25 Apr

Bank Of Canada Holds Interest Rate As It Ponders Timing Of Next Hike


Posted by: John Dunford

OTTAWA — For the Bank of Canada these days, it’s all about timing.

The central bank stuck with its benchmark interest rate of 1.25 per cent Wednesday as it continued along a careful process of determining the appropriate juncture for its next hike.

“Governing council has agreed that, over time, the economy would appear to be warranting higher interest rates — our uncertainty is about how much and at what pace,” governor Stephen Poloz told a news conference that followed his latest rate announcement.

“For us, the case is clear — interest rates are very low considering that the economy is pretty well at capacity, inflation’s at two per cent.

“So, there is a sense that, almost by law of gravity, interest rates will move somewhat higher over time — but again, the pace is a significant question mark for us given the data.”

The latest rate decision comes at a time of moderating growth following a strong 2017. Inflation is also running close to its ideal target and wage growth has strengthened with a tightening labour force.

Poloz, however, said that despite the recent improvements, the economy’s still unable to continue running at full tilt without the stimulative power of lower rates, at least for a little longer.

He listed four downward forces still weighing on the economy — all of which have come under close scrutiny by a central bank that has been describing itself as data dependent.

Two of these sources of uncertainty — inflation and wage growth — were highlighted as areas showing particular progress.

On inflation, Poloz said recent readings have been “very reassuring” with both the headline and core rates near its two per cent bull’s-eye.

Wage growth, he said, has increased significantly over the last 18 months to reach the three per cent range, although the bank noted the measure remains below what would be expected if the economy no longer had slack in its labour force.

The bank will also continue to watch two other areas of uncertainty: the economy’s sensitivity to higher interest rates and how well it builds capacity through business investment.

On capacity building, Poloz said he believes Canada now has a little more room to expand further, beyond what the bank sees as the economy’s potential growth — and all without driving up inflation.

When it comes to the impact of higher rates, Poloz said even with the inflated debt loads of Canadian households, recent data has shown moderation in credit growth.

Poloz reiterated Wednesday the bank would remain cautious when it comes to future increases.

Following the rate announcement, many experts stuck with their calls that the bank will introduce its next hike in July.

Poloz has raised rates three times since last summer following an impressive economic run for Canada that began in late 2016, but his last hike came in January.

Throughout this period, the bank has also kept a close watch on the evolution of external risks.

Exports and business investment in Canada have been held back by competitiveness challenges and trade-policy uncertainties, which include escalating geopolitical conflicts that risk damaging global expansion, the bank said.

It laid out estimates on the growth impacts on Canada due to tax reforms in the United States, which are expected to lure more investment south of the border. Due to these investment challenges, it predicts Canada’s gross domestic product to be 0.2 per cent lower by the end of 2020.

Exports are also expected to take a hit from trade uncertainties and reduced investment. The bank projects that Canada’s GDP will be 0.3 per cent lower by the end of 2020 due to the negative impacts on exports.

Fiscal stimulus introduced in recent provincial budgets is expected to help offset these effects by adding about 0.4 per cent to Canada’s real GDP by the end of 2020.

On Wednesday, the bank also posted new economic forecasts with the release of its latest monetary policy report.

For 2018, it’s now predicting two per cent growth, as measured by real gross domestic product, compared to its 2.2 per cent prediction in January.

That rate represents a drop from the three per cent growth in 2017. The bank had been anticipating such moderation.

However, the bank also raised its growth projection for 2019 to 2.1 per cent, up from its previous prediction of 1.6 per cent. It expects growth to ease to 1.8 per cent in 2020.

For the first three months of 2018, the bank is predicting growth of about 1.3 per cent — considerably lower than its January projection of 2.5 per cent.

The effects of sluggish exports and the housing markets’ responses to stricter mortgage rules played a big role in the disappointing numbers, the bank said.

It’s now predicting, however, the economy will rebound in the second quarter with 2.5 per cent growth, in part because of rising foreign demand.

18 Apr

Toronto Homebuyers Learn Harsh Lesson


Posted by: John Dunford

A recent study elucidated how badly homeowners got burned when Toronto’s housing market plunged about a year ago.

The report, published by Move Smartly, determined that hundreds of homeowners lost an average of $140,000 because of closing defaults, and according to John Pasalis of Realosophy, that totaled $121mln in lost market value.

“It tells you how rapid the decline was,” Pasalis told the Globe and Mail. “It tells you how quickly markets turn.”

Closing defaults often result in litigation, but that becomes even trickier when the purchaser who reneges on the transaction lives in another country.

“One client sold to a buyer from Iran, who was buying as a non-resident, and decided he’s not closing on the deal, and then what’s the recourse of the client—you’re going to sue someone in Iran?” said Mortgage Outlet’s Principal Broker Shawn Stillman. “Some people will simply not close because they don’t want to buy something that’s worth $200,000.”

On preconstruction purchases, Stillman recommends to all his clients that they take the on-site mortgage broker’s preapproval. While the terms might not be favourable, it mitigates the chances of defaulting on closing.

“One thing we always recommend people do is the builders always offer a preapproval for a set amount of time and we tell them to take it,” he said. “It’s something we can’t offer in the mortgage world. There’s always a mortgage broker from a major bank on site that usually does financing that will preapprove you for a few years. It’s a terrible rate but I always tell clients, ‘You don’t know what the future holds,’ and to always take that preapproval because that would be the worst case scenario.”

Unfortunately, through no fault of their own, sellers end up being the real losers. Because they sell their home on condition and buy another to move into only for their buyer to back out, they’re stuck between a rock and a hard place.

“Unfortunately, it’s not anybody else’s responsibility to help [the defaulting buyer] get out of that hole,” said Stillman. “When things went up in value, builders weren’t saying ‘You have to pay me 20% more, or a $100,000 more.’ Same thing when prices go down. It’s nobody’s responsibility but theirs to close the deal.”

10 Apr

Banks Face More Competition From Fintech, Demand Downturn


Posted by: John Dunford

Canada’s banking industry is facing increased competition from growth in the fintech sector as mortgage demand weakens according to a new report.

The Conference Board of Canada says that despite these challenges, banks will manage to increase their pre-tax profits to more than $95 billion in 2018 and will see output grow by an average of 2.6% annually through 2022.

“The impact of financial technology firms on the industry is growing, and to date this has been primarily beneficial to the industry. Productivity continues to increase considerably and has been a key driver behind its successful financial performance,” said Michael Burt, Director, Industrial Economic Trends, The Conference Board of Canada.

The banking sector has responded to fintech disruption by expanding their own digital offerings, but the other challenge they face will be hard to mitigate.

The report says that demand for mortgages will drop “considerably” as interest rates rise and more stringent mortgage regulations weigh. This, along with lower demand for other consumer loans will weigh on banks’ profitability.

10 Apr

Canada’s Jobless Rate Remains At A 40-Year Low


Posted by: John Dunford

Statistics Canada announced this morning that employment increased by a stronger-than-expected 32,300 in March, driven by full-time job gains. The unemployment rate was unchanged at a four-decade low of 5.8% indicating that the economy is at or near full employment.

In the first quarter of 2018, employment edged down (-40,000 or -0.2%) reflecting a decrease in January. On a longer-term basis, jobs have been on an uptrend since the second half of 2016 despite a price-induced weakening in the oil sector. Over the past year, total employment rose by nearly 300,000 (+1.6%), driven by a surge in full-time work and a net decline in part-time jobs–all excellent news for the economy. Over the same period, total hours worked grew by 2.2%.

Employment rose in Quebec and Saskatchewan, while there was little change in the rest of the country. As the table below shows, British Columbia continues to post the lowest jobless rate in Canada at a stable 4.7% followed by Ontario at 5.5%. Quebec is third with an unemployment rate only slightly above the level in Ontario, its best relative performance in many years. The jobless rate at 5.8% in Saskatchewan edged up last month as it did in Manitoba. Alberta saw a sharp improvement as the jobless rate fell from 6.7% to 6.3% continuing the trend of recent months. Atlantic Canada continued to post the highest proportion of unemployed people. While the unemployment rate edged down in Nova Scotia and New Brunswick, it rose in Prince Edward Island and Newfoundland and Labrador.

From an industry perspective, job gains were led by the construction sector (+18,300), representing more than half of the employment growth last month. This was the most robust performance for construction jobs since February of 2016. Compared with 12 months earlier, employment in this sector grew by 54,000 (+3.8%), mostly resulting from gains in the second half of last year. There were also gains in public administration and agriculture. The number of public sector employees rose, while the number in the private sector and those self-employed held steady. The number of people working in finance, insurance, real estate and leasing ticked down slightly last month while it declined -0.4% on a year-over-year basis. Manufacturing was a drag on the economy, with the sector losing 8,300 jobs in March, possibly reflecting NAFTA uncertainty.

Another piece of good news for Canadians is that annual wage gains averaged a sizeable 3.2% in the first quarter of this year, the most substantial quarterly rise since 2015.

The March jobs report reaffirms that the Canadian economy is very close to full employment with little slack left following Canada’s strong economic performance last year. “Normal” levels of monthly job growth are about 15,000 to 20,000.

Wages have been showing signs of strength in recent months as labour markets have tightened. Annual pay increases accelerated to 3.3% in March from 3.1% in February.

The Bank of Canada has much to weigh at its policy meeting on April 18. Growing optimism that a preliminary NAFTA deal is within reach has not yet triggered expectations for faster Bank of Canada interest rate hikes, particularly with rising U.S.-China trade tensions. Investors now wager there is about a 20% chance of an interest rate hike at the April 18 meeting, based on swaps trading, down from 40% two weeks ago. A BoC interest rate rise is not fully priced in until July.

Even if a tentative NAFTA deal is signed, the central bank would likely wait to see concrete increases in Canadian exports, business investment and inflationary pressure before moving again after three rate increases since last July. The February trade figures released this week were disappointing, particularly for non-energy exports. Railway delays led to a record drop in food exports. Canada has reported trade deficits since January 2017, amplifying concerns about a decline in competitiveness.

Before its April confab, the Bank will also analyze its own survey of business executives released this Monday to see how executives have responded to trade uncertainty and tight labour markets. The Bank of Canada’s business outlook indicators have been on a steady uptrend since the lows reached in 2015 and are hovering at some of the highest postings in the past 17 years. It will be interesting to see if enlarged global trade tensions have dampened business optimism in Canada.

2 Apr

Quebec Budget Welcomed By Real Estate Board


Posted by: John Dunford

The housing measures set out in the Quebec provincial budget have been given the thumbs up by a local real estate board.

The Greater Montreal Real Estate Board says that all of the real estate and housing measures tabled by the finance minister are positive, especially those relating to homeownership.

Among the province’s proposals are a non-refundable tax credit for eligible first-time buyers which when combined with the federal tax credit could mean $1,376 in tax relief after buying their first home.

First-timers will also be able to take advantage of a tax deduction of $5,000 to help defray the costs of incidental expenses not covered by a mortgage, such as inspection fees, property transfer taxes, notary fees and moving expenses.

For those renovating their home, the RenoVert refundable tax credit will be extended, providing assistance equivalent to 20% of eligible renovation costs above $2,500.

The government has also pledged to invest $103.9 million in affordable housing.

2 Apr

Foreign Buyers Starting to Drive Up Housing Prices in Quebec


Posted by: John Dunford

Foreign buyers of real estate in Quebec are putting “marginal” pressure on prices while still accounting for a tiny sliver of the market relative to Vancouver and Toronto, according to new data released by the French-speaking province.

Non-Canadian residents generated 1,307 property transactions in Quebec last year, representing 1 percent of all deals, finance ministry documents show. That’s little changed from 2008, when they made up 0.8 percent of the total. Foreigners mostly purchased high-end properties, averaging C$559,000 ($434,343) apiece, the finance ministry said Tuesday.

U.S.-based buyers made up the biggest share of foreign acquirers with 32 percent of all transactions. French buyers were next with 20 percent, followed by Chinese nationals at 16 percent. That’s a marked contrast from 2006, when Chinese residents accounted for just 1.3 percent of all foreign home transactions in Quebec.

Quebec recently began tracking and releasing data on the country of residence of home buyers following a decision by Ontario and British Columbia to impose taxes on foreign buyers.

“When we look at average prices in the Montreal area, compared to other places in Canada, they are still relatively affordable,” Quebec Finance Minister Carlos Leitao said Tuesday in Quebec City. “I don’t think we are at all in the same type of position as our neighbors in Toronto or Vancouver. There is no need, in our view, to consider any sort of more intense measures.”

Last year’s land-registry data — compiled by JLR Solutions Foncieres — show foreign buyers bought single-family homes that were twice as expensive on average as those acquired by Quebec residents, the finance ministry said. Co-ownership properties acquired by foreigners were 40 percent more expensive than those bought by Quebeckers, the ministry also said.

Foreigners accounted for just 1.4 percent of housing deals in Montreal last year, compared with 3.2 percent in Toronto and 3.5 percent in Vancouver, according to budget documents.

25 Mar

Interest Rate Rises Will Start To Affect Cooler Markets Says BMO


Posted by: John Dunford

Affordability in Canada’s housing markets is generally very good but interest rate increases could start to change that.

BMO’s Spring Housing Affordability Report also reveals the influence that Millennials have on the markets in Toronto and Vancouver, but also in those outside these hot markets as they seek more affordable options.

However, this influence is set to decline in the next decade, the report says, as the baby boomer homebuying era did in the late 90s.

“Millennial buyers and international migrants are cushioning the decline in detached home prices in the hottest markets,” said Sal Guatieri, Senior Economist, BMO Capital Markets. “We expect millennials to also bolster other markets like Montreal and Ottawa, as those looking for better affordability consider options beyond Toronto and Vancouver.”

He added that interest rates are likely to rise 50 points in this calendar year, with the additional costs eroding affordability in those markets that have not been affected by the tighter mortgage regulations and other cooling measures.

22 Mar

A More Hawkish Fed Was Expected


Posted by: John Dunford

The Federal Open Market Committee (FOMC) met this week for the first time under the chairmanship of Jerome Powell. In a unanimous decision, the Committee hiked the target range for the federal funds rate by 25 basis points to 1-1/2 to 1-3/4 percent. Unlike the Bank of Canada, which has a single objective of targeting inflation at roughly 2 percent, the Fed has a dual statutory mandate to both foster price stability and maximum employment.
U.S. labour conditions remain strong, and the economy continues to grow at a moderate pace. Inflation is still below the Fed’s target despite the rapid decline in unemployment to 4.1 percent. The growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter pace.
In the Fed’s quarterly forecast of economic and financial conditions, policymakers were divided over the outlook for the benchmark interest rate in 2018. Seven officials projected at least four quarter-point hikes would be appropriate this year, while eight expected three or fewer increases to be warranted. This is in direct contrast to market expectations of only two rate hikes this year by the Bank of Canada and is one important reason why the Canadian dollar has fallen sharply vis-a-vis the U.S. dollar in recent weeks, although the loonie did edge upward following the release of the Fed’s decision as the U.S. dollar fell sharply.
In the forecasts, U.S. central bankers projected a median federal funds rate of 2.9 percent by the end of 2019, implying three rate increases next year, compared with two 2019 moves seen in the last round of forecasts in December. They saw the fed funds rate at 3.4 percent in 2020, up from 3.1 percent in December, according to the median estimate.
The median estimate for economic growth this year rose to 2.7 percent from 2.5 percent in December, signaling confidence in US consumers despite recent weakness in retail sales. The 2019 estimate rose to 2.4 percent from 2.1 percent. The 2020 GDP growth continues to be a forecasted 2.0%. Fed officials expect a lift this year and next owing to the tax cuts passed by Republicans in December.
These projections are above the Fed’s estimate for the long-run sustainable growth rate of the US economy of 1.8 percent, a figure that is about in line with the Bank of Canada’s analysis for our country. The tax cut stimulus was introduced to an economy that was already experiencing labour shortages. The Fed estimates the long-run noninflationary level of unemployment to be about 4.5 percent–well above today’s nearly 20-year low of 4.1 percent, suggesting that inflation is likely to rise in coming months.

20 Mar

Uninsured Mortgages Soar to 8-Year High, Even As Canada’s Housing Market Cools


Posted by: John Dunford

Canada’s uninsured mortgage market reached an eight-year high in January as government steps to reduce taxpayer exposure to the housing market gain traction, according to data from the country’s banking regulator.

Mortgages that don’t require homeowner insurance surged 19 percent from a year ago, accounting for about 53 percent of the C$1.13 trillion ($864 billion) of home loans at Canada’s federally regulated banks, data from the Office of the Superintendent of Financial Institutions show. Insured home loans fell 6.5 percent from a year ago.

Uninsured mortgages have taken an increasing share of the nation’s housing loans since 2012 as the government moved to reduce the chances of the kind of taxpayer-funded bank bailouts that happened after the U.S. housing crash a decade ago.

Still, the slowdown of residential mortgage volumes continues, with banks posting a 5.3 percent increase from January 2017, down from a recent high of 6.6 percent in May, the data show. The trend reflects the sentiments of executives of Canada’s Big Six banks, who commented on a cooling mortgage market in recent weeks after reporting earnings results for the first quarter.

“The slowdown in mortgage growth has been evident since the middle of last year, reflecting the impact of prior policy measures, as well as three interest rate hikes by the Bank of Canada,” DBRS Ltd. said in a March 19 note.

In January, OSFI made it more difficult for those with more than a 20 percent down payment to qualify for loans. The measures, known as B-20 guidelines, requires borrowers to qualify at the greater of the Bank of Canada’s five-year benchmark rate or 2 percentage points higher than the offered mortgage rate. Prospective borrowers have increasingly been turning to alternative lenders to qualify.

“With new mortgage rules taking effect on January 1, home sales have showcased two straight months of declines,” Barclays Plc analyst John Aiken said in a March 16 note to clients. “While stronger home sales at the end of 2017 could still buoy mortgage growth in the second quarter, we anticipate new mortgage origination volume could be tested in the back half of the year.”

20 Mar

Canada’s Housing Market Continues to Slow


Posted by: John Dunford

Data released today by the Canadian Real Estate Association (CREA) show a second consecutive dip in home sales across much of the country. Rising mortgage rates and tighter mortgage qualification rules have hit first-time homebuyers particularly hard, and activity was pulled-forward late last year in advance of the new OSFI rules.
Existing home sales dropped 6.5% nationally in February, deepening the decline that began in January. February’s sales figure posted the lowest monthly reading in nearly five years. Home purchases over the first two months of this year plunged 19.4%. Sales fell in almost three-quarters of all local markets, with out-sized declines in and around Greater Vancouver (GVA) and Greater Toronto (GTA).
On a year-over-year (y/y) basis, activity slumped 16.9% from the peak pace of early 2017 and hit a five-year low for any February. Sales activity last month was 7% below the 10-year February average.
Toronto existing home sales plunged nearly 35% compared to the record pace of February 2017. In the GVA sales fell 9% y/y–14.4% below the ten-year February sales average. A CREA official said that “momentum for home sales activity going into the second quarter is likely to be weighed down by housing market uncertainty in British Columbia, where the provincial budget introduced new housing policies toward the end of February.”
Judging from price trends detailed below, the decline in sales in both Toronto and Vancouver appears to be almost entirely in higher-end single-detached homes, as the mid-range of the market–mainly condo apartments and townhouses–remain active.
Ottawa and Montreal have held up better than most, with sales little changed from a year ago. Elsewhere, sales in Calgary and Edmonton were down from the prior month and modestly from a year ago. But, most metrics still point to a soft and relatively stable market, ignoring the OSFI-related swing.
On a month-over-month (m/m) basis, three-quarters of housing markets experienced a decline in sales with just two provinces, P.E.I. (+2.98%) and N.B. (+0.79%) posting gains. B.C. led the declines, down 12.7% m/m, with the GVA down 15.8% and Fraser Valley down 16.3%. Calgary (-8.6%), the GTA (-8.2%) and several Greater Golden Horseshoe markets including Hamilton (-12.1%) and Oakville (-8.8%) were also down sharply on the month.

New Listings
The number of newly listed homes recovered 8.1% in February following a plunge of more than 20% in January. Despite the monthly increase in February, CREA reported that new listings nationally were still lower than monthly levels recorded in every month last year except January and were 6.4% below the 10-year monthly average and 14.6% below the peak reached in December 2017.
New supply was up in about three-quarters of local markets. B.C.’s Lower Mainland, the GTA, Ottawa and Montreal led the monthly increase. Despite the monthly rise in new supply, these markets remain balanced or continue to favour sellers.
With sales down and new listings up in February, the national sales-to-new listings ratio eased to 55% compared to 63.7% in January. Based on a comparison of the sales-to-new listings ratio with its long-term average, almost three-quarters of all local markets were in balanced market territory in February 2018. There were 5.3 months of inventory on a national basis at the end of February 2018 – the highest level in two-and-a-half years and in line with the long-term average of 5.2 months.

Home Prices
On a national basis, the Aggregate Composite MLS Home Price Index (HPI) rose 6.9% y/y in February posting the 10th consecutive deceleration in y/y gains. This continued the trend that began last April when the province of Ontario announced its new housing measures that included a 15% tax on nonresident foreign homebuyers. The slowing y/y home price growth mainly reflects the trend for the Greater Golden Horseshoe. Prices in that region have stabilized or begun to show tentative signs of moving higher in recent months; however, year-over-year comparisons are likely to continue to deteriorate further due to rapid price gains posted one year ago.
Nationally, condo units continued to show the highest y/y price gains in February (+20.1%), followed by townhouse/row units (+11.8%), one-storey single family homes (+3.5%), and two-storey single family homes (+1%).
In the GTA, the Composite MLS HPI rose 3.2% y/y, which was driven by an 18.8% y/y rise in condo apartment prices and 7.5% growth in townhouse prices. Single-family detached home prices were down slightly compared to February 2017.
Benchmark home prices in February were up from year-ago levels in 10 of the 13 markets tracked by the MLS® HPI (see the table below). Composite benchmark home prices in the Lower Mainland of British Columbia continued to trend higher after having dipped briefly during the second half of 2016 (GVA: +16.9% y/y; Fraser Valley: +24.1% y/y). Benchmark home prices rose by about 14% y/y in Victoria and by roughly 20% elsewhere on Vancouver Island.
In the GTA, benchmark price gains have slowed considerably but remain 3.2% above year-ago levels. While home prices in Oakville-Milton are down slightly over the past year (-1.9%), the monthly price trends there have begun to show signs of stabilizing with some tentative upward movement in recent months.
Calgary benchmark home prices were flat (+0.1%) on a y/y basis, while prices in Regina and Saskatoon were down from last February (-4.8% y/y and -3.8% y/y, respectively).
Benchmark home prices rose by 7.7% y/y in Ottawa (led by an 8.9% increase in two-storey single-family home prices). Greater Montreal saw a 6.1% rise y/y (driven by an 8.8% increase in townhouse prices). Benchmark prices increased 5% in Greater Moncton (led by a 6.4% rise in one-storey single-family home 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 in Toronto and Vancouver where buyers are confronted with limited supply. Owing to the housing slowdown, a general slowing in the Canadian economy and significant trade uncertainty, the Bank of Canada will continue to be cautious.

As the Bank of Canada pointed out last week, household credit growth has slowed in recent months led by a slowdown in residential mortgage credit. Rising interest rates are a severe headwind for consumer spending, and tighter monetary policy could derail an already fragile economy. So don’t expect a Bank of Canada rate hike anytime soon.