29 Jun

DLC on the Implications of Brexit on Canadian Real Estate


Posted by: John Dunford

The chaos that ensued in stock markets in the aftermath of the U.K. electorate’s “leave” vote on its Brexit referendum Thursday (June 23) has left global finance reeling, and Canadian real estate will not emerge from the tumult unscathed, according to a market observer.

 In a June 24 client note, Dominion Learning Centres chief economist Dr. Sherry Cooper said that the uncertainty stemming from the U.K.’s departure from the European Union—evident in the sharp declines experienced by the commodity sector and the 30-year lows suffered by the pound sterling—will definitely make itself felt across the Atlantic.

 “[While] this is not good for our economy, the negative impact will be relatively muted. Nevertheless, financial turmoil and uncertainty will continue for some time, which is never good for confidence and therefore, risk-taking and spending,” Cooper wrote.

 Companies and organizations that have business in the U.K. were caught flat-footed by the unprecedented vote, and this goes double for Canadians who have assets in the U.K. and the EU, Cooper warned.

 “Hedge funds and other investors around the world that have been caught on the wrong side of this trade are scrambling, which likely portends a sell off in risky assets for at least a couple of days,” Cooper explained.

 “Even with all of this, investors should not panic sell this environment. It is a buying opportunity for longer-term investors. At the same time, do not try to time markets. No one can pick the bottom and market timing never works. Canadians who have some dry powder should consider buying their favourite stocks as they are sideswiped by the British vote,” she added.

 The pressing problem would be lower interest rates, Cooper stated, which in turn would ensure that the country’s housing markets would remain especially active.

 “The Canadian dollar is actually holding up quite well right now, although Canadian bank stocks are taking a hit, down just over 2 percent as of this writing. Only about 4 percent of Canadian trade is with Europe and only roughly 3 percent with Britain,” the economist concluded. “If anything, continued very low interest rates could further boost already hot Toronto and Vancouver housing markets.”

26 Jun

Trudeau Says Canada Can Safely Navigate Brexit Turbulence


Posted by: John Dunford

Prime Minister Justin Trudeau says Canada can weather market turmoil after the U.K. voted to leave the European Union, while economists forecast the Bank of Canada is likely to continue to hold interest rates steady for longer or even cut them further.

Trudeau said in a statement Canada is well-positioned to endure economic uncertainty and pledged to “continue to build relations with both” the U.K. and EU. Bank of Canada Governor Stephen Poloz, Finance Minister Bill Morneau and fellow Group of Seven ministers and central bankers expressed confidence in the U.K. financial sector.

“We are monitoring the situation closely and we will be working with our partners around the world in order to maintain stability and create economic growth,” the prime minister told reporters Friday morning in Quebec City, adding that he had spoken earlier to both Morneau and Poloz. “They know the Canadian financial system remains strong and stable.”

The aftershocks from the U.K.’s Brexit vote are buffeting markets, while creating political upheaval in London, dismay in European capitals and panic on trading floors around the world. The pound plunged the most on record versus the U.S. dollar, global stocks tumbled and bonds and gold rallied. U.K. Prime Minister David Cameron resigned, saying he’d serve another three months, after a 52 percent majority rejected his pro-EU campaign.

‘Modest Drag’

The yield on the Canadian government 10-year bond fell 10 basis points to 1.187 percent as investors sought refuge in fixed income. The country’s currency declined 1.6 percent to C$1.2965, after earlier falling the most in six years. The S&P/TSX Composite Index dropped 1 percent, less than most global stock indexes, as a gold rally limited declines.

“I would see all of these moves as manageable” in Canada’s financial markets, said Eric Lascelles, chief economist at Royal Bank of Canada’s RBC Asset Management unit. “It will be a modest drag on Canadian growth, but I would stress the word modest.”

Other bank economists said the Brexit vote could cut 0.5 percentage points from domestic economic growth in the second half and lead the Bank of Canada to hold rates steady for longer. Interest-rate swaps show traders are pricing in a 32 percent chance of a Bank of Canada rate cut this year, up from 8 percent yesterday.

“The risk is still that the bank could conceivably cut in the event that the shocks that we’re looking at prove to be bigger than what we currently estimate,” David Tulk, chief Canada macro strategist at TD Securities, told Reuters.


TD Economics said the vote’s “financial and confidence spillovers could shave real GDP estimates by 0.5 percentage point or more in the second half of this year,” while Scotiabank said the vote, for the Bank of Canada, “will only add to long pause sentiment with a mild increase in cut risk expressed primarily through the currency.”

“Global economic growth remains lackluster and more uncertainty around this decision won’t help, with a Brexit magnifying the risks that already exist,” Jennifer Lee and Benjamin Reitzes, Toronto-based senior economists at BMO Capital Markets, said in a research note. They also pushed back their forecast for a rate hike to the fourth quarter of 2017, from the third.

The Bank of Canada is monitoring the situation closely, spokeswoman  Josianne Menard said in a statement. Lascelles said the central bank “would be prepared to act if needed.”

G-7 governors and finance ministers said they would “respect the intention” of the Brexit vote and remain united. “We affirm our assessment that the U.K. economy and financial sector remain resilient and are confident that the U.K. authorities are well-positioned to address the consequences of the referendum outcome,” they said in a joint statement.

Trade Ties

Canada’s exports to the U.K. totaled C$16.6 billion last year, or about 3.2 percent of the total, and fourth-most behind the U.S., China and the remainder of the EU.

Trudeau, who took power in late 2015 and has long fought against separatist forces within Canada, thanked outgoing U.K. Prime Minister David Cameron and pledged to continue working with the EU and U.K.

“The U.K. and the EU are important strategic partners for Canada with whom we enjoy deep historical ties and common values,” Trudeau said in his statement. “We will continue to build relations with both parties as they forge a new relationship.”

20 Jun

Divorce and What Can Happen With the Mortgage


Posted by: John Dunford

Divorce and What can happen with the Mortgage.When tough times put stress on families sometimes the end result is divorce. While no one ever wants to see this happen sometimes it is inevitable. Recently, CMHC changed the rules about how much a house can be refinanced for, they have set the limit at 80% of the property value so that refinances would no longer fall under the insured mortgages. What they also did was set some guidelines for couples who are divorcing.

When a partnership in a home is being dissolved, that partnership can be a marriage, common law relationship or simply two owners of a property, it is now considered a sale. This means that the existing mortgage will most likely be paid out or in some cases one of the spouses can assume that mortgage and possibly increase the amount. Most likely it will mean that one spouse will purchase the home from the other. Here’s the difference when we are in this situation, the home can be purchased with just 5% down payment again as it doesn’t fall under the refinance rule.

One other thing to consider under the divorce rules is child support. As many parents have learned lately, child support and section 7 spousal support are liabilities for many lenders. So if you do have a $2,000 a month support payment, then that is the same as having a $2,000 dollar car payment. Not all lenders are looking at that the same, some have allowed us to reduce the yearly incomes buy the amount of child support. The biggest difference here is of course that the reduction allows you to qualify for more mortgage, it’s just a matter of knowing which lenders work the system which way and a skilled mortgage broker will know the difference.

Ideally, of course, the divorce never happens but one way around child support being paid is joint custody where it is shared 50/50 and no liability is forced upon either spouse allowing them to maximize their purchasing power as the start their new lives.

What also needs to be considered is that this needs to be done in writing, separation agreements are legal binding documents that tell the lenders what your responsibility is to the other partner in the divorce. We have also had situations where a statutory declaration saying that you have no responsibility to the other partner has been sufficient especially in cases of common law separations.

So many in’s and out’s to be considered when embarking on dividing your households and of course we here at Dominion Lending Centres would always advise legal counsel first and then talk to your mortgage brokers about what is required for the mortgage process.

17 Jun

Fed Rate Hike Decision Revealed Moments Ago


Posted by: John Dunford

The Fed declined to raise interest rates at its policy meeting today, fulfilling the expectations of many economists who said a rate hike was unlikely after an exceptionally weak May jobs report.

Fed Chair Janet Yellen raised economists’ expectations that the Fed would hold off on a June hike to near certainty earlier this month when she failed to mention the possibility in a speech.

Yellen did say in that speech, however, that an eventual rate hike was still in the cards.

“If incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2% objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate,” she said.

Most observers had expected a June interest rate hike to be fairly likely at this meeting. But on June 3, the Labor Department reported that just 38,000 new jobs had been created in May. That’s the worst job creation in six years – and about 120,000 fewer jobs than projected.

The disappointing economic news – along with Yellen’s hints in the Philadelphia speech – dramatically dropped expectations of a hike. The CME Group’s futures exchange, which had put the odds of a hike at 21% before the jobs report, lowered them to just 1.9% after the report came out.

13 Jun

Poloz Warns Potential Homebuyers on Toronto, Vancouver Risks


Posted by: John Dunford

Bank of Canada Governor Stephen Poloz gave one of his bluntest warnings to date about the country’s housing boom, saying Vancouver and Toronto buyers should realize strong price gains probably can’t be sustained by economic fundamentals.

“This suggests that prospective homebuyers and their lenders should not extrapolate recent real estate performance into the future when contemplating a transaction,” Poloz said in a statement from Ottawa. The bank released its semi-annual Financial System Review Thursday. Poloz and Senior Deputy Governor Carolyn Wilkins are scheduled to hold a press conference at 11:15 a.m.

Home-price gains in Vancouver accelerated to a 30 percent year-over-year pace in May, from 15 percent at the end of last year, the bank said. In Toronto, the pace of price gains quickened to 15 percent from 10 percent over that period. The two cities are also leading a rise in the share of new mortgages exceeding 450 percent of borrower income, the central bank said.

Markets in the Toronto and Vancouver are exposed to a cycle where rising mortgage debt and prices feed off each other as buyers rush to get into the market, the central bank said, adding a crash is the biggest risk to the financial system. Poloz’s warning about what has been the world’s safest lending system through the 2008 financial crisis follows comments in the past week from bank executives and Vancouver’s mayor that past regulations to tighten mortgage rules haven’t been enough.

“Fundamental factors underpinning housing demand in the greater Vancouver and Toronto areas are strong, but the rapid pace of price increases seen over the past year raises the possibility that prices are also being supported by self-reinforcing price expectations,” policy makers said in the report. “It is unlikely that the current pace of price increases in the greater Vancouver area and greater Toronto area can be sustained.”

The risk of a housing crash remained “elevated” in the central bank’s report, the middle of five risk categories that range from low to very high. The probability of major damage from a housing correction “remains low,” the central bank said, citing the aid of a growing economy.

Positive factors supporting home prices are job growth in Vancouver and Toronto, as well as a strained supply of single-family homes, the bank said.

Policy makers also reiterated the divide between signs of overheating markets in Toronto and Vancouver and the pain felt in oil-producing regions from Calgary to Newfoundland.

Poloz cut his trend-setting interest rate to 0.5 percent last year and said the side effects in a booming housing market are best dealt with by regulators and in the decisions of individual lenders and borrowers. The Governor has said the rate cuts were needed to sustain an economy hit by an oil shock, despite any side effects in consumer finances

6 Jun

Shocking US Jobs Report and Toronto and Vancouver Housing Too Hot


Posted by: John Dunford

First on the U.S. Jobs Front

The May employment report was released this morning in the US and it was shockingly weak–indeed, the weakest number in almost 6 years. Nonfarm payroll employment was up only 38,000, well below the market expectation of 160,000. Not only was May incredibly weak, but the March and April job gains were revised down sharply, by 59,000. This represents a dramatic slowdown from last year’s average monthly growth of 229,000.

Economists had expected the May job gain to be depressed by the Verizon strike and information and telecommunications jobs were down by 34,000, but employment declines were also posted in manufacturing, construction and mining.

The average workweek was unchanged for all workers and was up slight in manufacturing. A bright spot in the report was worker pay. Average hourly earnings rose by 0.2 per cent in May after a 0.4 percent gain in April that was a bit stronger than initially reported. Worker pay increased 2.5 percent over the 12 months ended in May.

In addition, 458,000 people left the workforce last month, taking the labour force participation rate down to 62.6 per cent. In consequence, the unemployment rate fell by 0.3 percentage points to 4.7 per cent, the lowest level since November 2007. The drop in the jobless rate is nothing to cheer about since it was caused by Americans leaving the labour force.

Dismal employment gains reduce the chances of a pronounced upturn in household spending and economic growth from the disappointing first quarter pace. This takes a Federal Reserve rate hike off the table for June. Job growth has slowed in concert with weaker corporate profits and a weak global economy.

The Canadian dollar rose in the wake of this report as the US dollar plunged. Clearly, the weakness in the US is not good news for Canada as 77 per cent of Canadian exports go to the US. The Bank of Canada is counting on the export sector to pick up the slack from the hammered oil sector.

Red-Hot Housing Continues in May in Toronto and Vancouver

The release of the May data from the Real Estate Boards in Vancouver and Toronto show a continued record surge in sales and house prices. Both markets and their surrounding regions have posted enormously frothy gains, which appear to be accelerating. How much of the activity is attributable to foreign buying is unknown, but there is evidence that capital inflows to housing markets from China have risen in the past year.

Housing affordability is plunging in both regions and there has been a rising number of voices calling for government action of some sort. Some have suggest an increase in the minimum downpayment, tightening credit conditions or a rise in the cost of CMHC mortgage insurance–all of which would hurt first-time home buyers the most, exacerbating affordability. As well, the idea of action to slow foreign buying–such as, for example, a luxury tax–has also been floated.

This is a very tricky issue. The strength in housing (in these two regions) has been a key underpinning to economic growth this cycle. As well, 70 per cent of Canadian households own their own homes and home equity is for most people the largest component of household wealth, so the government is leery about triggering a collapse in housing. Nonetheless, housing growth this strong does not usually end well.

In Vancouver, the Multiple Listing Service reported unprecedented growth in home sales and prices. Last month’s sales were 35.3 percent above the 10-year sales average for May and ranks as the highest sales total on record for that month. While demand is very hot, the total number of listings in Metro Vancouver has declined 37.3 per cent from a year ago, helping to explain some of the upward pressure on price. Home prices in Greater Vancouver are up a stunning 48.3 per cent in the past three years and the one-year change has been close to 30 per cent. The numbers are similar for the Lower Mainland as a whole. The price gains are even larger for single family detached homes as supply is very limited.

In Toronto, the story is much the same, although the activity and price increases are slightly less frenzied, which isn’t saying much as multiple offers and paid prices well over asking has become increasingly common. The Toronto Real Estate Board reported a new record month for May sales, up 10.6 per cent from a year ago as the number of new listings was down 6.4 per cent. The excess demand in the Greater Toronto Area (GTA) continues to push prices higher and, in some cases, to create panic buying.

The MLS Home Price Index was up 15 per cent year-over-year, with the surge even stronger for detached homes. Gains in the 905 area (the suburbs and exurbs of Toronto) outpaced those in the 416 area (Toronto proper), likely reflecting the supply and affordability issue. The average price of a detached home in the 416 area is now $1.3 million compared to $892,000 in 905. Condo prices are considerably cheaper at an average price of $443,000 in Toronto and $347,000 in the burbs–still beyond the reach of many first-time homebuyers. Even move-up buyers are choosing to renovate their existing homes because they cannot afford to pay the prices for larger properties. Downsizers have an incentive to wait, thinking that price increase will only continue.

This is certainly top-of-the-market thinking, but as we have seen, it can last for a considerable period. Most everyone is predicting a slowdown in the housing markets next year. We better hope so. A soft landing is what we all want as prices cannot go up forever, especially at this pace.