9 Oct

IBC: Expect Two Rate Rises in the Next 3 Months


Posted by: John Dunford

Homeowners could be facing two interest rate rises in the coming months according to an updated forecast.

CIBC Capital Markets said Thursday that it was already expecting a rate rise in October due to anticipation that a NAFTA deal would happen. The agreement of the next-gen trade deal USMCA supports the earlier forecast.

However, economists are now calling for a further rate rise in January 2019, slightly earlier than it had been forecasting. That’s due to recent positive data points.

The good news for homeowners with mortgages is that, following those two rate rises within three months, CIBC Capital Markets believes there will need to be a “prolonged pause” by the BoC due to the “elevated sensitivity of households” to the interest rate hikes.

The outlook also forecasts that the Canadian dollar will strengthen over the next six months or so before easing back to the low 1.30s against the greenback by mid-2019.

Challenges ahead for the economy

CIBC economists Andrew Grantham and Royce Mendes have posted their economic outlook for the coming years and highlighted some challenges.

These include rising mortgage rates, attracting and retaining talent, and a US slowdown by 2020.

Provincially, Alberta is expected to see stronger growth in 2018 than previously predicted due to a resurgence of oil production.

BC is set for weaker growth than expected due to the slowdown in the housing market, which is a key driver of growth in the province. The economists note that there has been a more pronounced slowdown in the BC housing market activity than in Ontario and not much of a rebound so far.

The outlook also suggests a slowdown in consumer spending in BC and Ontario as the provinces see the biggest impact from rising interest rates.

The report highlights that 5-year mortgages will be renewed at higher rates for the first time in a generation.

9 Oct

Interest Rate Could Hit 6% By 2020


Posted by: John Dunford

Interest rates could hit 6% by 2020, according to Moody’s Analytics.

The prediction, using RPS data, is based on policymakers realizing plans to quell housing bubbles in Toronto and Vancouver, as well as on rising interest rates.

“Two macroeconomic projects now dominate housing markets in Canada,” said Andres Carbacho-Burgos, a Moody’s economist. “The first is that the [Bank of Canada] will continue to tighten short-term interest rates through 2020 in order to head off inflation and also maintain the value of the Canadian dollar relative to its U.S. counterpart.

“With some lag, monetary tightening will pull up mortgage rates. The five-year mortgage rate is now at about 4.4% after bottoming out at 3.6% in mid-2017; the Moody’s Analytics baseline projection is that it will continue to increase until it levels off at about 6% in late 2020.”

Prolonged North American Free Trade Agreement negotiations have only deferred the Bank of Canada’s rate hiking mandate, but with the federal government this week finalizing a new deal, the United States-Mexico-Canada Agreement, there will almost certainly be a hike on Oct. 24.

“Overall, when it comes to the new USMCA, it’s going to affect the housing market because interest rates are bound to go up,” said Samantha Brookes, founder of Mortgages of Canada. “The Bank of Canada was holding back the rate until there was an agreement. Now, we’ll get increases based on the way the economy has been performing, and what that means for Canadians is interest rates will go up and prices will continue to adjust.”

That will likely make conditions favourable for buyers as the market continues recovering from the shock of so many changes.

“I believe it will probably take until 2020 until we see some light at the end of the tunnel,” she said. “But that’s based on the correction that’s been happening over the last year. People need to be more creative with how they’re purchasing.”

This could give further rise to co-ownerships in the housing market.

“It’s becoming more and more popular,” said Brookes. “Be creative and you’ll still be able to get in. We all know real estate is still the number one investment, and it will be time to hold onto that investment rather than flipping it for a quick buck. It’s too risky for that right now, so buy and live in your home for a few years until the market corrects.”

2 Oct

Tories Plan to Make B-20 Election Issue


Posted by: John Dunford

The Conservative Party of Canada will make B-20 a hot button issue during next year’s election.

The party’s Deputy Shadow Minister for Finance has already tabled two motions, both of which were rejected by the Liberals, to study B-20’s effects. Refusing to go quietly, MP Tom Kmiec has vowed to put the mortgage stress test back on the agenda in time for the Oct. 2019 federal election.

“It will be an election issue, absolutely,” Kmiec told MortgageBrokerNews.ca. “I’m willing to use procedural tools to get this study done. I’m not necessarily saying to get rid of B-20 completely; I’m saying take a look at the data and then make a decision on it. I’m asking the Liberals to provide any internal documents they have showing why the mortgage rules were introduced in the first place.”

With the Bank of Canada raising interest rates, mortgage qualification has become even more onerous and Kmiec says it’s only going to get worse.

“This is an affordability issue. The Bank of Canada is raising interest rates, and I don’t fault them for it, but rules like B-20, and then provincial rules, are compounding and making it unaffordable for young people to get into their first home,” he said.

“There was a 63% jump in mortgage originations among 73- to 93-year-olds in the first half of this year, which is unusual for the pre-war generation to suddenly take out a whole bunch of mortgages for no apparent reason after B-20 was introduced. It only makes sense when you notice that mortgage originations among millennials are down 19% and Generation Z mortgage originations are down 22%. Are the B-20 mortgage rules causing Canadians to go to their grandparents to take out mortgages for them in their names?”

If that is indeed the case, Kmiec notes that, in the event of a grandparent’s death, messy estate complications will ensue.

According to Victor Peca, a mortgage broker and founding partner of Monarch Mortgage Group, the Liberal Party has deluded itself into believing B-20 is impacting the country positively. However, that isn’t the worst of it.

“The B-20 rules aren’t working because I see a lot more deals coming to me with fraud,” said Peca. “B-20 isn’t stopping that; it’s making it more pronounced because it’s harder to get a mortgage. When someone wants to buy a home, they’ll do whatever it takes to get that picket fence.”

Kmiec has started a website to pressure the Liberals into studying B-20’s effects. He claims the Liberals told him B-20 wouldn’t be examined without more data, which he says has since become plentiful. Having participated in filibustering the electoral reform committee, the Liberals might have underestimated Kmiec’s resolve, not to mention indefatigability.

“If it comes down to it, I’m happy to use up every two-hour time limit on every single committee until we agree to do a mortgage study,” said Kmiec. “I’m not asking for the moon, either. All I want are a few meetings in Ottawa where we can invite people with data who can then tell us what’s happening with the market.”

24 Sep

OECD Warns of Housing Correction if Outlook Changes


Posted by: John Dunford

If NAFTA talks fail or Canada’s inflation runs above acceptable levels, there could be a knock-on effect for the housing market, with a correction possible.

That’s according to the latest outlook from the OECD global policy forum which has updated its outlook to reflect changes since the last report in May.

The outlook for the global economy has been reduced to 3.7% for 2018 and 2018, down 0.1 percentage points, while Canada is expected to grow 2.1% this year (unchanged) and 2% in 2019 (down 0.2 pp).

While the outlook for Canada is essentially strong, driven by exports and a resurgence of the auto and energy sectors, there are still headwinds, especially with high home prices and high levels of household debt.

These include the NAFTA agreement, which if it does not conclude with terms as good or better than the current deal, could stifle growth. A regulatory burden to increasing oil pipeline capacity would also have a negative impact on growth.

Additionally, if inflation rises too high, the Bank of Canada may need to hike interest rates beyond current expectations, which the OECD says could impair the ability of many households to service their mortgages, leading to a housing market correction.

18 Sep

These May Be the World’s 10 Riskiest Housing Markets


Posted by: John Dunford

Housing market dangers are “especially acute” in Australia, Hong Kong, Canada and Sweden, Oxford Economics said, noting this has historically posed a threat to economic activity.

“In all four, valuations are very elevated, there has been a lengthy housing boom, debt levels are high and there is a significant share of floating rate debt,” Adam Slater, lead economist at Oxford, said in a research note.

On the positive side, it notes risks are relatively limited in key markets like the U.S., Germany, France, China and Japan. In addition, across most economies there has been no significant recent rise in mortgage rates, which have even fallen in some cases.

“So, the classic ‘trigger’ for house price declines is largely absent,” Slater said. “However, rising rates are not strictly necessary for prices to start falling.”

House prices are falling in Australia, down almost 3 percent in the year through August in major cities, and 5.6 percent in the Sydney market. Meanwhile, three of the nation’s four major banks raised mortgage rates in recent weeks, blaming higher funding costs. The increases came even as the central bank leaves official rates at a record low.

Oxford said it compared markets across OECD countries from 1970 to 2013 and found a clear negative relationship. Where valuations had risen 35 percent or more above the long-term average over that period, real house prices fell 75 percent of the time over the following five years, it said.

“This points to many OECD countries seeing stagnant or negative real house price growth in the next few years: the scope for a further house price ‘melt-up’ in highly valued markets looks extremely limited,” Slater said.

Stretched valuations also matter because house price changes can have a significant impact on economic activity, Oxford said, citing a sample of 83 house price booms. It also found house prices tended to fall after booms, and often substantially.

“For the G7 countries, we find a positive relationship between consumer spending and real house prices from 1997, albeit possibly weakening in recent years,” Slater said.

11 Sep

Canadian Jobs Plunge in August As Unemployment Rises


Posted by: John Dunford

In a real shocker, Statistics Canada announced this morning that employment dropped by 51,600, retracing most of the 54,100 gain in July. Economists had been expecting a much stronger number, but the Labour Force Survey is notoriously volatile, and job gains continue to average 14,000 per month over the past year. Full-time employment growth has run at about twice the pace at an average monthly increase of 27,000. Labour markets remain very tight across the country.

The unemployment rate returned to its June level of 6.0%, ticking up from 5.8% in July. July’s jobless figure matched a more than four-decade low. At 6.0%, the unemployment rate is 0.2 percentage points below the level one year ago.

All of the job loss last month was in part-time work, down 92,000, while full-time employment rose by 40,400. The strength in full-time jobs is a sign that the labour market is stronger than the headline numbers for August suggest.

On a year-over-year basis, employment grew by 172,000 or 0.9%. Full-time employment increased (+326,000 or +2.2%), while the number of people working part-time declined (-154,000 or -4.3%). Over the same period, total hours worked were up 1.6%.

Statistics Canada commented that monthly shifts in part-time employment could result from movements between part-time and full-time work, the flux of younger and older workers in and out of the labour force, changes in employment in industries where part-time work is relatively common, or deviations from typical seasonal patterns.

By industry, the decline was broadly based and included a loss of 16,400 jobs in construction and 22,100 in the professional services sector. The number of people working in wholesale and retail trade declined by 20,000, driven by Quebec and Ontario.

Job losses were huge in Ontario as employment increased in Alberta and Manitoba. Employment was little changed in the other provinces.

After two consecutive monthly increases, employment in Ontario fell by 80,000 in August, which was the province’s most significant job loss since 2009. All of the decline was in part-time work. On a year-over-year basis, Ontario employment increased by 79,000 (+1.1%). The Ontario unemployment rate rose 0.3 percentage points in August, to 5.7% (see table below).

In Ontario, full-time employment held steady compared with the previous month, with year-over-year gains totalling 172,000 (+3.0%). Part-time jobs fell by 80,000 in August, following a roughly equivalent rise in July. In the 12 months to August, part-time work decreased by 93,000 (-6.7%).
Employment in Alberta rose by 16,000, and the unemployment rate remained at 6.7% as more people participated in the labour market. Compared with August 2017, employment grew by 53,000 (+2.3%), mostly in full-time work.

In Manitoba, employment rose by 2,600, driven by gains in part-time work, and the unemployment rate was 5.8%. On a year-over-year basis, employment in the province was unchanged, while the unemployment rate increased 0.8 percentage points as more people looked for work.

In British Columbia, employment edged up and the unemployment rate increased 0.3 percentage points to 5.3% as more people searched for work. Compared with a year earlier, employment was virtually unchanged.

Wage gains decelerated to their lowest level this year as average hourly earnings were up 2.9% y/y, the slowest pace since December.

There is no real urgency for the Bank of Canada to hike interest rates as the economy shows little risk of overheating. So far in 2018, the economy has shed 14,600 jobs, but the number masks a 97,300 gain in full-time work. Part-time employment is down by 111,900 this year.

The economy is running at or near full-employment as job vacancies continue to mount. If a NAFTA agreement comes to fruition, it is still likely the Bank of Canada will raise interest rates once again at the policy meeting in October. The Bank of Canada guided in that direction yesterday when Senior Deputy Governor Carolyn Wilkins said the central bank’s top officials debated this week whether to accelerate the pace of potential interest rate hikes, before finally choosing to stick to their current “gradual” path.

11 Sep

BoC: Economy Adjusting Well to Higher Rates, Stress Tests


Posted by: John Dunford

Canada’s economy is adjusting well to higher borrowing rates and tighter mortgage lending restriction.

That was one of the key messages from the Bank of Canada’s senior deputy governor Carolyn Wilkins in a speech to the Saskatchewan Trade & Export Partnership on Thursday.

She spoke about the BoC’s decision this week to keep interest rates on hold but made it clear that higher rates are coming, albeit in small steps.

Inflation remains the main reason for the rate rise and she reinforced the bank’s assessment that the economy, both domestic and global, is positive.

Ms. Wilkins said that interest rates remain low compared to what would be considered a ‘neutral rate’, which the bank has clarified is in the 2.5-3.5% range.

Economy on target but volatile

The Canadian economy should operate near potential over the next couple of years, she added, but said that the quarterly GDP profile would remain volatile for the rest of 2018.

With a spike in exports in Q2 likely to ease and outages in the oil sector also expected to weigh on growth, Q3 data may be weaker; but the BoC is still expecting growth of around 2%.

She said that recent GDP data supported the bank’s decision to increase rates in July and she noted that household consumption and home renovations data showed that Canadians are generally adjusting well to the higher rates.

Housing market stabilizing

Ms. Wilkins spoke about the housing market, noting that there have been impacts of policy decisions on the resale market.

This has been prominent in the Toronto and Vancouver markets but there are signs of improvement, especially in Toronto, but also other urban areas such as Regina and Saskatoon. Vancouver activity and price growth remain subdued.

Overall though, the signs are that borrowers and mortgage lenders are coping with higher rates and tighter mortgage rules.

There is also an improvement in household credit growth and in the quality of new uninsured mortgages.

In conclusion, Wilkins said: “Recent data reinforce Governing Council’s assessment that higher interest rates will be warranted to achieve the inflation target. We will continue to take a gradual approach, guided by incoming data.”

She added that the BoC will continue to assess the impact of higher rates and how that might be changed by NAFTA and other trade policy developments.

6 Sep

Bank of Canada Holds Interest Rate for Now, Puts More Focus on NAFTA


Posted by: John Dunford

OTTAWA _ The Bank of Canada’s decision to leave its interest rate unchanged Wednesday could be just a brief pause that comes as it carefully follows the unpredictable twists in the country’s trade talks with the United States.

The central bank kept its benchmark at 1.5 per cent, but many experts predict another increase could arrive as early as next month.

In a statement Wednesday, the Bank of Canada said more hikes should be expected thanks to encouraging numbers for business investment, exports and evidence that households are adjusting to pricier borrowing costs.

The bank, however, also made a point of saying it’s closely watching the renegotiation of the North American Free Trade Agreement and other trade policy developments, which could have negative impacts on the Canadian economy. It’s particularly concerned with the potential implications for inflation.

Last week, U.S. President Donald Trump announced he had reached a bilateral trade agreement with Mexico that would replace the three-country NAFTA. He put pressure on Canada to join the U.S.-Mexico deal, but after fresh talks restarted last week Ottawa and Washington have so far been unable to reach an agreement.

Trump notified Congress last Friday of his intention to sign a trade agreement in 90 days with Mexico _ and Canada, if Ottawa decides to join them. If a deal can’t be reached, the president has also repeatedly threatened to impose punishing tariffs on Canadian auto imports.

Frances Donald, senior economist for Manulife Asset Management, said the Bank of Canada’s explicit mention of NAFTA in Wednesday’s statement suggests the negotiations have become even more important around the governing council’s table.

“They’re sending a message that everything looks as planned… What that says to me is that an October rate hike is still certainly in play,” Donald said about the

However, she said the NAFTA reference gives the Bank of Canada options to possibly stay on hold next month, particularly if trade talks _ and the outlooks for the economy and inflation _ deteriorate.

Governor Stephen Poloz, she added, has been “fairly agnostic” on the outlook for NAFTA. She said he’s pointed to potential negatives as well as positives, while the stressing everything is hypothetical until something is decided.

Benjamin Reitzes of BMO Capital Markets wrote in a note to clients that Wednesday’s statement makes it clear the NAFTA talks are biggest issue for markets and the Bank of Canada at the moment.

“There’s big time risk here, but most are still expecting a deal to get done,” Reitzes wrote as he referenced the apparent month-end deadline for NAFTA negotiations.

“Assuming all goes well with NAFTA (perhaps a big assumption) and the data over the next seven weeks, an October rate hike still looks like a reasonable expectation.”

Poloz has raised the rate four times since mid-2017 and his most-recent quarter-point increase came in July. The next rate announcement is scheduled for Oct. 24.

The Bank of Canada said Wednesday that the economy has seen improvements in business investment and exports despite persistent uncertainty about NAFTA and other trade policy developments.

“Recent data reinforce governing council’s assessment that higher interest rates will be warranted to achieve the inflation target,” the bank said as it explained the factors around its rate decision.

“We will continue to take a gradual approach, guided by incoming data. In particular, the bank continues to gauge the economy’s reaction to higher interest rates.”

The statement also pointed to other encouraging signs in Canada, including evidence the real estate market has begun to stabilize as households adjust to higher interest rates and new housing policies. Credit growth has moderated, the household debt-to-income ratio has started to move down and improvements in the job market and wages have helped support consumption, it said.

The bank can raise its overnight rate as a way to keep inflation from running too hot. Its target range for inflation is between one and three per cent.

Heading into Wednesday’s rate decision, analysts widely expected Poloz to hold off on moving the rate _ at least for now.

Last month, Poloz stressed the need to take a gradual approach to rate increases in times of uncertainty. He made the remarks during a panel appearance at the annual meeting of central bankers, academics and economists in Jackson Hole, Wyo.

6 Sep

Interest Rate Rise this Week? Here’s What the Economists Say


Posted by: John Dunford

Improvements in the economy have led to the Bank of Canada’s governor Stephen Poloz vowing to increase interest rates but will September see a hike?

Unlikely, according to two leading economists.

Avery Shenfeld from CIBC Economics says that the BoC will typically announce an increase following strong economic data but that early signs for Q3 do not make a compelling case for a rate rise.

He points out that, while Q2 showed some positive signs, one quarter does not hide an underlying weakness in exports and related capital spending. And inflation is not running away from BoC targets.

Therefore, he expects a hold-steady for interest rates this month, although notes that if NAFTA is agreed then a rate rise won’t be far away.

Over at TD Economics, the expectation is also for Governor Poloz to stand pat this week and to sound a generally positive tone.

“Although the Bank will no doubt continue to emphasize a gradual normalization path with a heavy focus on data dependency, we expect the Bank will be encouraged by economic data over the last six weeks. Notably, the housing market has attained a modicum of stability, while Poloz has consistently stated that the Bank will only incorporate tariffs into their forecast when they are implemented,” the team’s latest report states.

3 Sep

Why isn’t the government controlling unsecured debt?


Posted by: John Dunford

Croft Axsen recently had to inform a client wanting to buy a $300,000 house that he didn’t qualify, so the client instead decided to buy a $95,000 truck. According to Axsen, it is but one example of how easily credit debt can accrue, and how it’s more detrimental to Canadian households than mortgage debt.

“I get it’s easier for the government to regulate mortgage debt, but I’m not sure they’re doing consumers any favours by saying, ‘We’re going to control whether you can buy a house or not, but we’re not going to control whether or not you can buy a $95,000 truck,” said Axsen, owner of Dominion Lending Centres Jencor Mortgage Corporation.

“Instead of buying an appreciating asset, he buys a truck with a bigger payment. By the time the seven-year loan is over, the truck will be worth virtually nothing.”

Canadian mortgage debt has surpassed the trillion dollar mark, and that is worrying the government, but DLC President Gary Mauris says there’s a much bigger problem.

“Unsecured debt is the biggest problem,” he said. “The sheer cost and monthly maintenance of unsecured debt is worrying. Credit card debt, line of credit debt and department store debt are what’s strangling Canadians. Unfortunately, there’s so much pushback from Canadian chartered banks, and it’s such a large business, that the government doesn’t want to take that fight on, so they look at mortgage debt instead. They should be looking at ways to limit unsecured debt, if anything. It’s much higher and much riskier debt, and it’s what we typically see strangling homeowners.”

Mauris can scarcely recall a time when the Canadian housing market endured as much tumult as it is today. He says that, fortunately, lenders and brokers have become creative—and the latter, in particular, have become even more indispensable to the Canadian public—but it’s still bewilderingly difficult to qualify for a mortgage in 2018.

Even more confusing is the fact that tighter mortgage qualification rules merely push homeowners into more expensive financing channels.

“It’s pushing Canadians into more expensive financing like B, where it used to be A,” said Mauris. “You’re making your consumers pay more for mortgage financing. Overall, we’re in a dog fight and it’s become more important than ever before to work with mortgage agents.”

Axsen understands the imperative not to expose mortgage insurers, but he doesn’t understand why ingenuity is an afterthought.

“I get they’re concerned about CMHC being exposed and the danger to the Canadian taxpayer if CMHC ever gets stressed by something with the housing market, but why not come up with a unique product? You can refinance, but the amortization has to be shorter. Or perhaps make it a higher premium on the refinance debt portion, yet still let them use their house to get away from higher credit card debt or lines of credit debt. It seems like the management of debt could have been done in a way that’s better for the consumer and limits the exposure of CMHC and other insurers.”

Credit cards have a higher arrears ratio than mortgages, however, they’re more profitable for banks—and therein lies the rub.

“There are systems in place to control mortgages, so it’s a lot easier than it would be for the government to tell banks how to give someone a consumer loan, a charge card or line of credit,” said Axsen. “They can appear to be these magnanimous, wonderful guys trying to control debt, and being thoughtful about the whole process, but it would be much harder for them to sit bankers down and say, ‘Okay, let’s look at all this other debt and how you’re making decisions to lend it.’”