC nor any other housing authority, lender or brokerage has provided any evidence or metrics that tie current market activity or the economic slide caused by COVID-19 to plummeting home prices. And yet, the spectre of an 18 percent decline persists, hanging over the market like the reaper’s scythe, just waiting to harvest the souls and credit ratings of unfortunate Canadians.

Kyprianou is another market-watcher who can’t fathom the CMHC’s projection. His theory is that, in determining its absolute, institution-destroying, worst-case scenario as part of its annual report to the Office of the Superintendent of Financial Institutions, CMHC may have concluded that its own breaking point would come if home prices shrank by 18 percent.

“I think [CMHC CEO Evan Siddall] just spouted off the worst-case scenario,” Kyprianou says. “Well, the chance of the worst-case scenario is so remote, everything has to line-up perfectly – multiple times – for it to happen.”

Using five key metrics to compare the current economic situation to that which proceeded the last true housing crash in Ontario (1989-1995), Kyprianou says today’s consumers can remain confident that home values will largely maintain their strength, even as COVID-19 continues to cast its shadow over the Canadian economy.

1. Interest rates

“Interest rates are your biggest factor,” Kyprianou says “If interest rates keep going up, that’s the biggest burden on housing because your dollar just doesn’t go as far.”

Interest rates almost doubled during Ontario’s last crash, rising from from eight to fifteen percent, putting pressure not only on buyers but the province’s builders as well. That is simply not going to happen this time around. The Bank of Canada estimated that it may not raise its key interest rate target before 2022.

2. Unemployment

There is no question that Canada’s employment situation is a worry. Unemployment was 10.2 percent in August 2020, almost double the rate seen in August 2019. But Kyprianou says there’s more to the story than just the headline.

In the early 1990s, when unemployment was hovering around 11 percent, most of the jobs being lost belonged to high earners – middle management, skilled tradespeople, factory workers – who saw their employers close up shop and move their operations to countries like Mexico during the first rocky years of the North American Free Trade Agreement.

“When these jobs are evaporating and the bulk of the unemployed are the higher income earners, that is going to have an effect on housing,” Kyprianou says, adding that most of the labour disruption caused by COVID-19 has been proven to involve low-wage earners who are predominantly renters, not prospective home buyers.

“That’s a big dynamic change,” he says. “You just can’t look at what the unemployment number is. You have to drill down through it and look at who is unemployed.”

3. Equity

Much of the concern expressed by CMHC’s Siddall over Canadian debt levels and high-ratio mortgages is the risk of borrowers being dragged underwater if falling home prices leave them in a negative equity position. Fair enough. But Kyprianou, quoting statistics provided by Canadian Mortgage Professionals, says the vast majority of Canadians have far more than five percent equity in their homes.

In its most recent Annual State of the Residential Mortgage Market in Canada report, CMP found that 88 percent of Canadian homeowners have equity ratios of 25 percent or higher. Among the 6 million homeowners with mortgages, 81 percent have equity ratios of 25 percent or more.

Kyprianou says there is also the concept of emotional equity to consider. Defaulting on a mortgage is seen as an embarrassing failure most homeowners will do all they can to avoid. He saw many of them get resourceful during the last recession – taking on boarders, getting a second job, asking their families for assistance – as a means of making their monthly mortgage payments. He expects the same level of effort from today’s borrowers.

“You gotta make it work,” he says.

4. Taxes

In the early 90s, sky-high personal and corporate tax rates were deemed responsible for driving companies and individual professionals into the waiting arms of the United States. The resulting brain drain eventually led to lower tax rates in Canada, but the damage was done.

With unemployment high and business confidence muted, it is highly unlikely that taxes will see any kind of significant spike over the near-term. Canadians are likely to be up in arms when their CERB payments are taken into account come tax time next year, and the billions in government aid used to prop up the economy for six months will eventually need to be recouped, but it’s safe to say the feds won’t threaten the nation’s economic recovery – or their polling numbers – by implementing any significant new taxes.

5. Immigration

In the 1989-1995 downturn, the problem wasn’t a lack of new Canadians, it was an inability to keep them. The brain drain days are over, but by limiting international immigration, COVID-19 has thrown a wrench into the works. With just over 100,000 permanent residents being welcomed into the country in the first six-months of 2020, Canada has little chance of hitting its immigration target of 341,000 for the year.

Immigration has been a significant driver of all things good in Canada over the past several years – population growth, innovation, economic expansion, home sales – but Kyprianou doesn’t see a fall in immigration numbers having too negative an impact on home prices, largely because immigrants don’t tend to buy properties for the first two years after arriving in Canada.

“If the pandemic affects immigration for three years, it’s not going to be a problem,” he says. “If it’s just a year, year-and-a-half, it’s not going to be a problem.”

Canada’s reputation for being a stable presence in a chaotic world has also been strengthened by the country’s handling of the pandemic (and the humiliating failure of our neighbours to the south to do the same). Once recovered from COVID-19, the country should still offer the same opportunity for new arrivals to find not only a safe environment to raise their families, but high-paying jobs in growing industries like tech and financial services.

The only sub-market where Kyprianou sees prices softening is high-rise condos. But with so many investors having purchased rapidly appreciating pre-construction properties over the past five years, even those who may be forced to sell, like unlucky Airbnb operators, are unlikely to face a loss. If the average price per square foot in Toronto, for example, falls from its current level of approximately $1,100 to $900, anyone who purchased at $500 per square foot in 2015 will still be making a hefty profit.

“It’s not like there’s going to be a bloodbath,” Kyprianou says. “They just don’t make as much money if they have to sell.”  By Clayton Jarvis. 

Mortgage costs stay low, central bank keeps interest rate at rock-bottom level

The Bank of Canada announced today that it would be keeping its mortgage-market influencing policy rate at the record low 0.25 percent level with no sign that it would increase any time soon.

The policy rate, which has a major effect on how mortgage lenders set their rates, has been steady at 0.25 percent since March, when the central bank sprung into action with a dramatic series of rate cuts meant to support the economy during the early days of the pandemic.

A lot has happened since then, to say the least. The central bank, now led by recently appointed Governor Tiff Macklem, has repeatedly stated that its policy rate will remain ultra-low to continue supporting the country’s economic recovery. But the summer brought with it some significant signs that a healthy bounce back is underway, led by the country’s housing market.

This did not appear to faze the bank, according to Capital Economics’ Stephen Brown, who noted that the robust housing recovery only received a brief mention in today’s announcement.

“While home sales were admittedly still lower on a year-to-date basis in July than they were in 2019, the timelier local real estate board data for Toronto and Vancouver showed even further strong rises in sales in August,” wrote Brown.

“Moreover, as sales have surged by more than new listings, the nationwide sales-to-new listing ratio now points to very strong house price inflation, which is surely making at least some members of the [Bank of Canada’s] Governing Council nervous,” he continued.

Brown is alluding to the fact that the central bank wants to avoid a situation in which a sustained low interest rate environment causes home prices to skyrocket due to high demand driven by rock bottom borrowing costs.

Lenders have already been competing for mortgage market share by cutting fixed and variable rates that have now reached historic lows.

A renewed flurry of mortgage borrowing could exacerbate an already worrying pre-pandemic trend that saw Canadian household debt reach and remain at one of the highest levels recorded in developed countries. An event that triggers rates to rise rapidly or incomes to fall quickly — like a wind down of pandemic-related government support — could prove to be disastrous for many indebted households.

But despite these concerns it appears the Bank of Canada’s policy rate, and by extension, mortgage rates will remain low for a long time to come. As Capital Economics’ Brown wrote, the bank has essentially reiterated in today’s announcement that “interest rate rises are years away.”  By Sean McKay. 

What if we shut down again? Are you ready?

With such a hot market over these past few months, instead of sitting back and relaxing throughout the summer, most people have been really busy. That’s a good thing for sure.

As we start the fall market though, there is a lot of uncertainty ahead. Have you planned for the “what if”?  What if schools shut down again, what if the market slows down again, what if they run out of toilet paper again (lol)?

Seriously though, are you ready? Watch to see what I think you should focus on right now to ensure you’re ahead of this thing in case we go back into lockdown.  By David Greenspan. 

Bank of Canada drives another nail in the coffin for savers

Growing your retirement nest-egg safely became even more elusive this week after the Bank of Canada reiterated its pledge to keep its trend-setting interest rate near zero for years to come.

For borrowers it’s a reprieve, but for savers looking for a safe haven in fixed income it’s the continuation of more than a decade of paltry yields.

Bank of Canada Governor Tiff Macklem held Canada’s benchmark rate at 0.25 per cent until the country’s COVID-battered economy can sustain an annual growth rate of two per cent. In the meantime, safe fixed income investments such as guaranteed investment certificates (GICs) will trickle out annual returns of about one per cent.

It presents a real dilemma for Canadians saving for retirement through registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), and workplace defined-contribution (DC) pension plans. A typical retirement plan calls for portfolio growth of between five per cent and eight per cent. Much of the heavy lifting is done through equity investments linked to the stock market, and that risk is offset by a significant portion of fixed income.   

Lower fixed income yields will continue to force investors to generate income by putting a greater proportion of their retirement savings into riskier equity investments such as stocks that pay dividends. Unlike fixed income, dividends are paid at the discretion of the company and the underlying stock is subject to price changes at the discretion of the market. With the threat of a second wave of COVID-19 and a turbulent U.S. presidential election campaign, equity markets could be in for a wild ride.

That could cause even more grief for older investors in, or nearing, retirement who need to draw on a reliable source of cash for day-to-day living expenses. If cash and fixed income reserves dry up, they could be forced to sell equities in a down market, leaving less money invested to grow over time and see them through retirement.

Longer term government and corporate bonds can pay out a bit more but many bond experts say the extra yield is not worth the added risk of default, and having your money exposed to the market for long periods of time.

One questionable fixed income option is bond funds. Many investment advisors substitute them for the fixed income portion of a portfolio but returns are not consistent. That’s because holdings are often traded before maturity, and the funds themselves are subject price changes. In other words: income is not fixed. In many cases, advisors only have access to mutual funds, which pay them a commission.

Good advisors say fixed income should always have a place in a diversified portfolio regardless of yield. Even at zero, fixed income could be your best performing asset class if equity markets are down. The portion of a portfolio that should be dedicated to fixed income depends on the comfort level of the individual investor but should increase as they get older and closer to the time when they want to withdraw funds.

They say the best way to squeeze out the highest yields over the long term is to ladder maturities over different time intervals. The goal is to have fixed income maturities come often so there are more opportunities to get the best yields.

Deciding to sacrifice returns for security is a gut-wrenching reality in today’s economy. You might not reach your return goals, but at least you can rest easy knowing that something will be there.

Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com.  By Dale Jackson. BNN Bloomberg.

Builders record busiest month for home construction in 13 years

Canadian housing starts, led by a blazing construction pace in Ontario, accelerated to the highest level seen in 13 years in August.

On a national level, starts reached 262,400 annualized units in August, up seven percent from July’s reading for the fastest pace of home building seen since 2007.

Housing starts measure how many homes began construction during a given period and are viewed as a key factor in determining market health.

The housing starts data, released earlier this week by the Canada Mortgage and Housing Corporation (CMHC), was hailed as another sign the housing market is in the midst of a robust recovery.

“Add this report to the list of very strong Canadian housing data that we’ve seen since the worst of the pandemic in April, as the sector continues to outperform other parts of the economy,” wrote TD Economist Rishi Sondhi.

“The robust pace of homebuilding is being driven by past sales gains, with low interest rates also providing support. These factors should keep homebuilding elevated through next year as well,” he continued.

Condo developers in Ontario were responsible for a substantial amount of the home construction strength seen on the national level, with starts in the province jumping by 30,700 units in August to 114,800 annualized units. Sondhi said it marked the strongest pace of home building in the province since 1990.

Looking ahead, market experts believe the blazing pace of home construction will likely run into the realities of the ongoing pandemic, with population growth temporarily slowing and government income support programs winding down, resulting in dampened demand for housing.

Sondhi noted that building permits, a reliable indicator of where home construction is heading, eased up in July, pointing to a come down from the dizzying pace seen in August.  By Sean MacKay. 

Stress test must be revised to reflect market realities – economist

Improved purchasing power will stem from the mortgage stress test being updated to reflect the sub-2% rates currently available in the market, according to economist Will Dunning.

The disparity is particularly jarring when one considers that new borrowers are tested against an interest rate of 4.79%, Dunning said in an interview with the Georgia Straight.

“This is an impediment to many Canadians achieving their reasonable home-buying goals and is also an impediment to the broader economic recovery,” Dunning said.

Moreover, the stress test does not take into account rising incomes, which Dunning said has been a decades-long trend.

“It is omitting one of the most important factors that will affect people’s ability to make their future payment, and so that’s a major flaw in the testing system that exists today,” Dunning said.

The economist added that while it’s “very good policy” to put borrowers through these assessments to ensure that they can actually pay their loans, some adjustments might be appropriate at this point.

“It’s time to recalibrate that policy to say, you know, what is a reasonable expectation about the conditions that will exist in five years and will affect people’s ability to make their payments,” Dunning said. “If you think interest rates might rise by two points over the next five years, and you also have an expectation that incomes will continue to rise the way they have in the past, then the way to simulate that combination is to say that the test should be the contracted interest rate plus three-quarters of a point.”  By Ephraim Vecina. 

Second homes and the principal residence tax exemption

From what I have read, the demand for cottage properties has soared during COVID-19. City folk are eager to get out of the city for a change of scenery, especially since many people are still working from home. So the idea of having your laptop set up on the dock of your second home is definitely appealing. And if you are on the selling side, you likely have benefitted from the high demand for properties.

A question I get from both purchasers and sellers is whether the principal residence exemption can be used to shelter the capital gain on a cottage property. The short answer is yes, it’s possible.

In order to take advantage of the principal residence exemption (PRE), certain requirements must be met:

• You, your spouse or former spouse or a child must ordinarily occupy the house for some time during the year. Ordinarily occupy can also include a vacation home that is used by you and your family.
• To claim the PRE on a large lot (over half a hectare – about 1 1/2 acres), you must be in a position to establish that the land over half a hectare is necessary for the “use and enjoyment” of your home. This may be quite relevant if your cottage or second home is located on a large piece of land or island.
• Restrictions will also apply if part, or your entire home, is rented out or is not used by a family member, or if you have not been resident in Canada throughout the period of ownership (other than in the year of purchase).
• As a general rule, a family can claim the PRE on only one home at a time. So the second home is more of a problem: to stop you from trying to claim a separate exemption for another home by putting it in the name of a child, children are restricted from claiming the exemption unless they have reached age 18 in the year or are married.
• Where specific conditions are met, non-Canadian properties may also qualify for the PRE.
• Subject to new rules that were introduced in 2016, it may be possible for certain trusts to claim the PRE provided that a corporation is not a beneficiary, and the trust designates a beneficiary (or their spouse, common-law partner or child) of the trust who ordinarily inhabits the property (referred to as a “specified beneficiary”). See further discussion below regarding trusts.

How it works

Most people think of the PRE as a black-and-white matter – either you qualify to sell tax-free or you don’t. Actually, this is not the case. When you sell your home, you must calculate the gain on your residence just like any other capital gain. Then PRE itself reduces your gain.

Moreover, eligibility for the exemption is on a year-by-year basis, which might come as a surprise to you. The more years you qualify relative to your total period of ownership, the more your gain gets reduced. The basic formula that normally applies:

1 + number of years after 1971 the house was used and designated as a principal residence (and you were a resident of Canada), divided by the number of years of ownership calculated after 1971, times the capital gain otherwise calculated.

Despite only allowing one property to be claimed, the rules allow you to have two residences in the same year: that is, where one residence is sold and another is purchased in the same year. That is why the above formula adds “1” to the number of years the property was a principal residence (the “plus one rule”). Note: As a result of certain changes to the rules that were announced in 2016 the “plus one rule” will not apply where an individual is not resident in Canada during that year. Prior to the change in rules, you could benefit from the PRE for the year that you purchased a residence in Canada, even though you were not a Canadian resident in the year of acquisition.

As you can see from the formula, to get the tax reduction you must designate the home as principal residence on a year-by-year basis.

Ownership by a trust:

Starting as of 2017, additional requirements will be applicable where a trust owns a principal residence (for the years that begin after 2016). Essentially, only the following types of trusts are able to designate a principal residence (where the trust has Canadian-resident beneficiaries and a “specified beneficiary”):

• An alter ego trust, a spousal or common-law partner trust, a joint spousal or common-law partner trust (or a similar trust for the exclusive benefit of the settlor of the trust during his/her lifetime).
• A testamentary trust created under a will that is a qualifying disability trust; or
• A trust for the benefit of a minor child of deceased parents.

If you have a trust that owns a principal residence and don’t meet the above conditions, you can take advantage of transitional rules that will allow the trust to crystallize the PRE in respect of any accrued capital gain relating to the property up to Dec. 31, 2016. Essentially, the trust will be deemed to have disposed of the property on Dec. 31, 2016 (and the trust can shelter the gain under the PRE up until that date) and to have reacquired the property at a cost equal to the fair market value on Jan. 1, 2017.

However, it would appear that as long as the trust distributes the property to a specified beneficiary prior to an eventual sale, and the specified beneficiary in turn sells the property, the PRE would be available for those years after 2017 as well. That is because the trust would not be claiming the PRE; rather, the specified beneficiary does. So if you have purchased a cottage, and you happen to have children that are over the age of 18 (who don’t own their own home), it is still possible to make use of a discretionary trust to hold the cottage property for some time (with your adult children as beneficiaries) and then eventually distribute the property to your children. When the children eventually sell, they may choose to designate the cottage property as their principal residence for those years that they did not own another home. This results in tax savings, since if you held the cottage personally, you would have to pay capital gains tax on either the cottage or your home.

If your entire gain is covered by the PRE, you are now required to report the sale of your principal residence and make the designation (this was not the case prior to 2016). If you fail to do so, the CRA will accept a late principal residence exception in certain circumstances, but you could be subject to a penalty of up to $8,000.

Moreover, the CRA has the ability to reassess you beyond the normal reassessment period (three years from the date of the notice of assessment) if you do not report the disposition of your principal residence.

So whether you are preparing to find your perfect second home, or have just sold one, consider whether you and your family members might be able to take advantage of the PRE rules.  By Samantha Prasad.  

Economic Highlights

Assessing the economy six months into the pandemic

While lockdowns have been eased, the outlook remains uncertain

In this month’s letter, we examine the impact of the pandemic on the Canadian economy as the magnitude of the initial shock is now measurable.

We also share our expectations for the next six months. The economy still faces multiple challenges and a vaccine for the coronavirus will be necessary, but not sufficient, for a full recovery.

The economic impact—six months after the great lockdown

In the face of the unknown, the early months of the pandemic were marked by sweeping restrictions aimed at limiting the spread of the virus.

The economic impact of these measures was immediate. One in six Canadians lost their jobs between February and April (three million jobs lost). City centres around the world were emptied, industrial production slowed sharply and retail sales fell to an unprecedented low.

The most recent data from Statistics Canada shows the magnitude of the economic shock. In the first half of the year, the economy contracted by 13.4% compared to the fourth quarter of 2019.

However, since May, activity has picked up again and points to a rebound in GDP that would bring economic activity in September back to about 95% of its pre-crisis level. (See the Canada section.)

By August, 63% of the jobs lost during the lockdowns had been recovered. But not surprisingly, the most affected sectors remained accommodation and food services (21% fewer jobs) and information, culture and recreation (13%). These two industries depend on proximity to customers and an influx of tourists, who have been largely absent in 2020.

While the economy has performed mostly as expected, there have been some surprises. A V-shaped recovery—a rapid return to pre-crisis GDP—remains out of the question for the Canadian economy as a whole, but retail sales have exceeded expectations and even set a record in June.

These results are mainly attributable to the significant income support measures put in place by various levels of government, and consumers catching up on purchases that could not be made during the lockdowns.

Nevertheless, the economy remains in a severe recession with permanent job losses. Although it’s operating at close to 95% of its capacity, compared to 82% in April, the coming period is likely to be more difficult.

The expected scorecard for Year 1 of the COVID-19 era

In the absence of a second wave, the economy will continue to grow over the next six months, but at a much slower pace.

Despite increased confidence since the easing of the distancing measures, business investment intentions remain weak. According to our internal surveys, many entrepreneurs are focused on shoring up their finances as they emerge from the crisis. Investments will be delayed even longer in the hard-hit oil-producing provinces. (See oil section.)

Meanwhile, exports were down 8% in July compared to the pace observed in 2019. Several factors will continue to impact Canadian exporters, including low oil prices, uncertainty caused by tensions between the U.S. and China, and more generally, increased protectionism by several trading partners.

Finally, the gradual withdrawal of government support programs will have an impact on household disposable income, which has so far remained buoyant during the crisis.

Caution by consumers that’s reflected in a higher savings rate could lead to a slowdown in retail sales. In addition, physical distancing measures will limit the recovery potential of several sectors. It is unlikely that these measures will be further relaxed until a vaccine is developed and distributed. In the graph, the closer to 100, the more stringent are distancing measures. It shows that Canada’s current standing compares to the United States and is stricter than much of Europe.

Currently, we are forecasting a contraction of the Canadian economy of about 7% in 2020. This implies that the momentum observed over the summer will fade this fall.

Underlying risks remain significant

The strength of the recovery will depend on how two key risks play out.

• In the short term, will a second wave of infections occur?
• In the medium term, will a vaccine be deployed and how effective will it be?

In the short term

Our baseline scenario assumes Canada will escape a second wave of infections. However, a severe second wave would lead to a W-shaped recovery, where the economy would contract again in a few months’ time.

The reintroduction of lockdowns as stringent as the ones in effect last spring remains unlikely. However, a tightening of physical distancing measures would lead to further setbacks in several sectors, as demonstrated by the situation in some U.S. states.

A mushrooming number of cases is currently being reported in several European countries, including France and Spain. Thus, a partial lockdown remains a definite downside risk for Canadian entrepreneurs.

In the medium term

The full recovery of the global economy will require the development of a vaccine against COVID-19 that would likely be available in 2021. Several potential vaccines are currently in late-stage development.

However, there will still be many challenges to returning to a full-employment economy like the one we had before the pandemic began.

A vaccine is never 100% effective and the longevity of the immunity period would remain uncertain. Additionally, the production and distribution of a vaccine will be an unprecedented operation, suggesting it may run up against numerous bottlenecks.

Thus, a vaccine is necessary but not sufficient for an economic recovery. It is therefore likely the economic impact of COVID-19 will persist for some time to come. As things stand, outbreaks of infection could be part of our reality until 2022.

What does it mean for entrepreneurs?

1. The recovery is progressing well and the number of cases of infection remains stable for the moment.

2. However, the increase in infections in Europe shows the fragility of the situation. Canada could experience a second wave in the coming months.

3. Lockdowns as stringent as those in the spring are unlikely.  However, business owners operating in service sectors with close physical proximity (e.g. accommodation and food services) should have a contingency plan to deal with the possibility of a tightening of measures to counter the spread of the virus.

4. The development of a vaccine will not be enough to erase the economic damage done by COVID-19.  Entrepreneurs need to keep an eye on their cash flow.

5. According to our surveys, many companies have bet on a strategy of minimizing costs and increasing efficiency.  With the economy still nearly two years away from full recovery, it may be useful to follow their lead by reviewing your business processes to remain competitive.

Bank of Canada’s willingness to speak up will offend some, but it’s time to open policy debates

Tiff Macklem has been Bank of Canada governor for only four months, but he must be feeling comfortable, because he is making a habit of entering dangerous territory.

Macklem’s latest speech was about income inequality, a societal problem that economic orthodoxy suggests should be off limits for a central banker since there’s little that monetary policy can do to correct it. Mark Carney, a previous Bank of Canada governor, once offended some for expressing sympathy for the Occupy movement, which made a cause of trying to claw back the outsized wealth of the one per cent.

But economic orthodoxy was cracked by the Great Recession, and is now being shattered by the coronavirus pandemic.

Macklem started his professional career at the Bank of Canada in the 1980s, fought the 2008-09 financial crisis as a senior official at the Finance Department, and then had a chance to reflect on all that he had observed when he became dean of the University of Toronto’s Rotman School of Management. No governor has been more prepared for extraordinary events, and Macklem appears set to lead the central bank in a new direction.

Last month, Macklem signalled an end to the Bank’s tradition of aloofness, using a virtual appearance at the annual Jackson Hole central banking conference to argue that central banks had made a mistake by relying on traders, economists and journalists to interpret monetary policy for the masses. “The best way to get our messages to the public is to deliver them ourselves,” he said on Aug. 27.

Macklem on Sept. 10 backed that up in remarks given at a virtual event hosted by the Canadian Chamber of Commerce, yet clearly directed to a far broader audience than the business community. He used the bulk of his speech to share an analysis of how the COVID-19 recession has taken a disproportionate toll on women and younger workers, pledging to take that into account when assessing the state of the economy.

“Our mandate is to maximize the economic well-being of Canadians,” Macklem said. “Very uneven recessions tend to be longer and have a larger impact on the labour market. So, uneven outcomes for some can lead to poorer outcomes for all.”

Most people will find those comments reassuring, others will simply see them as a statement of the obvious. But some will deem them controversial, since certain political parties have made a virtue of closing the income gap, and convention suggests the central bank governor should speak only about arcana such as the output gap and the neutral rate of interest.

Those people will be doubly displeased by Macklem’s assertion during the question-and-answer period that “we are going to need to accelerate our efforts” on dealing with climate change, a fact-based statement that nonetheless will be construed by some as political.

However, it’s 2020 and central bankers are learning how to live with the fame that was thrust upon them during the financial crisis, when they arrested the Great Recession with relatively little help from elected officials.

There have been missteps, to be sure. Carney, who also served as head of the Bank of England, and Raghuram Rajan, the former Reserve Bank of India governor, often strayed too far from monetary policy in their public remarks, making themselves partisan targets. Rajan, while celebrated in the Indian press, was effectively run out of his home country by the ruling political party. Carney allowed himself to become a lightning rod in the Brexit debate.

Yet central bankers would be doing the public a disservice if they retreated entirely, because voters would lose access to an important perspective. Macklem appears willing to speak frankly on important economic issues, while steering clear of offering prescriptive advice on what legislators should do about them. “Striving for equality of opportunity is simply the right thing to do,” he said in his speech to the Chamber of Commerce.

Such an approach will invite slings and arrows.

You could argue that it’s a bit rich for a central bank to express concern about economic disparity, since monetary policy over the past decade probably made things worse. The most obvious beneficiaries of quantitative easing (QE), the policy of creating billions of dollars to buy bonds, have been equity investors, an already wealthy minority. Macklem acknowledged that possibility in his speech, while pointing out there is also research that suggests the opposite.

“Lower borrowing costs stimulate economic activity, which in turn boosts jobs and incomes, particularly for people with lower incomes,” he said. “Research on this topic is ongoing both internationally and here in Canada. We will continue to study and monitor all the effects of QE.”

Macklem was also fuzzy on how the Bank of Canada’s observations about the unbalanced nature of the COVID-19 recession would factor in policy going forward.

Before the pandemic, Jerome Powell, chair of the U.S. Federal Reserve, often boasted that the Fed’s decision to let the U.S. economy run past conventional limits associated with full employment resulted in more jobs for underprivileged groups without creating inflation. It seems likely the Bank of Canada will attempt to do the same, although Macklem declined to commit to that explicitly.

“It’s very important that we understand the dynamics of this recession,” he said on a conference call with reporters. “The unevenness affects the durability of the recovery and while we can’t target specific sectors or workers, the amount of stimulus we put in place will be calibrated to support the recovery, to support the durability of the recovery. That is how you get inflation back to target and keep it there.”

There will be chatter that Macklem’s Bank of Canada is letting itself get distracted by the latest fad in economics. So be it. At least the debate will be had out in the open.  By Carmichael Kevin. 

Mortgage Interest Rates

Both Fixed  and Variable mortgage rates have decreased slightly and are at historically low levels.    View rates Here – and be sure to contact us for a quote to help you find the lowest rate for your specific needs and product requirements.

The Bank of Canada’s kept it’s overnight rate is 0.25%.  Prime lending rate remains at 2.45%.  What is Prime lending rate?  The prime rate is the interest rate that commercial banks charge their most creditworthy corporate customers.  The Bank of Canada overnight lending rate serves as the basis for the prime rate, and prime serves as the starting point for most other interest rates.  Bank of Canada Benchmark Qualifying rate for mortgage approval is 4.94%. 

The Bank of Canada’s target overnight rate is 0.25%.  Prime lending rate is 2.45%.  What is Prime lending rate?  The prime rate is the interest rate that commercial banks charge their most creditworthy corporate customers. The Bank of Canada overnight lending rate serves as the basis for the prime rate, and prime serves as the starting point for most other interest rates.  Bank of Canada Benchmark Qualifying rate for mortgage approval is 4.79%.   Read the Government of Canada Department of Finance summary on Benchmark Rate for Insured Mortgages statement here. 

Your Mortgage

To ensure you obtain the best deals and lowest rates for your mortgage in a rapidly changing market, please contact us to discuss your needs, review your options and secure the lowest rates to protect your best interest.

At iMortgageBroker, we love looking after our clients’ needs to ensure you get all the options with the best deals and best results.  We do this by shopping your mortgage to all the lenders out there that includes banks, trust companies, credit unions, mortgage corporations & insurance companies.  We do this with a smile, and with service excellence!

Reach out to us – let us do all the hard work in getting you the best results and peace of mind!

We encourage you to follow guidelines from our public health authorities:

Middlesex Health Unit

https://www.healthunit.com/novel-coronavirus

Southwestern Public Health

https://www.swpublichealth.ca/content/community-update-novel-coronavirus-covid-19

Ontario Ministry of Health

https://www.ontario.ca/page/2019-novel-coronavirus

Public Health Canada

https://www.canada.ca/en/public-health/services/diseases/coronavirus-disease-covid-19.html

Factual Statistics Coronavirus COVID-19 Globally:

https://www.worldometers.info/coronavirus/

https://gisanddata.maps.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6

 

 

The Government of Ontario announced it is reducing the list of businesses classified as essential and ordering more workplaces to close, to prevent the spread of COVID-19. The updated list of essential businesses does include real estate agent services, which the Government has grouped under Financial Services.

In his news conference today, Premier Ford said unnecessary industrial construction will stop, and new starts in residential projects will stop. There will also be higher scrutiny at critical construction sites, such as new hospitals, roads and bridges. The closure will take effect as of Saturday, April 4, 2020 at 11:59 pm.

Check out the full news release for more details.

Again, this is NOT business as usual. LSTAR urges its Members to practise social distancing and use all the tools available to support clients and close transactions remotely, following the guidelines from Public Health Authorities.  By LSTAR 2020 President Blair Campbell.

March home sales remain steady

London and St. Thomas Association of REALTORS® (LSTAR) announced that 866 homes exchanged hands in March, an increase of 6.9% compared to March 2019. Units sold are on par with the 10-year average.

“For the first quarter, home sales in 2020 are at 2,170, 12.3% ahead of 2019,” said 2020 LSTAR President Blair Campbell. “But with the COVID-19 pandemic affecting all businesses, there is an expectation the marketplace will be impacted in the coming weeks and months. We’ll have to wait and see what this means for LSTAR’s jurisdiction, based on data for the upcoming monthly cycles.”

“First I want to stress that LSTAR’s highest priority during this challenging time is the safety and well-being of its Members and staff,” Campbell said. “We continue to urge members to practice social distancing and follow the guidelines set by our public health authorities. It is not business as usual.”

Compared to a year ago, the overall average home price experienced an increase of 10.3%, rising to $447,152 in March. This average sales price includes all housing types, from single detached homes to high rise apartment condominiums. Across the five major areas of LSTAR’s region, average home sales price continued to increase. The following table illustrates last month’s average home prices by area and how they compare to the values recorded at the end of March 2019.

Residential Market Commentary – March limps away

That is the question.

Industry & Market Highlights 

Bank of Canada enacts another overnight rate cut

For the third time this month, the Bank of Canada cut to the overnight rate, this time slashing off 50 basis points to a new level of .025%. The Bank Rate is correspondingly 0.50% and the deposit rate is .025% percent.

In a press statement, the central bank said this “unscheduled rate decision brings the policy rate to its effective lower bound and is intended to provide support to the Canadian financial system and the economy during the COVID-19 pandemic.”

The BoC also launched two programmes designed to address the economic chaos created by COVID-19: The Commercial Paper Purchase Program (CPPP) is designed to “alleviate strains in short-term funding markets and thereby preserve a key source of funding for businesses,” while the second initiative will have the BoC acquiring Government of Canada securities in the secondary market, beginning with a minimum acquisition of $5 billion per week across the yield curve.

“The program will be adjusted as conditions warrant, but will continue until the economic recovery is well underway,” the BoC said, adding that its balance sheet “will expand as a result of these purchases.” By Phil Hall.

Government introduces Canada Emergency Response Benefit to help workers and businesses. 

The Government of Canada is taking strong, immediate and effective action to protect Canadians and the economy from the impacts of the global COVID-19 pandemic. No Canadian should have to choose between protecting their health, putting food on the table, paying for their medication or caring for a family member.

To support workers and help businesses keep their employees, the government has proposed legislation to establish the Canada Emergency Response Benefit (CERB). This taxable benefit would provide $2,000 a month for up to four months for workers who lose their income as a result of the COVID-19 pandemic. The CERB would be a simpler and more accessible combination of the previously announced Emergency Care Benefit and Emergency Support Benefit.

The CERB would cover Canadians who have lost their job, are sick, quarantined, or taking care of someone who is sick with COVID-19, as well as working parents who must stay home without pay to care for children who are sick or at home because of school and daycare closures. The CERB would apply to wage earners, as well as contract workers and self-employed individuals who would not otherwise be eligible for Employment Insurance (EI).

Additionally, workers who are still employed, but are not receiving income because of disruptions to their work situation due to COVID-19, would also qualify for the CERB. This would help businesses keep their employees as they navigate these difficult times, while ensuring they preserve the ability to quickly resume operations as soon as it becomes possible.

The EI system was not designed to process the unprecedented high volume of applications received in the past week. Given this situation, all Canadians who have ceased working due to COVID-19, whether they are EI-eligible or not, would be able to receive the CERB to ensure they have timely access to the income support they need.

Canadians who are already receiving EI regular and sickness benefits as of today would continue to receive their benefits and should not apply to the CERB. If their EI benefits end before October 3, 2020, they could apply for the CERB once their EI benefits cease, if they are unable to return to work due to COVID-19. Canadians who have already applied for EI and whose application has not yet been processed would not need to reapply. Canadians who are eligible for EI regular and sickness benefits would still be able to access their normal EI benefits, if still unemployed, after the 16-week period covered by the CERB.

The government is working to get money into the pockets of Canadians as quickly as possible. The portal for accessing the CERB would be available in early April. EI eligible Canadians who have lost their job can continue to apply for EI here, as can Canadians applying for other EI benefits.

Canadians would begin to receive their CERB payments within 10 days of application. The CERB would be paid every four weeks and be available from March 15, 2020 until October 3, 2020.

This benefit would be one part of the government’s COVID-19 Economic Response Plan, to support Canadian workers and businesses and help stabilize the economy by helping Canadians pay for essentials like housing and groceries, and helping businesses pay their employees and bills during this unprecedented time of global uncertainty.

March 25, 2020 – Ottawa, Ontario – Department of Finance Canada

https://www.canada.ca/en/department-finance/news/2020/03/introduces-canada-emergency-response-benefit-to-help-workers-and-businesses.html

Ontario Prohibits Gatherings of More Than Five People with Strict Exceptions

Stronger action required to stop the spread of COVID-19

The Ontario government is taking immediate and decisive action to further stop the spread of COVID-19 and protect the health and well-being of all Ontarians.

Based on the best advice of Ontario’s Chief Medical Officer of Health, the Ontario government is issuing a new emergency order under the Emergency Management and Civil Protection Act to prohibit organized public events and social gatherings of more than five people, effective immediately.

This order would not apply to private households with five people or more. It would also not apply to  operating child care centres supporting frontline health care workers and first responders provided the number of persons at each centre does not exceed 50 people. Funerals would be permitted to proceed with up to 10 people at one time.

“If we are going to stop the spread of COVID-19 now and keep our communities safe, we need to take extraordinary measures to ensure physical distancing,” said Premier Doug Ford. “I strongly encourage everyone to do the responsible thing and stay home unless absolutely necessary. I can assure everyone that we will do everything in our power to stop this virus in its tracks.”

“We are acting on the best advice of our Chief Medical Officer of Health and other leading public health officials across the province,” said Christine Elliott, Deputy Premier and Minister of Health. “These are extraordinary times that demand extraordinary measures to stop the spread of COVID-19 and protect our people. Nothing is more important.”

Organized public events include parades, events including weddings, social gatherings and communal services within places of worship. This order replaces a previous emergency order which prohibits organized public events of over 50 people.

Ontario declared a provincial state of emergency on March 17, 2020 and has issued orders to close non-essential workplaces, recreational programs, libraries, publicly funded schools, private schools, daycares, provincial parks, churches and other faith settings, as well as bars and restaurants, except those that may only offer takeout or delivery. Essential services, such as grocery stores, convenience stores, pharmacies, public transit, manufacturing facilities, and supply chain companies remain open and operational.

Quick Facts

• Everyone in Ontario should be practicing physical distancing to reduce their exposure to other people. Avoid close contact (within 2 metres) with people outside of your immediate families.
• On March 25, 2020, the federal government announced an Emergency Order under the Quarantine Act that requires any person entering Canada by air, sea or land to self-isolate for 14 days whether or not they have symptoms of COVID-19. They should monitor for symptoms of COVID-19 for 14 days.
• Take everyday steps to reduce exposure to COVID-19 and protect your health: wash your hands often with soap and water or alcohol-based hand sanitizer; sneeze and cough into your sleeve; avoid touching your eyes, nose or mouth; avoid contact with people who are sick; stay home if you are sick.

Additional Resources

• Visit Ontario’s website to learn more about how the province continues to protect Ontarians from COVID-19.
• Ontario Enacts Declaration of Emergency to Protect the Public
• The 2019 Novel Coronavirus (COVID-19)
• For public inquiries, call ServiceOntario, INFOline at 1-866-532-3161 (toll-free in Ontario only).

https://news.ontario.ca/opo/en/2020/03/ontario-prohibits-gatherings-of-five-people-or-more-with-strict-exceptions.html

Pent up housing demand during COVID-19 may lead to hot summer market

As Canada prepares to weather the worst of the COVID-19 pandemic, there are already hopeful signs emerging from China where the novel coronavirus originated months ago.

China is maintaining a long streak of reporting no new local COVID-19 infections as its economy is gradually ramping back up after coming to a screeching halt earlier in the year. With it, the Chinese housing market is experiencing a sharp rebound in March, in what could be a bellwether for anticipating Canada’s own market trajectory once the pandemic’s impact subsides in the country.

“China’s private housing market is springing back to life as more sales offices reopened across the country following a nationwide shutdown, saving home builders from a deeper financial slump this year,” wrote South China Morning Post reporter Iris Ouyang in an article published today.

Ouyang cited home transaction volume in eight large Chinese cities that has eclipsed levels observed in the final quarter of 2019. She also noted that property sales in 30 tier-1 and tier-2 Chinese cities tripled in March from February, a sign that the coronavirus crisis was waning. South China Morning Post uses a four-tier system to rank cities in China using GDP, population and political governance data.

“There’s a release of pent-up demand from the Spring Festival and the coronavirus lockdown period in February,” Yang Hongxu of E-House China Research and Development Institute, a Shanghai-based real estate research firm, told South China Morning Post. “Thus we are seeing partial warming up of the property market.”

While nothing can be guaranteed during these extraordinary times, many economists believe that the experience of China and other Asian countries that were first hit by the virus early in the year will largely mirror the experience of Western countries now facing the full brunt of their outbreaks.

“If the dynamics seen in Asia repeat (and we have reason to believe it will) we are about 3 to 4 weeks away from the global pandemic inflection point,” wrote Tamara Basic Vasiljev, senior economist at Oxford Economics, in a research note published today.

“True, the numbers of coronavirus cases continue to rise sharply and western economies have been unable to repeat the success of Asian quarantine and containment policies. But the dynamics of COVID-19 deaths in the West are similar to patterns seen in Asia, pointing to a near turnaround,” she continued.

When this turning point is reached in Canada and new infections begin to ebb, there is promise that pent up housing demand in the country’s major markets will be unleashed in the second half of the year.

The conditions are certainly right for a reinvigorated market in the summer and fall. BMO economist Priscilla Thiagamoorthy wrote earlier this month that Canada’s housing market “found a solid footing in the first couple of months of 2020” before being derailed by the unprecedented disruptive effects of the COVID-19 pandemic.

In response to the pandemic’s wide-ranging economic impacts, the Bank of Canada slashed its key interest rate to a historic low last week.

With strong housing demand in the months prior to the pandemic and all-time low mortgage rates expected when Canada emerges on the other side of its COVID-19 crisis, there are plenty of reasons to expect a housing rebound in the subsequent months.

China is seemingly following this trajectory as its outbreak wanes, bolstering the case further that Canada’s market could bounce back rapidly if it follows the same path. By Sean MacKay. 

Economic Highlights

Bank of Canada Moves to Restore “Financial Market Functionality”

The Bank of Canada today lowered its target for the overnight rate by 50 basis points to ¼ percent. This unscheduled rate decision brings the policy rate to its effective lower bound and is intended to provide support to the Canadian financial system and the economy during the COVID-19 pandemic (see chart below).

Strains in the commercial paper and government securities markets triggered today’s action to engage in quantitative easing. The Governing Council has been meeting every day during the pandemic crisis. Market illiquidity is a significant problem and one the Bank considers foundational. These large-scale purchases of financial assets are intended to improve the functioning of financial markets.

Credit risk spreads have widened sharply in recent days. People are moving to cash. Liquidity has dried up in all financial markets, even government-guaranteed markets such as Canadian Mortgage-Backed securities (CMBs) and GoC bills and bonds. The commercial paper market–used by businesses for short-term financing–has become nonfunctional. The Bank is making large-scale purchases of financial assets in illiquid markets to improve market functioning across the yield curve. They are not attempting to change the shape of the curve for now but might do so in the future.

These large-scale purchases will create the liquidity that the financial system is demanding so that financial intermediation can function. Risk has risen, which creates the need for more significant cash injections.

At the press conference today, Senior Deputy Governor Wilkins refrained from speculating what other measures the Bank might take in the future. When asked, “Where is the bottom?” She responded, “That depends on the resolution of the Covid-19 health issues.”

The Bank will discuss the economic outlook in its Monetary Policy Report at their regularly scheduled meeting on April 15. In response to questions, Governor Poloz said it is challenging to assess what the impact of the shutdown of the economy will be. A negative cycle of pessimism is clearly in place. The Bank’s rate cuts help to reduce monthly payments on floating rate debt. He is hoping to maintain consumer confidence and expectations of a return to normalcy.

The oil price cut alone would have been sufficient reason for the Bank of Canada to lower interest rates. The Covid-19 medical emergency and the shutdown dramatically exacerbates the situation. All that monetary policy can do is to cushion the blow and avoid structural problems to the economy. The overnight rate of 0.25% is consistent with market rates along the yield curve.

High household debt levels have historically been a concern. Monetary policy easing helps to bridge the gap until the health concerns are resolved. The housing market, according to Wilkins, is no longer a concern for excessive borrowing by cash-strapped households.

At this point, the Bank is not contemplating negative interest rates. Monetary policy has little further room to maneuver, given interest rates are already very low. With businesses closed, lower interest rates do not encourage consumers to go out and spend money.

Large-scale debt purchases by the Bank will continue for an extended period to provide liquidity. The Bank can do this in virtually unlimited quantities as needed. The policymakers are also focussing on the period after the crisis. They want the economy to have an excellent foundation for growth when the economy resumes its normal functioning.

Fiscal stimulus is crucial at this time. The newly introduced income support for people who are not covered by the Employment Insurance system is a particularly important safety net for the economy. There are many other elements of the fiscal stimulus, and the government stands ready to do more as needed.

The Canadian dollar has moved down on the Bank’s latest emergency action. The loonie has also been battered by the dramatic decline in oil prices. Canada is getting a double whammy from the pandemic and the oil price war between Saudi Arabia and Russia. The loonie’s decline feeds through to rising prices of imports. However, the pandemic has disrupted trade and imports have fallen.

The Bank of Canada suggested as well that they are meeting twice a week with the leadership of the Big-Six Banks. The cost of funds for the banks has risen sharply. CMHC is buying large volumes of mortgages from the banks, which, along with CMB purchases by the central bank, will shore up liquidity. The banks are well-capitalized and robust. The level of collaboration between the Bank of Canada and the Big Six is very high.

The Stock Market Has Had Three Good Days

As the chart below shows, the Toronto Stock Exchange has retraced some of its losses in the past three days as the US and Canada have announced very aggressive fiscal stimulus. As well, the Bank of Canada has now lowered interest rates three times this month, with a cumulative easing of 1.5 percentage points. The Federal Reserve has also cut by 150 basis points over the same period. In addition to lowering borrowing costs, the central bank has also announced in recent days a slew of new liquidity measures to inject cash into the banking system and money markets and to ensure it can handle any market-wide stresses in the financial system.

The economic pain is just getting started in Canada with the spike in joblessness and the shutdown of all but essential services. Similarly, the US posted its highest level of initial unemployment insurance claims in history–3.83 million, which compares to a previous high of 685,000 during the financial crisis just over a decade ago.

These are the earliest indicator of a virus-slammed economy, with much more to come. All of this is without precedent, but rest assured that policy leaders will continue to do whatever it takes to cushion the blow of the pandemic on consumers and businesses and to bridge a return to normalcy.

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

Millions of Canadians already missing payments due to COVID-19

We are still relatively early in the coronavirus crisis but already many people are missing payments.

A new report from insolvency practitioners Bromwich+Smith with Leger Research has found that 49% of households in Ontario and Alberta, and more than half in British Columbians, have suffered an immediate income reduction since the crisis began.

The share of households who reported already falling behind with payments on credit cards, utilities, or telecoms is 24% in Alberta, and 19% in Ontario and BC.

“The results are quite staggering really. Of course, we get a sense of what is happening when we read the news, but the survey results make it far more real having interviewed 750 people across BC, Alberta and Ontario,” says David de Lange, Senior Vice President of Leger Research.

Getting help

Most of those struggling will reach out for help from the federal and provincial governments but almost a quarter of respondents said they didn’t know how they would adjust to a reduction in income.

Bromwich+Smith advises that getting government help is a good first step for those that cannot pay their debts followed by asking their mortgage lender to see if a deferral could work for them or call a licensed insolvency trustee to understand if restructuring debts makes sense for their current state. By Steve Randall.

Mortgage Interest Rates

The Bank of Canada’s target overnight rate is now 0.25%.  Prime lending rate is now down to 2.45%.  What is Prime lending rate?  The prime rate is the interest rate that commercial banks charge their most creditworthy corporate customers. The Bank of Canada overnight lending rate serves as the basis for the prime rate, and prime serves as the starting point for most other interest rates.  Bank of Canada Benchmark Qualifying rate for mortgage approval lowered to 5.04% adding on average another $10,000 in increased borrowing capacity, but changes to the mortgage qualifying rate is coming into effect April 6, 2020: Instead of the Bank of Canada 5-Year Benchmark Posted Rate, the new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%. 

Banks/Lenders started raising fixed rates due to market volatility and and liquidity concerns.  Discounts on variable rates have also been reduced now at Prime plus. Bond markets are not operating as normal and lenders cost for hedging funds has become more expensive also affecting rates.

View rates Here – and be sure to contact us for a quote as rates are moving faster than can be updated.

Why Are Mortgage Rates Rising?

Over the past month, the Bank of Canada has lowered its overnight rate by a whopping 1.5 percentage points to a mere 0.25%. Many people expected mortgage rates to fall equivalently. The banks have reduced prime rates by the full 150 basis points (bps). But, since the second Bank of Canada rate cut on March 13, banks and other lenders have hiked mortgage rates for fixed- and variable-rate loans. That’s not what happens typically when the Bank cuts its overnight rate. But these are extraordinary times.

The Covid-19 pandemic has disrupted everything, shutting down the entire global economy and damaging business and consumer confidence. No one knows when it will end. This degree of uncertainty and the risk to our health is profoundly unnerving.

Most businesses have ground to a halt, so unemployment has surged. Hourly workers and many of the self-employed have found themselves with no income for an indeterminate period. All but essential workers are staying at home, including vast numbers of students and pre-school children. Nothing like this has happened in the past century. The societal and emotional toll is enormous, and governments at all levels are introducing income support programs for individuals and businesses, but so far, no cheques are in the mail.

In consequence, the economy hasn’t just slowed; it has frozen in place and is rapidly contracting. Travel has stopped. Trade and transport have stopped. Manufacturing and commerce have stopped. And this is happening all over the world.

What’s more, the Saudis and Russians took advantage of the disruption to escalate oil production and drive down prices in a thinly veiled attempt to drive marginal producers in the US and Canada out of business. This has compounded the negative impact on our economy and dramatically intensified the plunge in our stock market.

Many Canadians are now forced to live off their savings or go into debt until employment insurance and other government assistance kicks in, and even when it does, it will not cover 100% of the income loss. The majority of the population has very little savings, so people are resort to drawing on their home equity lines of credit (HELOCs), other credit lines or adding to credit card debt. Businesses are doing the same.

The good news is that people and businesses that already have loans tied to the prime rate are enjoying a significant reduction in their monthly payments. All of the major banks have reduced their prime rates from 3.95% to 2.45%. So people or businesses with floating-rate loans, be they mortgages or HELOCs or commercial lines of credit, have seen their monthly borrowing costs fall by 1.5 percentage points. That helps to reduce the burden of dipping into this source of funds to replace income.

So Why Are Mortgage Rates For New Loans Rising?

These disruptive forces of Covid-19 have markedly reduced the earnings of banks and other lenders and dramatically increased their risk. That is why the stock prices of banks and other publically-traded lenders have fallen very sharply, causing their dividend yields to rise to levels well above government bond yields. As an example, Royal Bank’s stock price has fallen 22% year-to-date (ytd), increasing its annual dividend yield to 5.31%. For CIBC, it has been even worse. Its stock price has fallen 30%, driving its dividend yield to 7.66%. To put this into perspective, the 10-year Government of Canada bond yield is only 0.64%. The gap is a reflection of the investor perception of the risk confronting Canadian banks.

Thus, the cost of funds for banks and other lenders has risen sharply despite the cut in the Bank of Canada’s overnight rate. The cheapest source of funding is short-term deposits–especially savings and chequing accounts. Still, unemployed consumers and shut-down businesses are withdrawing these deposits to pay the rent and put food on the table.

Longer-term deposits called GICs, which stands for Guaranteed Investment Certificates, are a more expensive source of funds. Still, owing to their hefty penalties for early withdrawal, they become a more reliable funding source at a time like this. As noted by Rob Carrick, consumer finance reporter for the Globe and Mail, “GIC rates should be in the toilet right now because that’s what rates broadly do in times of economic stress. But GIC rates follow a similar path to mortgage rates, which have risen lately as lenders price rising default risk into borrowing costs.”

To attract funds, some of the smaller banks have increased their savings and GIC rates. For example, EQ Bank is paying 2.45% on its High-Interest Savings Account and 2.55% on its 5-year GIC. Other small banks are also hiking GIC rates, raising their cost of funds. Rob McLister noted that “The likes of Home Capital, Equitable Bank and Canadian Western Bank have lifted their 1-year GIC rates over 65 bps in the last few weeks, according to data from noted housing analyst Ben Rabidoux.”

The banks are having to set aside funds to cover rising loan loss reserves, which exacerbates their earnings decline. An unusually large component of Canadian bank loan losses is coming from the oil sector. Still, default risk is rising sharply for almost every business, small and large–think airlines, shipping companies, manufacturers, auto dealers, department stores, etc.

Lenders have also been swamped by thousands of applications to defer mortgage payments.

Hence, confronted with rising costs and falling revenues, the banks are tightening their belts. They slashed their prime rates but eliminated the discounts to prime for new variable-rate mortgage loans. Some lenders will no doubt start charging prime plus a premium for such mortgage loans. Banks have also raised fixed-rate mortgage rates as these myriad pressures reducing bank earnings are causing investors to insist banks pay more for the funds they need to remain liquid.

An additional concern is that financial markets have become less and less liquid–sellers cannot find buyers at reasonable prices. The ‘bid-ask’ spreads are widening. That’s why the central bank and CMHC are buying mortgage-backed securities in enormous volumes. That is also why the Bank of Canada has started large-scale weekly buying of government securities and commercial paper. These government entities have become the buyer of last resort, providing liquidity to the mortgage and bond markets.

These markets are crucial to the financial stability of Canada. Large-scale purchases of securities are called “quantitative easing” and have never been used before by the Bank of Canada. It was used extensively by the Fed and other central banks during the 2008-10 financial crisis. When business and consumer confidence is so low that nothing the central bank can do will spur investment and spending, they resort to quantitative easing to keep financial markets functioning. In today’s world, businesses and consumers are locked down, and no one knows when it will end. With so much uncertainty, confidence about the future diminishes. The natural tendency is for people to cancel major expenditures and hunker down.

We are living through an unprecedented period. When the health emergency has passed, we will celebrate a return to a new normal. In the meantime, seemingly odd things will continue to happen in financial markets.  By Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres.

Your Mortgage

If you have concerns about your mortgage and the rapidly changing market, please contact us to discuss your needs, concerns and options in detail to protect your best interest.

Ensure that your current mortgage is performing optimally, or if you are shopping for a mortgage, only finalize your decision when you are confident you have all the options and the best deals with lowest rates for your needs.

Here at iMortgageBroker, we love looking after our clients’ needs to ensure you get all the options and the best deals and best results.  We do this by shopping your mortgage to all the lenders out there that includes banks, trust companies, credit unions, mortgage corporations & insurance companies.  We do this with a smile, and with service excellence!

Reach out to us – let us do all the hard work in getting you the best results and peace of mind!

For Continued Updates on The COVID-19 Pandemic, please visit:

Middlesex Health Unit

https://www.healthunit.com/news/novel-coronavirus

Ontario Health

https://www.ontario.ca/page/2019-novel-coronavirus

Government Canada Public Health

https://www.canada.ca/en/public-health/services/diseases/coronavirus-disease-covid-19.html

World Health Organization: 

https://www.who.int/emergencies/diseases/novel-coronavirus-2019

Factual Statistics Coronavirus COVID-19 Global Cases

https://gisanddata.maps.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6

https://www.youtube.com/watch?v=qgylp3Td1Bw&app=desktop

 

Industry & Market Highlights 

Bank of Canada lowers overnight rate at second 2020 meeting

The Bank of Canada lowered its target for the overnight rate by 50 basis points to 1.25 percent from 1.75 percent.

This is the first time the benchmark rate has changed since October 24, 2018.

Comparing the Bank’s two most recent statements (today and January 22, 2020), we find several notable new comments:

• It is “becoming clear that the first quarter of 2020 will be weaker than the Bank had expected” when CPI inflation was “stronger than expected”
• While Canada’s economy has been operating close to potential with inflation on target, “the COVID-19 virus is a material negative shock to the Canadian and global outlooks”
• COVID-19 “represents a significant health threat to people in a growing number of countries” and in some regions, business activity has fallen sharply, supply chains have been disrupted, commodity prices have been pulled down and the Canadian dollar has depreciated
• The drop in Canada’s terms of trade, if sustained, will weigh on income growth
• Business investment “does not appear to be recovering as was expected following positive trade policy developments”
• Although markets continue to “function well,” the Bank of Canada will continue to ensure that the Canadian financial system has sufficient liquidity

As a result of its revised near-term outlook, the Bank’s Governing Council noted that it “stands ready” to adjust monetary policy further if required to support economic growth and keep inflation on target.

BoC’s next policy announcement is set for April 15, 2020 and in the ensuing period the Bank’s Governing Council intends to coordinate with other G7 central banks and fiscal authorities as it “closely” monitors economic and financial conditions. We will closely monitor these conditions as well.  By First National Financial. 

Ontario passes Trust in Real Estate Services Act

The Ontario Government has passed the Trust in Real Estate Service Act, 2019 (TRESA), and was announced at the Ontario Real Estate Association’s REALiTY Conference and AGM by new OREA President Sean Morrison.

The legislation was called back on Wednesday, and the Bill was unanimously passed after its third and final reading. TRESA amends the Real Estate & Business Brokers Act, 2002 (REBBA).

“This is a huge win for our Realtor members, their clients and hardworking Ontarians across the province,” said OREA President Sean Morrison. “Thanks to the Ford Government’s newly passed legislation, Ontario’s homebuyers and sellers can have greater confidence that the Realtor at their side during the largest financial transaction of their life has the highest professional standards, training and modern tools in North America, such as the ability to form personal real estate corporations.”

TRESA is one of the few pieces of legislation in Ontario to receive bi-partisan support following constructive debate in the Legislature led by Minister Lisa Thompson and NDP Consumer Critic Tom Rakocevic and other MPPs.

“By strengthening consumer protection and fixing the broken real estate discipline system, the Government of Ontario is showing Realtors and home buyers and sellers that it is on their side,” said OREA CEO Tim Hudak. “Ontarians deserve the best when it comes to making the biggest financial transaction of their lives and TRESA will make this province the North American leader once again when it comes to a well-regulated real estate market.”

OREA has been advocating for a review of REBBA for over a decade and finally, the Ontario Government has passed this historic piece of legislation.

There are five primary goals in the proposed legislation: enable regulatory changes that would improve consumer protection and choice; improve professionalism among real estate professionals and brokerages through enhanced ethical requirements; update the powers available to RECO to address poor conduct and improve efficiency; create a stronger business environment; and bring legislation and regulations up-to-date and reduce regulatory burden.

Ontario’s real estate rules were nearly 20 years old and this legislation brings the profession into the modern age, Hudak indicated.

OREA will continue to work closely with the Government of Ontario as they develop regulations for the Bill, and work towards enacting the legislation into law.  By Kimberly Greene. 

Changes to stress test

Minister of Finance Bill Morneau announced changes to the benchmark rate used to determine the minimum qualifying rate for insured mortgages.

Instead of the Bank of Canada 5-Year Benchmark Posted Rate, the new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%. These changes will come into effect on April 6, 2020.

The new benchmark rate will be published on a Wednesday and come into effect the following Monday.

“For many middle-class Canadians, their home is the most important investment they will make in their lifetime. Our government has a responsibility to ensure that investment is protected and to support a stable housing market. The government will continue to monitor the housing market and make changes as appropriate. Reviewing the stress test ensures it is responsive to market conditions,” Morneau said.

The minimum qualifying rate for insured mortgages will now be the greater of the borrower’s contract rate, which is the mortgage interest rate agreed to by the lending institution and the borrower; or the new benchmark rate.

The change comes after a recent review by federal financial agencies, which concluded that the minimum qualifying rate should be more dynamic to better reflect the evolution of market conditions. Overall, the review concluded that mortgage standards are working to ensure that home buyers are able to afford their homes even if interest rates rise, incomes change, or families are faced with unforeseen expenses. This adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions.

The new Benchmark Rate for insured mortgages will be published weekly on the Bank of Canada’s website, and will be based on submitted mortgage insurance application contract rates. If, on any given week, there are any delays in updating the new Benchmark Rate, the previous week’s published Rate will stand until a new Rate is published.  By Kimberly Greene. 

Who are the winners with the new qualifying interest rate?

Mortgage brokers and homebuyers across Canada got the relief that many of them have been clamouring for: a change in the qualifying interest rate for insured mortgages.

Last week, Minister of Finance Bill Morneau announced changes to the benchmark rate used to determine the minimum qualifying rate for insured mortgages. As of April 6th, that rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.

“It’s fantastic news. Borrowers will now have a little more buying power,” said Michelle Campbell, principal mortgage broker at Mortgage District. “It’s definitely a step in the right direction.”

Others, however, are a little slower to rejoice.

“At this time it is too hard to tell – with no idea what the new benchmark rate is going to be, we don’t know if it is just a 10bps or 25bps difference. That difference might increase a borrower’s purchasing power a little but at the same time we will see a potential upswing in increases in prices for the Spring market as well as the perception that the market is hot—which could potentially just mitigate or counteract any potential this change might provide,” said Claire Drage, CEO of the Windrose Group.

The so-called stress test was put into place at a time where the interest rate environment was thought to be rising, and it did effectively put the brakes on the runaway housing markets of Toronto and Vancouver. Given that prices had begun to rise again in Toronto, however, some people question whether or not this is the right time to change it—and whether or not a more regional-specific strategy would had a better effect nationwide.

In fact, Royal LePage President and CEO Phil Soper recently reiterated this point a few weeks ago, calling for housing policy that meeds the varied economies and needs that vary region to region.

Mixed benefits have also been shared by industry analysts.

“Changes are likely to further increase home prices, further stretching affordability and consumer leverage,” RBC Capital Markets analyst Geoffrey Kwan told Bloomberg. “The changes are aimed at the demand side of the equation regarding home ownership, instead of addressing the supply side.”

But buyers aside—it could be that the entities that stand to benefit the most from this change are the companies with the highest gearing to the mortgage market (i.e., Equitable Group, Home Capital, Genworth MI, and First National) as opposed to companies that are more diversified, such as the big banks and regional lenders.

National Bank Financial Analyst Jaeme Gloyn told Bloomberg that the lower qualifying rate should shift part of the mortgage away from private, unregulated lenders back into the regulated mortgage market. Borrowers at least have a choice to get a larger mortgage or at least qualify for one, both of which stimulate the housing market and benefit lenders.

“In the short run, this change will likely help some Canadians who currently do not qualify for mortgage financing get into the housing market,” Cormark Securities Inc. Analyst Meny Grauman told Bloomberg. “However, over time this change is likely to only raise prices given increased marginal demand.”

The move could be a risky one, as household debt continues to rise. In a note to investors, Bank of Montreal economists said that “to the extent the rule change fans some already-hot regions, it might discourage the Bank of Canada from lowering rates.”

The Office of the Superintendent of Financial Institutions (OSFI) said it’s considering a similar change for uninsured mortgages and is seeking input before March 17.  By Kimberly Greene. 

London area home sales remain at peak levels

Last month, local residential real estate transactions remained at peak levels, with 740 homes trading hands in LSTAR’s jurisdiction – only 22 less than three years ago, when the Association had its best February sales ever.

“Overall, home sales took a leap over the previous month – from 568 to 740, which signals an early start of a busy spring market,” said 2020 LSTAR President Blair Campbell.

Compared to a year ago, the local residential sales activity saw a 23.7% increase, while the overall average home price experienced a 13% surge, rising to $445,535 in February.

“Even though the number of LSTAR new listings grew to 1,034, which is almost on par with the 10-year average, the number of active listings at month end was still much lower than normal. This reflects the strong demand for residential properties in our area,” stated Campbell.

Inventory is another important measure of the balance between sales and the supply of listings. This shows how long it would take to liquidate existing inventories at the current rate of sales activity. At the end of February 2020, there were only 1.8 months of inventory across the entire LSTAR district – the lowest level in the last ten years.

“Looking at the home sales activity in LSTAR’s five main regions, it’s interesting to see that three of them – Elgin County, Middlesex County and Strathroy – had their second best February ever. London witnessed its third best February with 488 home sales, while St. Thomas set a new absolute record for February home sales, with 68,” Campbell noted.

“However, if you will dig deeper into the London statistical figures, you will be surprised to discover that London South’s February home sales reached their highest peak ever. This demonstrates, once again, that real estate is local and that, if you’re looking for real estate information or guidance, a local REALTOR® is your best bet,” Campbell emphasized.

The following table illustrates last month’s average home prices in LSTAR’s main regions and how they compare to the values recorded at the end of February 2019.

“Analyzing average prices in London’s three main geographic areas, it is worth to note that London East saw the biggest year-over-year increase,” Campbell added.

The average home price in London East was $369,094, up 21.8% from last February, while London North saw an increase of only 6.1% over last February, with an average home sales price of $530,042. In London South, the average home price was $437,667 – up 11.5% over February 2019.

The following chart is based on data taken from the CREA National Price Map for January 2020 (the latest CREA statistics available). It provides a snapshot of how home prices in London and St. Thomas compare to some other major Ontario and Canadian centres.

Toronto approves increase in residential property tax

In a move touted by local leadership as a vital component of a “good, responsible, realistic” budget, the Toronto city council has implemented a 4.24% residential property tax hike for 2020.

The new levy that came with the approval of the city’s $13.5-billion operating budget would mean an estimated $130 in additional expenses for each household this year.

“The budget is balanced in the sense that the revenues meet the expenditures as is required by law. But I believe it is also balanced in the context of balancing all the competing interests and different interests that the city has,” Mayor John Tory said in a news conference earlier this week, as quoted by CBC News.

“I understand that people, in many cases, are finding life stressful on a financial basis today, but together with a modest tax increase, we’re also doing things to try to make their lives more affordable,” Tory added. “It will cost a lot more in the future if we don’t invest in transit and affordable housing and community safety now.”

Housing taxes have been repeatedly put forward as solutions to a wide assortment of market ills, and this has become an especially contentious topic in the higher-end market.

Among the suggestions put forward by city officials is a 3% tax on homes with sales values of $3 million and higher. Councillor Ana Bailao (Ward 9 Davenport) has also called for a policy similar to that of Vancouver’s vacant homes tax – which earned the latter city around $40 million last year alone.

However, Don Kottick of Sotheby’s warned that such a move will only end up discouraging talent from other places.

“I don’t think taxing is the right way to go. We’re already paying more tax than people pay in other countries,” the Sotheby’s CEO told the Toronto Star. “If you keep taxing we’re going to become anti-competitive.”

“At some point people are going to say, ‘Enough is enough.’”  By Ephraim Vecina. 

Economic Highlights

Interest Rates Nosedive as Bank of Canada cuts rates 50 BPS

Following the surprise emergency 50 basis point (bp) rate cut by the Fed, the Bank of Canada followed suit and signalled it is poised to do more if necessary. The BoC lowered its target for the overnight rate by 50 bps to 1.25%, suggesting that “the COVID-19 virus is a material negative shock to the Canadian and global outlooks.” This is the first time the Bank has eased monetary policy in four years. 

According to the BoC’s press release, “COVID-19 represents a significant health threat to people in a growing number of countries. In consequence, business activity in some regions has fallen sharply, and supply chains have been disrupted. This has pulled down commodity prices, and the Canadian dollar has depreciated. Global markets are reacting to the spread of the virus by repricing risk across a broad set of assets, making financial conditions less accommodative. It is likely that as the virus spreads, business and consumer confidence will deteriorate, further depressing activity.” The press release went on to promise that “as the situation evolves, the Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.” 

Moving the full 50 basis points is a powerful message from the Bank of Canada. Particularly given that Governor Poloz has long been bucking the tide of monetary easing by more than 30 central banks around the world, concerned about adding fuel to a red hot housing market, especially in Toronto. Other central banks will no doubt follow, although already-negative interest rates hamper the euro-area and Japan.

Canadian interest rates, which have been falling rapidly since mid-February, nosedived in response to the Bank’s announcement. The 5-year Government of Canada bond yield plunged to a mere 0.82% (see chart below), about half its level at the start of the year. 

Fixed-rate mortgage rates have fallen as well, although not as much as government bond yields. The prime rate, which has been stuck at 3.95% since October 2018 when the Bank of Canada last changed (hiked) its overnight rate, is going to fall, but not by the full 50 bps as the cost of funds for banks has risen with the surge in credit spreads. A cut in the prime rate will lower variable-rate mortgage rates. 

Many expect the Fed to cut rates again when it meets later this month at its regularly scheduled policy meeting, and the Canadian central bank is now expected to cut interest rates again in April. Of course, monetary easing does not address supply-chain disruptions or travel cancellations. Easing is meant to flood the system with liquidity and improve consumer and business confidence–just as happened in response to the financial crisis. Expect fiscal stimulus as well in the upcoming federal budget. 

All of this will boost housing demand even though reduced travel from China might crimp sales in Vancouver. A potential recession is not good for housing, but lower interest rates certainly fuel what was already a hot spring sales market. Data released today by the Toronto Real Estate Board show that Toronto home prices soared in February, and sales jumped despite low inventories. The number of transactions jumped 46% from February 2019, which was a 10-year sales low as the market struggled with tougher mortgage rules and higher interest rates. February sales were up by about 15% compared to January.

Virus Anxiety and The Canadian Housing Market

As though things weren’t volatile enough, a new wave of virus terror is wreaking havoc on global financial markets. The novel conronavirus, COVID-19, continues to spread causing panic in worldwide stock and bond markets for the seventh day. Share prices have plummetted in Asia, Europe, the U.S. and Canada. The sell-off is fueled mostly by concern that measures to contain the virus will hamper corporate profits and economic growth, and fears that the outbreak could get worse.

Interest rates are falling sharply, hitting record lows reflecting a movement of cash out of stocks and commodities like oil, into the safer havens of government bonds and gold. In Canada, the 5-year bond yield has fallen to 1.16% this morning, down more than 50 basis points (bps) year-to-date and down 65 bps year-over-year (see chart below). Mortgage rates are closely linked to the 5-year government bond yield, so further downward pressure on mortgage rates is likely. Oil prices have fallen sharply, hitting the Prairie provinces hard. Crude oil WTI prices have fallen to just over US$45.00 a barrel compared to $62.50 earlier this year.

The Canadian dollar has also taken a beating, down to 0.7468 cents US, compared to a high of 0.7712 early this year.

The Canadian economy was already battered as today’s release of fourth-quarter GDP data shows. Statistics Canada reported that the economy came to a near halt in Q4 as exports dropped by the most since 2017 and business investment declined. Household spending was a bright spot–a reflection of a strong labour market and rising wages.

Monthly data for December, also released this morning, came in stronger than expected, showing the economy had some momentum going into 2020 before the coronavirus reared its ugly head.

The weak 0.3% growth in Q4 was expected as a series of temporary factors including a week-long rail strike, manufacturing plant disruptions and pipeline shutdowns slowed growth. Even though December posted an uptick, the first quarter will no doubt be hampered by the rail blockade and now virus-related supply and travel disruptions as well as reduced tourism.

Bottom Line: Panic selling in the stock market is never a good idea. The TSX opened down more 550 points this morning following yesterday’s outage. Trading on Thursday was suspended around 2 PM for technical reasons. None of this is good for psychology or the economy.

The Bank of Canada meets next Wednesday, and clearly, their press release will address these issues. It’s unlikely the Bank will cut rates in response on March 4, but if the economic disruption continues, rate cuts could be coming by mid-year.

The new stress test will be in place on April 6. If rates were at today’s level, the qualifying rate for mortgage borrowers would be more than 40-to-50 basis points lower than today’s level of 5.19%. This will add fuel to an already hot housing market.

Mortgage Interest Rates

Prime lending has lowered 50 bps is 3.45%.  Bank of Canada Benchmark Qualifying rate for mortgage approval is still at 5.19% but changes to the mortgage qualifying rate is coming into effect April 6, 2020: Instead of the Bank of Canada 5-Year Benchmark Posted Rate, the new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%. 

Fixed rates are moving down with lower bond yields.  Deep discounts are offered by some lenders for variable rates making adjustable variable rate mortgages very attractive again.

Ensure that your current mortgage is performing optimally, or if you are shopping for a mortgage, only finalized your decision when you are certain you have all the options and the best deals with lowest rates for your needs.

Here at iMortgageBroker, we love looking after our clients needs to ensure your best interest is protected.  We do this by shopping your mortgage to all the lenders out there that includes banks, trust companies, credit unions, mortgage corporations & insurance companies.  We do this with a smile, and with service excellence!

Reach out to us – let us do all the hard work in getting you the best results and peace of mind!