OSFI MORTGAGE CHANGES ARE COMING
As many of you may remember, this past October the Office of the Superintendent of Financial Institutions (OSFI) issued a revision to Guideline B-20 . The changes will go into effect on January 1, 2018 but lenders are expecting to roll this rules out to their consumers between December 7th – 15th, and will require conventional mortgage applicants to qualify at the Bank of Canada’s five-year benchmark rate or the customer’s mortgage interest rate +2%, whichever is greater.
OSFI is implementing these changes for all federally regulated financial institutions. What this means is that certain clients looking to purchase a home or refinance their current mortgage could have their borrowing power reduced.
What to expect
It is expected that the average Canadian’s home purchasing power for any given income bracket will see their borrowing power and/or buying power reduced 15-25%. Here is an example of the impact the new rules will have on buying a home and refinancing a home.
Purchasing a new home
When purchasing a new home with these new guidelines, borrowing power is also restricted. Using the scenario of a dual income family making a combined annual income of $85,000 the borrowing amount would be:
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Up To December 31 2017
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After January 1 2018
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Target Rate
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3.34%
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3.34%
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Qualifying Rate
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3.34%
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5.34%
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Maximum Mortgage Amout
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$560,000
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$455,000
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Available Down Payment
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$100,000
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$100,000
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Home Purchase Price
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$660,000
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$555,000
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Refinancing a mortgage
A dual-income family with a combined annual income of $85,000.00. The current value of their home is $700,000. They have a remaining mortgage balance of $415,000 and lenders will refinance to a maximum of 80% LTV. The maximum amount available is: $560,000 minus the existing mortgage gives you $145,000 available in the equity of the home, provided you qualify to borrow it.
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Up to December 31, 2017
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After January 1 2018
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Target Rate
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3.34%
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3.34%
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Qualifying Rate
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3.34%
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5.34%
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Maximum Amount Available to Borrow
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$560,000
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$560,000
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Remaining Mortgage Balance
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$415,000
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$415,000
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Equity Able to Qualify For
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$145,000
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$40,000
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In transit purchase/refinance
If you have a current purchase or refinance in motion with a federally regulated institution you can expect something similar to the below. A note, these new guidelines are not being recognized by provincially regulated lenders (i.e credit unions) but are expected to follow these new guidelines in due time.
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Timeline:
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Purchase Transactions or Refinances:
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Before
January 1, 2018
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Approved applications closing before or beyond January 1st will remain valid; no re-adjudication is required as a result of the qualifying rate update.
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On and after
January 1, 2018
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Material changes to the request post January 1st may require re-adjudication using updated qualifying rate rules.
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These changes are significant and they will have different implications for different people. Whether you are refinancing or purchasing, these changes could potentially impact you. We advise that if you do have any questions, concerns or want to know more that you contact your Dominion Lending Centres mortgage broker. They can advise on the best course of action for your unique situation and can help guide you through this next round of mortgage changes.
Key Opportunities for Your Clients with Mortgage Rule Changes
Reach out to your clients buying at max with 20%.
As of January 1, 2018, any uninsured pre-approvals that do not convert into a live property-specific deal will no longer be valid under old qualifying rules.
With select few lenders – your Mortgage Broker can get Pre-Approvals committed before January 1st to remain valid up to 120 days following the initial credit decision under the old rules.
Refinance applications submitted before January 1st will remain valid for 120 days from date of the original approval under current rules.
Reach out to your clients needing to refinance in the near future and create a sense of urgency for acting now before the deadline.
Market Commentary
Economy Takes a Breather, Rate Hikes Seen Sooner than Later
The Canadian economy moderated in the third quarter of the year, taking a breather from its blistering pace of earlier in the year, as exports and home construction slowed while consumer spending continued to drive growth.
Statistics Canada reported that Canada’s real gross domestic product grew at an annualized pace of 1.7 per cent in the quarter, on a seasonally adjusted basis, less than half of the growth rate that the economy posted in each of the first two quarters of the year. Economists had expected the pace to slow to more sustainable levels in the latest quarter, following a second-quarter growth spurt of 4.3 per cent. (The second-quarter figure was revised down slightly from an originally reported 4.5 per cent.)
The third-quarter growth rate was the slowest since the 2016 second quarter. Nevertheless, it marked the fifth consecutive quarter of growth for the Canadian economy, the longest streak since 2014.
“Canadian growth was always poised to cool after a monster first half,” said Canadian Imperial Bank of Commerce economist Nick Exarhos in a research note.
However, real GDP in September, the final month of the quarter, grew 0.2 per cent month over month, slightly better than economists had expected. The increase, reversing August’s 0.1-per-cent decline, marked the strongest performance since June, and indicated that the economy was regaining momentum entering the final quarter of the year.
The third-quarter slowdown was primarily due to a steep 10.2-per-cent annualized decline in exports, which reversed course after having been a key driver of growth in the second quarter. Exports look to have been weighed down by a less favourable exchange rate for the Canadian dollar, which rose more than 10 per cent against the U.S. dollar between early June and mid-September, spurred by rising interest rates from the Bank of Canada.
Meanwhile, investment in residential structures fell 1.4 per cent annualized, evidence of a cooling in key housing markets following regulatory changes designed to raise the bar on mortgage approvals and slow foreign investment.
On the other hand, household consumption remained a strong driver of the economy, up a better-than-expected 4 per cent annualized. And investment in non-residential structures, machinery and equipment rose at a 3.7-per-cent annualized pace, evidence of continued strong business investment – considered a key element in sustaining Canada’s current economic expansion.
“Aside from the drop in exports, the news was mostly good,” said David Madani, senior Canadian economist at Capital Economics, in a note to clients.
“All told, we wound up with a much more ‘normal’ pace of growth, consistent with an economy entering the mature phase of the economic cycle,” said Brian DePratto, senior economist at Toronto-Dominion Bank, in a research report.
The third-quarter growth was just slightly below the 1.8 per cent that the Bank of Canada had estimated in its most recent quarterly Monetary Policy Report, released in late October. In the same report, the central bank projected that growth in the fourth quarter would pick up to a 2.5-per-cent pace. Economists said the solid September growth rebound puts the economy on a good track to come close to the central bank’s target.
“The data is still pointing to a slowing in underlying GDP growth from the outsized pace from mid-2016 to mid-2017, but is also still fully consistent with our – and the Bank of Canada’s – view that growth will be sustained at a modestly above-trend 2 per cent pace going forward,” said Royal Bank of Canada senior economist Nathan Janzen in a research report.
The slowdown in the third quarter has fuelled considerable speculation about how long the Bank of Canada might delay its next rate increase, after raising rates twice during the second quarter. But the 1.7-per-cent growth pace is still above the central bank’s estimate of “potential output growth” – the rate at which it believes the economy can grow without triggering rising inflation, a critical concern for a central bank that relies on inflation targeting to guide its rate decisions. Expectations of a modest acceleration in growth in the fourth quarter indicates that the economy continues to perform above potential, which will add inflationary pressure and keep the central bank on track to raise interest rates further next year.
Economists said the Bank of Canada will likely take particular note of wage data in the GDP report, as rising wages are typically a key catalyst for inflation. Employment compensation grew at a brisk 5.2-per-cent annualized pace in the quarter, its strongest growth in three years.
The strong wage indicators came at the same time that Statscan also reported, in a separate release, that employment surged by 80,000 jobs in November, and unemployment fell to a nine-year low of 5.9 per cent – further indication that a strong labour market could accelerate inflation in the coming months.
Economists said that while the Bank of Canada remains unlikely to raise rates at next Wednesday’s rate announcement, the GDP and jobs report, taken together, put a January rate hike squarely on the table.
“Today’s reports all support another rate hike coming sooner rather than later,” Mr. DePratto said. By David Parkinson.
Economic Highlights:
Data Release: Poloz holds for now with caution ruling the day
•As widely expected, the Bank of Canada held its key monetary policy interest rate at 1.00% this morning, with the accompanying statement striking a dovish tone.
•The economic backdrop appears to be evolving in line with the Bank’s expectations at the time of the October Monetary Policy Report, although ‘considerable uncertainty’ still clouds the global outlook.
•The Canadian economy is also seen as falling in line with their expectations, with ‘very strong’ employment growth noted, as well as robust consumer spending, ongoing contributions from business investment, and more evidence that public infrastructure spending is having a rising impact on growth. Although exports disappointed in the third quarter, the Bank noted that the latest trade data supports the view that exports are likely to make a positive contribution to growth going forward.
•On the inflation front, slightly higher than anticipated price pressures are seen as being helped by temporary factors (notably gas prices), but core inflation has also ticked up in line with ‘continued absorption of economic slack’.
•On the downside, the Bank continues to see “ongoing – albeit diminishing – slack in the labour market”, while noting that employment continues to rise alongside participation rates.
•The final section of the statement struck a somewhat dovish tone. It was noted that higher rates will likely be required over time, but the Governing Council will be ‘cautious, guided by incoming data”, pointing again to the key areas of the Bank’s focus in recent quarters: the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of wage growth and inflation.
Key Implications
•If it weren’t for the final section of the statement, this would have looked like a central bank getting ready to hike. With developments since their October Monetary Policy Report in line with their expectations, by their own assessment the economy is likely entering excess demand, which would typically call for a monetary policy response.
•Indeed, most, if not all of the tick-boxes that the Bank has identified appear to be getting ticked: employment growth remains robust, wages continue to accelerate by almost all measures, and consumer spending has remained healthy despite rising borrowing costs with the most recent aggregate employee compensation data reported the strongest quarterly gain since late 2014. This latter point should help reduce the sensitivity of the economy to rising rates – it’s easier to deal with a potential rise in debt service costs if you’re also making more money. It is also becoming increasingly difficult to identify the labour market slack that once again seems to be a key factor in the Bank’s decision making.
•Ultimately, it is the Bank’s risk management framework that appears to have ruled the day. Despite things seeming to line up for further near-term tightening, Governor Poloz has chosen to maintain his optionality. With economic growth appearing likely to exceed the Bank’s 2.5% expectation for the fourth quarter of this year, things continue to point to a hike sooner rather than later. However, as today’s statement shows, nothing is a done deal until the day of the decision.
Industry News
TREB Toronto Real Estate Board VS Competition Bureau
The Toronto Real Estate Board has decided to take its six year fight against the tide of technological change to the Supreme Court of Canada.
TREB will be looking to appeal a federal court ruling that upheld a Competition Tribunal decision against the board. Back in 2011 the Competition Bureau ordered that TREB must allow its member realtors to publish detailed, home sale information online. That information would include things like ownership and price history and realtor commissions.
The Competition Bureau ruled TREB’s ban prevents competition and stifles innovation. TREB counters that the information is personal and the policy protects the privacy of home buyers and sellers. It challenged the ruling at the Competition Tribunal. The Tribunal upheld the Bureau’s decision in April 2016. The Federal Court of Appeal, in turn, backed the Tribunal ruling last week.
Opponents of TREB’s policy say the board is really fighting to protect its monopoly as the sole provider of detailed home sales information. They argue releasing that control will help both home buyers and sellers and allow realtors to provide more service.
A home’s sales history could help buyers determine if a newly renovated property is being flipped by showing how long the current owners have had it. Pricing information can help determine whether a home, or a neighbourhood, is appreciating or depreciating in value.
TREB has 60 days to request a leave to appeal to the Supreme Court. By First National Financial.
Crypto Currencies and Bitcoin
Last week, the value of a single bitcoin officially cleared $10,000, a new high point that’s over an order of magnitude greater than its price at the start of this year. Bitcoin has defied market expectations before, but in 2017, it didn’t just become more valuable. Bitcoin and other cryptocurrencies have become an acknowledged part of the financial system — albeit a nebulous one.
Bitcoin traded at around $960 at the beginning of the year, and it’s risen steadily since then, with a steep jump in the past two months. There are multiple, complementary explanations for this, but this latest boom was sparked partly by the CME Group, a futures marketplace that announced its intent to start listing bitcoin by the end of the year. It’s a stamp of approval that could help cement bitcoins’ position at other major financial institutions, many of which are already handling bitcoin-related trading in some capacity. Even JPMorgan Chase, whose CEO Jamie Dimon has said he would fire anyone who traded bitcoin, is reportedly considering a plan to let its clients access CME’s futures.
Not everyone believes that bitcoin is ready to enter the futures market. Themis Trading principal Joe Saluzzi warned that the currency is dangerously unregulated: “It reminds me of the financial crisis all over again,” he told CNBC. And bitcoin is so volatile that spending it doesn’t make sense. Nobody knows how valuable a single bitcoin might BECOME — while Thomas Glucksmann of currency exchange Gatecoin said $10,000 was still “cheap in my opinion,” bitcoin has also suffered extended catastrophic crashes, including a long slump after passing $1,000 in 2013. As an example of just how surreal bitcoin fluctuations can be, Gizmodo writer Kashmir Hill tweeted about buying a sushi dinner in 2013 for the equivalent of $99,000 today.
There are still places where bitcoin payments make sense, although they’re sometimes unsavory: far-right groups have used them after being dropped by payment processors, for instance. And the underlying blockchain technology has myriad uses that aren’t cryptocurrency-focused — from quickly processing international money transfers to tracking legal marijuana.
But people have also found uses for cryptocurrency that go beyond replacing cash. The best-known example of 2017 might be initial coin offerings or ICOs, in which companies sell digital tokens based on cryptocurrencies like Ethereum. ICOs range from serious fundraising efforts to absurd but startlingly successful jokes, and some have earned endorsements from the likes of Paris Hilton and Ghostface Killah of Wu-Tang Clan. And unlike Dogecoin or other earlier novelty currencies, they’ve attracted serious regulatory attention.
Some countries have outright banned ICOs — China barred the offerings as a form of “illegal public financing,” and South Korea announced “stern penalties” for running them. But other countries have attempted to clarify how existing rules apply to them. The US Securities and Exchange Commission ruled that some ICOs fell under securities law, setting them apart from general crowdfunding efforts. Japanese regulators also outlined how ICOs may fall under existing financial rules. In the US, the SEC has even issued guidance for how celebrities can hawk them.
Cryptocurrencies’ overall legal status is still complicated, but several countries have made major policy decisions around them in 2017. Some of these are negative: China shut down currency exchanges earlier this year, although traders have moved to other platforms, and the SEC rejected a high-profile application for a bitcoin stock fund. Many other countries have given more ambiguous signals. Russian president Vladimir Putin ordered regulators to develop a wide-ranging set of rules for miners and traders, even as officials have signalled a crackdown. India’s government launched a committee earlier this year to study digital currency regulation, and the Supreme Court recently urged it to speed up its work.
People have been prosecuted for cryptocurrency-related crimes like Ponzi schemes in past years, and governments have issued guidance about bitcoin. Some of these new decisions just raise new questions: the SEC, for instance, didn’t address how it would punish a decentralized network for violating securities rules. Likewise, getting attention from investors and regulators doesn’t tell us whether bitcoin will succeed in the long run, or whether cryptocurrencies will play a major role in most people’s lives. But even if cryptocurrencies aren’t directly competing with their traditional counterparts, the past year shows how serious they’ve become to both regulators and investors.
The Most Dangerous Event In Cryptos & Digital Currencies
Mike Maloney explores the events and evidence leading up to what he believes will be the most dangerous event the world will see in the coming years — the potential for governments to enforce their own centralized digital currencies. THIS LINK
Rates
Bank of Canada holding it’s overnight lending rate, no change to Prime rate currently at 3.2%. Bank of Canada Benchmark Qualifying rate for mortgage approval is at 4.99%. No change in fixed rates. No change in variable rates.
Other Newsworthy
CBC’s O’Reilly on the World of Real Estate Marketing.
Why do real estate agents often use their photos on business cards? Are attractive agents more successful? And how did a hot air balloon end up as the Re/Max logo? Adman Terry O’Reilly answers these questions and more as he investigates the world of real estate advertising in a recent episode of his hugely successful and entertaining CBC radio documentary series Under the Influence.REM caught up with the multi-award-winning radio host for an email interview.
You’ve covered many topics in Under the Influence, from gender marketing to the “crazy world of trademarks” and brands that go political. What prompted you to explore real estate advertising for one of your episodes? (The episode is called Selling the Dream: Real Estate Advertising.)
O’Reilly: I have always thought that real estate marketing is a world unto itself. It involves personalities, lots of advertising and the biggest purchases in our lives. There are a lot of staples in the real estate world – like using agent’s faces in lawn signage, billboards and print ads, employing the MLS, evaluating pricing, judging neighbourhoods…It is also an industry with intense competition. All of this was interesting to me and I wanted to go back in history to see how it all started – and why.
Why do real estate agents, perhaps more than people in any other service industry, so often use their photos on business cards and other advertisements?
O’Reilly: My research told me that this practice started in the late 1800s/early 1900s. People were moving to cities from the country and unscrupulous conmen would meet these people at train stations and sell them non-existent property. These land sellers were called “land sharks” and took advantage of good people looking to start a new life. The term “swampland in Florida” was coined in this period.
Legitimate real estate agents wanted to distance themselves from these scam artists, so they began to organize by creating real estate boards and they established standards of practice. Using a face in their marketing and opening offices with fixed addresses suggested accountability. No conman would ever advertise his face and they certainly didn’t want offices where they could be tracked down. In other words, the use of a face in real estate marketing was the ultimate sign of trust.
You say that real estate has its own rules, techniques and own breed of salespeople. How so? How is it different than other industries in terms of advertising and marketing?
O’Reilly: Generally speaking, a real estate transaction is the biggest purchase a person makes in their lifetime. So, the price tag is great. Real estate agents try to bring two parties together: a willing seller and a willing buyer. That middleman position is somewhat unique in marketing. Agents must be power listeners to understand what a client really wants. Virtually every transaction is a negotiation, and negotiating is an art. Agents love to use their faces in their marketing, as I mentioned earlier. Not many service industries do that. The advertising industry – which is to say, my industry – is a service business but we never use our faces to win clients. Real estate agents are not selling houses, they are selling homes. That makes it an extremely emotional purchase. Navigating that much emotion requires a unique skill set.
In your show you mention a fascinating study done by three American universities that looked at physical attractiveness as it relates to a real estate professional’s success. Could you elaborate?
O’Reilly: It was an interesting study because this is an industry that relies on faces. Essentially, it said that attractive agents had listings with higher selling prices and higher commissions. The study confirmed that physical attractiveness is an asset. But, there was an interesting side note: Less attractive agents had lower selling prices but more listings and more sales. Which I interpret to mean, they worked harder. Attractive people use their beauty in place of other work skills. Less attractive people must work harder and they do.
You discovered that real estate played an important role in the evolution of the advertising business. How so?
O’Reilly: To begin with, the very first advertising agency in North America was started by a Philadelphia real estate agent named Volney Palmer around 1837. Second, the very first radio commercial ever aired was for a real estate development. It was broadcast in 1922 on radio station WEAF in New York. Close to $14 billion is spent on real estate advertising in North America annually, so it is a powerful marketing sector.
What are some offbeat ways real estate agents or homeowners have used to gain attention, and do any of them work?
O’Reilly: I was very interested to see what novel techniques real estate agents are using these days. Many are employing humour. Signs that say, “Free pizza with house” and “zombie free” are examples of that. Remember, attention is the oxygen of any business, and more so in real estate marketing.
Some home sellers are offering potential buyers an Airbnb night in their home to give buyers a real sense of what it would be like to live in the house. That’s a smart insight – we sometimes spend more time buying socks than we spend in the homes we’re buying. Some Realtors are producing very creative videos. Some are creating songs! I have to say I like the fact agents are starting to break the traditional rules of real estate selling. Do all of these ideas work? Hard to say but standing out is job one in marketing. Fortune favours the bold.
You say that few real estate companies have readily identifiable logos, but Re/Max is a notable exception. How did it get a hot air balloon as its logo, which on the face of it doesn’t have much of a connection to real estate?
O’Reilly: Brokers sell agents. Agents sell property. I believe that real estate companies should be doing more branding to distinguish their businesses in the marketplace. When they do, they give their agents a powerful calling card. Most real estate companies have weak brand personalities.
Re/Max is an exception because it is one of the few companies that has a powerful brand and a memorable brand icon. The Re/Max balloon is instantly recognizable, as is their slogan, “Above the Crowd.” Many years ago, two Re/Max franchisees in New Mexico approached head office with a drawing of a red, white and blue hot air balloon and said, “This should be our logo.” Management said a hot air balloon had nothing to do with real estate and turned them down. A year later, those same two franchisees came back with an 8mm film of a Re/Max hot air balloon they had flown the day before at a hot air balloon festival and said, “This should be our logo!” Again, management gave them a hard pass.
A year after that, Re/Max hired a consultant to gauge how well-known the company was in its hometown of Denver. The survey showed they ranked number eight. Clearly, they were in desperate need of some branding. Then somebody remembered the Re/Max balloon. So, they hired a plane, got some footage of the balloon floating in sky and created a TV commercial with it.
At the end of the eight-week campaign, the consultant came in with his annual survey and told Re/Max they were now the number one real estate company in the city. Re/Max said that’s great. Wait, the consultant said, you don’t understand, 66 per cent of the people surveyed said Re/Max has a red, white and blue balloon, and 36 per cent said your theme is “Above the Crowd.” After only eight weeks, this kind of feedback is unheard of. This balloon should be your logo! So, Re/Max took another vote and this time the unanimous response was… yes! And that’s how one of the most recognized logos in the real estate business took flight over 40 years ago.
As someone with extensive experience in the advertising business, what would you do today if you were a real estate agent in a tough market?
O’Reilly: Stand out. Amateurs think marketing is all about selling stuff. But the pros know marketing is all about differentiating your business. Once you can do that, once you become top-of-mind in your town or your industry, the real selling starts. I would analyze what other smart agents are doing in other markets. Other countries. I would look beyond real estate and see how other smart service-based industries are marketing themselves.
There is a reason most real estate advertising all looks the same – Realtors are inhaling their own fumes. But those boundaries are artificial. Push the guardrails back. Deliver above and beyond the services that your competitors aren’t offering. Identify the friction points in real estate transactions and eliminate them. Think big. When was the last time you wowed your clients?
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Please Note: Payment per $100K and possible savings shown above are based on a 25-year ammortization. Rates are subject to change without notice and the rate you receive may vary depending on your personal financial situation. *OAC E&OE. Please reply to this email and I will be happy to provide you with greater detail and determine the best rate available for you.
This edition of the Weekly Rate Minder shows the latest rates available for Canadian mortgages. At Dominion Lending Centres, we work on your behalf to find the best possible mortgage to suit your needs.
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