14 Oct

Canada Has Recouped Three-Quarters Of Pandemic Job Losses

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Posted by: Iko Maurovski

The September Labour Force Survey, released this morning by Statistics Canada, reflects labour market conditions during the week of September 13 to 19, six months after the onset of the COVID-19 economic shutdown. As Canadian families adapted to new back-to-school routines at the beginning of September, public health restrictions had been substantially eased across the country, and many businesses and workplaces had re-opened. Throughout the month, some restrictions were re-imposed in response to increases in the number of COVID-19 cases. In British Columbia, new rules and guidelines related to bars and restaurants were implemented on September 8. In Ontario, limits on social gatherings were tightened for the hot spots of Toronto, Peel and Ottawa on September 17 and the rest of the province on September 19.

Employment gains unexpectedly accelerated in September, increasing by 378,200, more than double the consensus forecast on a broadly based pickup in hiring. This was the fifth consecutive month of job gains, which has now retraced three-quarters of the 3 million jobs lost during March and April. The unemployment rate fell from 10.2% in August to 9.0% in September. Most economists had expected a job gain of 150,000 and a jobless rate of 9.8%.

Another piece of good news is that most of the net new jobs were in full-time work. The number of Canadians who were employed but worked less than half their usual hours for reasons likely related to COVID-19 fell by 108,000 (-7.1%) in September.

September gains brought employment to within 720,000 (-3.7%) of its pre-COVID February level. The accommodation and food services (-188,000) and retail trade (-146,000) industries remained furthest from full recovery, while youth employment was 263,000 (-10.3%) below February levels.

Among Canadians who worked most of their usual hours, the proportion working from home edged down from August to September, from 26.4% to 25.6%.

Employment increased in every province except New Brunswick and Prince Edward Island in September, with the largest gains in Ontario and Quebec.

As a result of the COVID-19 economic shutdown, the unemployment rate more than doubled from 5.6% in February to a record high of 13.7% in May. The 9.0% jobless rate in September marks a rapid improvement.  By comparison, during the 2008/2009 recession, the unemployment rate rose from 6.2% in October 2008 to peak at 8.7% in June 2009. It then took approximately nine years to return to its pre-recession rate.

Employment in accommodation and food services rose by 72,000 (+7.4%) in September. This was the fifth consecutive monthly increase and brought total gains since the initial easing of COVID-19 restrictions in May to 427,000. Nevertheless, this industry’s employment was the furthest from recovery in September, down 15.3% (-188,000) from its pre-pandemic February level.

The accommodation and food services industry is likely to continue to face many challenges over the coming months. While outdoor dining is likely to become impractical during the winter months and as some COVID restrictions are re-introduced, a recent study indicated that Canadians plan to reduce spending at restaurants.

Following four months of increases, employment in retail trade held steady in September. Compared with February, employment in this industry was down by 146,000 (-6.4%). After increasing sharply in May and June, following the initial easing of COVID-19 restrictions, retail sales slowed markedly in July.

In construction, a long road to recovery remains.

Employment in construction remained little changed for the second consecutive month in September and was down by 120,000 (-8.1%) compared with its pre-COVID level. Compared with February, employment in construction was down the most in Ontario (-54,000; -9.5%) and British Columbia (-39,000; -16.3%).

Construction consists of three subsectors: construction of buildings, heavy and civil engineering construction, and specialty trade contractors. According to the latest results from the Survey of Employment Payrolls and Hours, employment in construction fell from February to July in each of these subsectors, with the largest decline among specialty trade contractors. The release of investment in building construction for July showed that investment in building construction was slightly lower in July than in February.

Manufacturing employment almost fully recovered, but lagging in Alberta.

While some industries face a long recovery to pre-COVID employment levels, some sectors—including manufacturing—have almost fully recovered.

The pace of employment growth in manufacturing picked up in September (+68,000; +4.1%), following two months of modest growth over the summer. The September gains brought the total employment change in this industry to a level similar to that of February. While employment in manufacturing remained well below pre-pandemic levels in Alberta (-17,000; -12.1%) and to a lesser extent in Quebec (-15,000; -3.1%), employment was above the pre-COVID level in Ontario (+17,000; +2.3%).

Employment in educational services rises in September and surpasses pre-COVID levels.

Employment in educational services grew by 68,000 (+5.0%) in September, led by Ontario and Quebec. After declining by 11.5% from February to April, employment in the industry has increased for five consecutive months and has reached a level 2.6% higher than in February.

As students returned to school in August and September, some jurisdictions increased staffing levels to support classroom adaptations. On a year-over-year basis, employment in educational services was up by 32,000 (+2.3%) in September, driven by an increase in elementary and secondary school teachers and educational counsellors (not seasonally adjusted).

Bottom Line 

The labour market impact of the COVID-19 economic shutdown has been particularly severe for low-wage employees (defined as those who earned less than $16.03 per hour, or two-thirds of the 2019 annual median wage of $24.04/hour). From February to April, employment among low-wage employees fell by 38.1%, compared with a decline of 12.7% for all other paid employees (not seasonally adjusted).
Almost half of the year-over-year decline in low-wage employees in September was accounted for by three industries: retail trade; accommodation and food services; and business, building and other support services industries.
The pandemic has disproportionately hit low-wage workers and youth, explaining why housing activity has been so strong. Low-wage employees and youth are typically not homebuyers or sellers.

Moreover, the RBC COVID Consumer Spending Tracker for the week of October 5 shows that spending trends continued solid with few signs of second-wave worries impacting consumer confidence yet.
According to RBC:

  • “Among retail categories, clothing spending continued to climb, returning to year-ago levels.
  • Spending on apparel, gifts, and jewelry was up 1.5% relative to last year.
  • Other retail categories held on to gains from the past few months.
  • Despite plateauing in dollar terms, entertainment spending ticked up relative to last year.
  • During the summer, high golf spending likely continued into early fall— rather than slowing down as it would have in a normal year.
  • Slower spending on accommodation and car rentals accelerated a downward trend in travel-related purchases that have dominated in the last several weeks.
  • Travel spending had recovered partially from pandemic lows; it was still down about 60% in peak summer. It worsened again as the weather cooled.
  • Simultaneously, automotive spending fell slightly, in line with seasonal trends, as the summer road trip season came to an end.
  • Labour Day saw the strongest restaurant spending since before the pandemic, but the uptick was fleeting.
  • Spending on dining out quickly fell back to -6% relative to a year ago, a level it’s hovered around since July.”

Recently released data from the real estate boards in Toronto and Vancouver showed strong sales activity and significant further upward pressure on prices. In the GTA, a surge in new listings of high-rise condos meant that the upward pressure on home prices was driven by the ground-oriented market segments, including detached and semi-detached houses and townhouses. Home sales and new listing activity reached record levels in Metro Vancouver last month. The heightened demand from home buyers is keeping overall supply levels down. This is creating upward pressure on home prices, which have been edging up since the spring.

The CREA data for the whole country will be out on the 15th of October. This adjusts the price data for types of homes sold, giving us a better idea of how significant price pressures have been and in which sectors—more on that next week.

 

By:

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

 

Your Interest is my only Interest

Iko M.

2 Sep

Canadian Economy Took a Record Nosedive in Q2

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Posted by: Iko Maurovski

 

Canadian real GDP plunged 11.5% in the second quarter, or -38.7% at an annualized rate, the worst quarterly decline on record (see chart below). This followed an 8.2% plunge in Q1. The worst of the contraction occurred early in the quarter as the lockdown in March and April wreaked havoc on activity. Since then, the economy has shown surprisingly strong signs of recovery.

StatsCan revealed today that GDP rose 6.5% in June following the 4.8% rise in May and an estimated 3.0% growth in July. Even so, Canada’s recovery is expected to be bumpy and long. No doubt, not all businesses and sectors will expand in sync, and not all jobs will be recovered.

One of the brightest spots in the recovery has been housing, where activity surged in July, reflective of record-low mortgage rates and pent-up demand. Apparently, many homebound Canadians are reassessing their housing needs. Demand for increased space, especially in the suburbs or exurbs, has been robust.

Virtually every sector of the economy was battered in Q2. Household spending dived 43% while business investment collapsed at a 57% annual rate. Virus containment weighed on both, with a fall in oil prices exacerbating the decline in oil & gas investment. Net exports were the only sector that added to economic activity, but only because imports fell more than exports as housebound consumers and shuttered businesses had little need for imported products.

On a year-over-year basis, the monthly rise in June and July will leave GDP down a much milder 5%, but still worse than the -4.7% drop during the financial crisis. The surge in June–itself a record bounce–reflects the gradual re-opening of the economy, with retail, wholesale and manufacturing leading the way. Retail trade jumped 22.3% in June, surpassing its pre-pandemic level of activity. Motor vehicle dealers contributed most to growth.
Following a 17.3% jump in May, the construction sector rose 9.4% in June as a continued easing of emergency restrictions across the country contributed to the return to nearly normal levels of activity at construction sites. Residential construction grew 7.1% as increases in multi-unit dwellings construction and home alterations and improvements more than offset lower single-unit construction. Non-residential construction rose 11.0%, surpassing the pre-pandemic level of activity, as all three components were up.

Real estate and rental and leasing grew 2.5% in June. Activity at the offices of real estate agents and brokers jumped 65.2% in the month, following a 56.4% increase in May, as home resale activity in all major urban centres saw double-digit increases. The output of real estate agents and brokers was about 7% below February’s pre-pandemic level, but other data show it was up sharply in July, hitting new record highs.

Government Provided A Much-Needed Cushion 

Household disposable income surged last quarter despite the pandemic thanks to government income support (see chart below). The rise in income, coupled with the massive decline in consumer spending as well as the deferral of mortgage payments for many triggered a surge in the savings rate. The household saving rate jumped to 28.2% from 7.6% in the prior quarter. Savings rates, of course, are generally higher for higher income brackets.

Bottom Line

The plunge in economic activity in the second quarter–though awful–was not as deep as the Bank of Canada expected (-43%) in its most recent Monetary Policy Report. As well, the rebound since the end of April has been stronger than expected, especially in the housing sector. To be sure, labour market conditions are still very soft with the jobless rate at 10.9% in July, but the new programs announced last week by the federal government to replace CERB will help ease the transition for people still looking for work. 

A possible resurgence in the virus remains a risk unless an effective vaccine can be distributed. The economy will operate below capacity into the next year, but perhaps not as drastically below capacity as previously feared.

Yours Interest is my only Inters

Iko Maurovski

Mortgage Broker

By:

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

15 Apr

Housing Market Another Victim of the Virus  

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Posted by: Iko Maurovski

Data released this morning from the Canadian Real Estate Association (CREA) showed national home sales fell 14.3% on a month-over-month (m-o-m) basis in March, the first national indication of the early impact of social isolation. The economic disruption and massive layoffs caused both buyers and sellers to increasingly retreat to the sidelines over the second half of the month.Transactions were down on a m-o-m basis in the vast majority of local markets last month. Among Canada’s largest markets, sales declined in the Greater Toronto Area (GTA) (-20.8%), Montreal (-13.3%), Greater Vancouver (-2.9%), the Fraser Valley (-13.6%), Calgary (-26.3%), Edmonton (-13.2%), Winnipeg (-7.3%), Hamilton-Burlington (-24.9%) and Ottawa (-7.9%).

Actual (not seasonally adjusted) sales activity was still running 7.8% above a quiet March in 2019, although that was a considerable slowdown compared to the y-o-y gain of close to 30% recorded in February.

“March 2020 will be remembered around the planet for a long time. Canadian home sales and listings were increasing heading into what was expected to be a busy spring for Canadian REALTORS®,” said Jason Stephen, president of CREA. “After Friday the 13th, everything went sideways. REALTORS® are complying with government directives and advice, all the while adopting virtual technologies allowing them to continue showing properties to clients already in the market, and completing all necessary documents.”

“Numbers for March 2020 are a reflection of two very different realities, with most of the stronger sales and price growth recorded during the pre-COVID-19 reality which we are no longer in,” said Shaun Cathcart, CREA’s Senior Economist. “The numbers that matter most for understanding what follows are those from mid-March on, and things didn’t really start to ratchet down until week four. Preliminary data from the first week of April suggest both sales and new listings were only about half of what would be normal for that time of year.”

New Listings
The number of newly listed homes declined by 12.5% in March compared to the prior month. As with sales, the declines were recorded across the country.

With sales and new listings each falling by similar magnitudes in March, the national sales-to-new listings ratio edged back to 64% compared to 65.4% in February. While this is down slightly, the bigger picture is that this measure of market balance was remarkably little changed considering the extent to which current economic and social conditions are impacting both buyers and sellers.

Based on a comparison of the sales-to-new listings ratio with the long-term average, two-thirds of all local markets were in balanced market territory in March 2020. Virtually all of the remainder continued to favour sellers.

There were 4.3 months of inventory on a national basis at the end of March 2020. While this is up from the almost 15-year low of 3.8 months recorded in February, it remains almost a full month below the long-term average of 5.2 months. With the overall number of listings on the market continuing to fall in March, the m-o-m decline in the months of inventory measure was entirely the result of the outsized drop in sales activity.

The number of months of inventory is well above long-term averages in the Prairie provinces and Newfoundland & Labrador. By contrast, the measure is running well below long-term averages in Ontario, Quebec and the Maritime provinces. The measure remains in balanced territory in British Columbia.

Home PricesWith measures of market balance at this point, little changed from recent history, and most of the impact on sales and listings from the COVID-19 situation only showing up towards the end of March, the impact on housing prices will likely take a little longer to become apparent. Price measures for March 2020 were strongly influenced by very tight markets and a very strong start to the spring market in many parts of Canada before physical distancing measures were implemented.

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.8% in March 2020 compared to February, marking its 10th consecutive monthly gain.

The MLS® HPI was up in March 2020 compared to the previous month in 16 of the 19 markets tracked by the index. (See the Table below)

Looking at the major Prairie markets, home price trends have ticked downwards in Calgary and Edmonton to start 2020 but have generally been stable since the beginning of last year. Prices in Saskatoon have also been stable over the last year, while those in Regina have continued to trend lower. Prices in Winnipeg have been on a slow upward trend since the beginning of 2019.

Meanwhile, the recovery in home prices has been in full swing throughout British Columbia and in Ontario’s Greater Golden Horseshoe (GGH) region. Further east, price growth in Ottawa, Montreal and Moncton continues as it has for some time now, with Ottawa and Montreal prices accelerating to start 2020.

Bottom Line: Clearly this is only the beginning, but the plunge in sales and new listings in the second half of March is indicative of the stall out in housing market activity likely until social distancing is removed and people feel safe enough to resume normal activities. No doubt, at that point, there will be buying opportunities, but right now, housing is just another contributor to the collapse in the economy.

By: Dr.Sherry Copper

Your Interest is my only Interest

Iko M.

 

1 Apr

Why Are Mortgage Rates Rising?

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Posted by: Iko Maurovski

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.

Your Interest is my Only Interest

Iko M.

647-200-0723

28 Jan

Change in the Stress Test

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Posted by: Iko Maurovski

This is great news and sounds exactly like what I have been hearing from other sources. It is also consistent with Evan Siddall leaving CMHC and it reduces the power of the banks that set the posted rate and keep it excessively above contract rates.

MPC Pres & CEO Paul Taylor was at C.D. Howe today, listening to a speech by OSFI’s Ben Gully. It became more of a big deal for our mortgage brokering community than would have been expected. The Globe and Mail just reported on it this hours. Not sure if the story is paywalled, so here it is for BTBB:

https://www.theglobeandmail.com/business/article-banking-regulator-reviewing-key-component-of-mortgage-stress-test/

Banking regulator reviewing key component of mortgage stress test
JAMES BRADSHAW – Globe and Mail

Canada’s banking regulator says it is reviewing a key component of its stress test for mortgages for the first time, but continues to defend its core tenets as good policy for the housing market.

The hotly debated stress test, introduced in 2018 by the Office of the Superintendent of Financial Institutions (OSFI), has been applied to uninsured mortgages – those with a down payment of at least 20 per cent of the purchase price – since 2018. It forces lenders to make sure borrowers could handle an increase of at least two percentage points in their mortgage interest rate.

To set the test’s threshold for each borrower, mortgage providers must either add two percentage points to the loan’s actual rate, or use the Bank of Canada’s five-year benchmark mortgage rate – whichever is higher. But OSFI is now considering whether the central bank’s benchmark should still be part of the calculation.

OSFI has staunchly defended the stress test, insisting it was necessary to clamp down on loose mortgage underwriting standards that posed a risk to lenders, and to the broader financial system. But the rule change has drawn criticism from mortgage professionals and would-be homeowners, who see the stress test as too onerous and inflexible. Some have suggested it was primarily a response to hot housing markets in Toronto and Vancouver, applied bluntly to all Canadian mortgages, though OSFI says it wants consistent underwriting across the country.

Federal Finance Minister Bill Morneau was tasked with considering ways to make the mortgage stress test “more dynamic” in his mandate letter from Prime Minister Justin Trudeau, and will review recommendations from financial agencies.

Introducing the stress test “was not a popular decision,” said Ben Gully, assistant superintendent for OSFI’s regulation division, in a speech to the C.D. Howe Institute in Toronto. “This certainly tested our mettle.”
He defended the stress test again, saying “the qualifying rate is working.” But he also said that the Bank of Canada rate used to set it may need to be changed. At current levels, that benchmark rate is making it even tougher to qualify for an uninsured mortgage.

When the regulator chose to use the Bank of Canada’s benchmark, it was “the best available rate at the time,” Mr. Gully said, but it “is not playing the role that we intended.” That’s because the gap between that rate, now at 5.19 per cent, and the average mortgage rate has widened to roughly 2.3 percentage points, making it “less responsive to market changes than when it was first proposed,” Mr. Gully said.

OSFI is now reviewing whether it should still use the benchmark as part of the stress test, and the findings “will help to inform the advice OSFI might provide to the Minister, as requested in the mandate letter to him,” Mr. Gully said.

But OSFI maintains that a threshold of two percentage points – or 200 basis points – is a reasonable buffer to ensure borrowers can manage unforeseen shocks such as a job loss or a rise in interest rates. “This will therefore remain a key part of OSFI’s guideline B-20,” the regulation that outlines the stress test, he said.

Mr. Gully took over OSFI’s regulation division last April after his predecessor Carolyn Rogers, a key architect of the stress test, was appointed as the first Canadian secretary- general of the Basel Committee on Banking Supervision, a standard-setter for global banking regulation.

 

Iko M.

Mortgage Broker

18 Sep

Benefits of Homeownership Reaffirmed in New Study

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Posted by: Iko Maurovski

Despite deteriorating housing affordability across the country, buying a home is still the more affordable option when compared to renting.

A new report from Mortgage Professionals Canada has determined that, despite the rapid rise in home price, those who are able to invest in a home would end up “significantly better off” in the long term compared to renting.

The report, authored by the mortgage broker association’s chief economist Will Dunning, found that while upfront monthly costs are in fact cheaper in most locations, the “net” cost of ownership is less than the equivalent cost of renting in a majority of cases, and becomes even more cost effective over time.

“The costs of owning and renting continue to rise across Canada,” Dunning noted. “However, rents continue to rise over time whereas the largest cost of homeownership–the mortgage payment–typically maintains a fixed amount over a set period of time – usually for the first five years. The result is that the cost of renting will increase more rapidly than the cost of homeownership.”

Additionally, the costs of ownership include considerable amounts of repayment of the mortgage principal. “When this saving is considered, the ‘net’ or ‘effective’ cost of homeownership is correspondingly reduced,” Dunning added.

On average, the monthly cost of owning exceeds the cost of renting by $541 per month. But when principal repayment is considered, the net cost of owning falls to $449 less than renting.

Interest Rate Scenarios

The analysis compared the cost of renting vs. owning both five and 10 years into the future, with higher interest rates factored into the equation. In all cases, owning comes out ahead:

Scenario #1: If interest rates remain the same (using an average of 3.25%), after 10 years the average net cost of owning is $1,014 less than the monthly cost of renting.

Scenario #2: If interest rates rise to 4.25% after five years, the average net cost of owning falls to $1,295 less than the monthly cost of renting.

Scenario #3: If interest rates rise to 5.25% after five years, the average net cost of owning is still $726 less than the monthly cost of renting.

“By the time the mortgage is fully repaid in 25 years (or less) the cost of owning will be vastly lower than the cost of renting,” the report adds, noting that the cost of owning, on average, would be $1,549 per month vs. $4,655 for an equivalent dwelling.

Canada Still a Country of Homeowners

Despite rising home prices and deteriorating affordability, Canada remains a nation of aspiring homeowners.

The study pointed to the continued strong resale activity as one indicator of this.

Resale activity in 2017 was still the third-highest year on record, at 516,500 sales, just off the peak of 541,2220 sales in 2016.

But other polls have also found a strong desire among younger generations that still dream of owning.

RBC’s Homeownership Poll found a seven-percentage-point increase in the percentage of overall Canadians who planned to buy a home within the next two years (32%), and a full 50% of millennials.

Similarly, a RE/MAX poll found more than half of “Generation Z” (those aged 18-24) also hope to own a home within the next few years.

Perhaps the biggest question is whether those aspiring homeowners will have the means to surpass the barriers to homeownership, namely larger down payments and the government’s new stress test.

“While recent changes to mortgage qualifying have made the barrier to entry higher, those who can qualify will be much better off in the long term,” Paul Taylor, President and CEO of Mortgage Professionals Canada said in a statement. “Given the economic advantages of homeownership, Mortgage Professionals Canada would recommend the government consider ways to enable more middle-class Canadians to achieve homeownership.”

Despite its affordability benefit over renting, Dunning addresses some of the impediments of homeownership, namely the longer timeframe needed to save for the down payment. Despite higher home prices and larger down payments required, first-time buyers still made an average 20% down payment.

Additional Tidbits from the Report

Some additional data included in Dunning’s report include:

  • Average house price rose 6.2% per year from $154,563 in 1997 to $510,090 in 2017
  • Average weekly wage growth was up just 2.6% per year from 1997 to 2017
  • The average minimum interest rate for the stress test during the study period: 5.26%
  • The average annual rates of increase for the following housing costs:
    • Property taxes: 2.8%
    • Repairs: 1.9%
    • Home insurance: 5.4%
    • Utilities: 1.6%
    • Rents: 2.4%

Your Interest is my Only Interest

 

11 Sep

Here’s what Canadian homeowners should know about the housing market in September

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Posted by: Iko Maurovski

The Canadian housing market is facing significant headwinds heading into the fall, and it’s still unclear how it will navigate them.

From a rising interest rate environment, to worryingly high levels of household debt, there are several factors the industry experts are telling homeowners and would-be buyers to consider.

For a closer look at what could affect the market this month, Livabl has rounded up the latest industry commentary, to keep you in the know.

An interest rate hike is on its way

The Bank of Canada chose not to hike the overnight rate this week — but that doesn’t mean it won’t in the near future.

In its release, the Bank noted that the housing market is “beginning to stabilize as households adjust to higher interest rates and changes in housing policies.” That, combined with an acknowledgement that the debt burden among households is starting to lower, has TD senior economist Brian DePratto predicting that the Bank will choose to hike the overnight rate in October.

“The Bank of Canada made it clear that it is still on track to raise interest rates again this year,” he wrote, in a note. “The Canadian economy is indeed evolving in line with its projections, with the desired rotation of demand towards investment and exports, and a stabilization of the housing market after a difficult start to the year…We believe the BoC will raise interest rates at its October meeting, consistent with its gradual approach to policy normalization.”

As the overnight rate climbs, mortgage rates will also be pushed upwards, possibly causing some would-be buyers to reconsider entering the housing market. Beyond causing a slowdown in activity, a rate increase would weigh on existing homeowners, who might struggle to make higher mortgage payments.

Affordability is deteriorating

As interest rates moved upwards, housing affordability deteriorated in most major Canadian markets last quarter.
The Bank of Canada hiked the overnight rate to 1.50 per cent in July, and mortgage rates followed suit.

The ratio of homeowners mortgage payments in comparison to their income, known as MPPI, rose 0.2 per cent in Q2, after a 1.2 per cent rise in Q1, marking 12 months of consecutive deterioration. In total, seven of 10 major markets saw their MMPI rise last quarter.

“Mortgage interest rates were on the rise for a fourth consecutive quarter in Q2,” wrote National Bank economists Matthieu Arseneau and Kyle Dahms. “Unsurprisingly, the rise in interest rates hit harder for the priciest markets in the country.”

Household debt is still a concern

That deteriorating affordability is bad news for Canadians household debt levels, which are still worryingly high.

“Risks around housing appear to have dissipated with the national market stabilizing in recent months,” wrote BMO senior economist Benjamin Reitzes, in a recent note. “[But] household debt is an issue that isn’t going to be resolved anytime soon.”

While Canada’s debt-to-disposable income ratio eased from 169.7 to 168 per cent in the first quarter of 2018, Canadians still have some of the highest debt levels in the world.

“The [Bank of Canada] is continuously collecting data on how households are coping with rising rates, while the macro data suggest the moves have been manageable thus far,” wrote Reitzes. “The slowing housing market and new mortgage rules have caused debt growth to decelerate, but it’s going to take time to work off debt burdens and bring debt ratios down.”

Your Interest is my Only Interest

Iko M.

Mortgage Broker

647-200-0723

http://ikomaurovski.com/

7 Aug

CMHC changes to assist self-employed borrowers

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Posted by: Iko Maurovski

Self-employed Canadians will be happy to hear that CMHC is willing to make some changes that will make it easier to qualify for a mortgage.

In an announcement on July 19, 2018, the CMHC has said “Self-employed Canadians represent a significant part of the Canadian workforce. These policy changes respond to that reality by making it easier for self-employed borrowers to obtain CMHC mortgage loan insurance and benefit from competitive interest rates.” — Romy Bowers, Chief Commercial Officer, Canada Mortgage and Housing Corporation. These policy changes are to take effect Oct. 1, 2018.

Traditionally self-employed borrowers will write as many expenses as they can to minimize the income tax they pay each year. While this is a good tax-saving technique, it means that often a realistic annual income cannot be established high enough to meet mortgage qualification guidelines.

Plain speak, self-employed people don’t look good on paper.

Normally CMHC wants to see two years established business history to be able to determine an average income. But the agency said it will now make allowances for people who acquire existing businesses, can demonstrate sufficient cash reserves, who will be expecting predictable earnings and have previous training and education.

Take for example a borrower that has been an interior designer with a firm for the past eight years and in the same industry for the past 30 years, but just struck out on his own last year. His main work contract is with the firm he used to work for, but now he has the ability to pick up additional contracts from the industry in which he has vast connections.

Where previously he would have had to entertain a mortgage with an interest rate at least 1% higher than the best on the market and have to pay a fee, now he would be able to meet insurance requirements and get preferred rates.

The other change that CMHC has made is to allow for more flexible documentation of income and the ability to look at Statements of Business Professional Activity from a sole-proprietor’s income tax submission to support Add Backs of certain write-offs to support a grossing-up of income. Basically, recognizing that many write-offs are simply for tax-saving purposes and are not a reduction of actual income. This could mean a significant increase in income and buying power.

It is refreshing after years of government claw-backs and conservative policy changes to finally see the swing back in the other direction. Self-employed Canadians have taken on the burden of an often fluctuating income and responsible income tax management all for the ability to work for themselves. These measures will help them with the reward of being able to own their own home as well.

Your Interest is my Only Interest

Iko M.

647-200-0723

Welcome

 

19 Jun

The Spring Housing Market Continues To Be Weak

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Posted by: Iko Maurovski

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

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

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

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

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

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

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

New Listings
The number of newly listed homes rose 5.1% in May but remained below year-ago levels. New listings rose in about three-quarters of all local markets, led by Edmonton, Calgary, Montreal, Quebec City, Ottawa and the GTA.
With new listings up and sales virtually unchanged, the national sales-to-new listings ratio eased to 50.6% in May compared to 53.2% in April and stayed within short reach of the long-term average of 53.4%. Based on a comparison of the sales-to-new listings ratio with its long-term average, about two-thirds of all local markets were in balanced market territory in May 2018. There were 5.7 months of inventory on a national basis at the end of May 2018. While this marks a three-year high for the measure, it remains near the long-term average of 5.2 months.

Home Prices
On a national basis, the Aggregate Composite MLS Home Price Index (HPI) rose only 1.0% y/y (year-over-year) in May 2018, marking the 13th consecutive month of decelerating y/y gains. It was also the smallest annual increase since September 2009.
Decelerating year-over-year home price gains largely reflect trends among GGH housing markets tracked by the index. While home prices in the region have stabilized and begun trending higher on a monthly basis, rapid price gains recorded one year ago have contributed to deteriorating y/y price comparisons. If recent trends remain intact, year-over-year comparisons will likely improve in the months ahead.
Condo apartment units again posted the most substantial y/y price gains in May(+12.7%), followed by townhouse/row units (+4.9%). By contrast, one-storey and two-storey single-family home prices were down (-1.5% and -4.7% y/y respectively), very much in line with what we saw last month.

Benchmark home prices in May were up from year-ago levels in 8 of the 15 markets tracked by the index (see Table below).
Composite benchmark home prices in the Lower Mainland of British Columbia continue to trend upward after having dipped briefly in the second half of 2016 (Greater Vancouver (GVA): +11.5% y/y; Fraser Valley: +20.6% y/y). Apartment and townhouse/row units have been mainly driving this regional trend while single-family home prices in the GVA have stabilized. In the Fraser Valley, single-family home prices have also started rising.
Benchmark home prices were up by 11.5% on a y/y basis in Victoria and by 18.1% elsewhere on Vancouver Island.

Within the GGH region, price gains have slowed considerably on a y/y basis but remain above year-ago levels in Guelph (+3.8%). By contrast, home prices in the GTA, Oakville-Milton and Barrie were down from where they stood one year earlier (GTA: -5.4% y/y; Oakville-Milton: -5.9% y/y; Barrie and District: -6.3% y/y). This reflects rapid price growth recorded one year ago and masks recent month-over-month price gains in these markets.

Calgary and Edmonton benchmark home prices were down slightly on a y/y basis in May (Calgary: -0.5% y/y; Edmonton: -0.9% y/y), while prices in Regina and Saskatoon were down more noticeably from year-ago levels (-6.2% y/y and -2.7% y/y, respectively).
Benchmark home prices rose by 8.2% y/y in Ottawa (led by a 9.5% increase in two-storey single-family home prices), by 6.7% in Greater Montreal (driven by a 7.3% increase in two-storey single-family home prices) and by 4.3% in Greater Moncton (led by a 4.8% increase in townhouse/row unit prices).

Bottom Line
Housing markets continue to adjust to regulatory and government tightening as well as to higher mortgage rates. The speculative frenzy has cooled, and multiple bidding situations are no longer commonplace in Toronto and surrounding areas. Home prices in the detached single-family space will remain soft for some time, and residential markets are now balanced or favour buyers across the country. The hottest sector remains condos where buyers face limited supply.

Owing to the housing slowdown, a general slowing in the Canadian economy and significant trade uncertainty, the Bank of Canada has taken a very cautious stance. However, at their last meeting, monetary policymakers have signalled that a rate hike is coming, likely when they next meet on July 11.
Five-year fixed mortgage rates have already risen roughly 110 basis points, while rates for new variable mortgages rose by close to 40 basis points. Since the implementation of new mortgage standards, nonprice lending conditions for mortgages and home equity lines of credit have also tightened.

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

Your Interest is my Only Interest

Iko M.

647-200-0723

27 Mar

GETTING PRE-APPROVED FOR A MORTGAGE THIS SPRING

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Posted by: Iko Maurovski

Apparently, as per the weather experts, March has a lot of snowfall and surprisingly so does April!
Hearing this on the radio gives you a wave of emotions: holy cow, oh great, I wonder how many vacation days I have left and when can I take down my Christmas lights.
Good news, those same weather experts are predicting a hot summer and you know what that means! Buy your fan(s) now before they run out and check out a pool, size and budget appropriate, for the backyard. So glad we have a compressor to blow that thing up every year; three rings take a lot of breath!
Normally by April you are thinking about moving because you need a bigger home, you need to down size, or its time to leave the basement of your family home.
Those weekends where you have little to do so you opt to go out, get a coffee and go to show homes and see how they decorate because the DIY on TV is all reruns. While you are there, you start to picture yourself living there and then begin to wonder, “can I do this?” Do I want to want to do all the landscaping, do I need a developed basement now or later, where are the schools? Maybe should I think about an already established community with lots of schools, trees, or place that my cat and I can live.
Working with your Dominion Lending Centres Mortgage Professional, we will review your options, your affordability, possible extra costs that you may have missed and finally, get you pre-approved!

Prequalified or rate hold, what is the difference?
Your broker has asked you for supporting documentation that will confirm your income, you do indeed have a down payment, and your debt is not more than you can handle along with possible new housing costs. This is so they can start the application to ensure the numbers are good and we can begin.

  • Rate Hold – it is just that, a rate that lender is offering and, based on the application submitted to them, it shows the numbers are in alignment for them to hold a rate for you. This rate can be held anywhere from 90 – 120 days. Remember, they have reviewed the application submitted only and no other supporting documentation.
  • Prequalified – it is just that, the lender has reviewed the supporting paperwork along with the application and is in happy to provide you with a prequalified letter stating they not only are they holding the rate for 90 – 120 days, depending on which lender, but you have met their criteria for lending.

o Although once you present you offer they may still have a few more items they want to check:
▪ You still working? – you will need a current paystub
▪ You still working at the same place?
▪ You didn’t buy a new car, right? Ugh!
▪ You didn’t get new furniture and finance it with the store, right? Ugh!

Ask your advisor about the DO’s and DON’Ts; this one single sheet of paper will make or break a deal!
Prequalified or rate hold, now you know the difference.

Your Interest is my Only Interest

Iko M.

647-200-0723

 

By: Karren Panner