29 Aug

TD Bank Warning Over OSFI Mortgage Proposals


Posted by: John Dunford

Further increases in mortgage regulations could see a significant cut in housing demand according to a new report from TD Bank.

In its regional housing outlook published Monday, TD chief economist Beata Caranci and economist Diana Petramala say that despite “unprecedented” housing policy changes in the past 18 months, the impact on demand so far from federal changes has been “flat relative to expectations” at around 2%.

However, they believe that this was due to the policies targeting insured mortgages, a shrinking share of the market as more borrowers move to conventional loans.

Provincial policy measures, such as the foreign buyers’ taxes introduced in BC and Ontario, have had a larger impact on housing demand, leading to sales declines.

The report notes that OSFI is proposing additional tightening on uninsured mortgages with income tests at 2 percentage points above the contract rate. If this happens, TD’s economists forecast a drop in demand of 5-10% and a drop in average house price level of 2-4% for 2018.

29 Aug

Housing Bubble Has Already Burst Says BMO’s Porter


Posted by: John Dunford

Not everyone agrees that Toronto has been in a housing bubble but BMO’s chief economist is in no doubt.

“By any traditional definition, we were in the grips of a full-on bubble earlier this year,” Doug Porter told CBC’s Metro Morning on Friday. He backed that up with stats on house prices rising 40% in around 15 months, a situation last seen in the late 1980s which was widely accepted as a bubble.

Porter continued that the Ontario government’s measures to cool the market helped burst the bubble.

Although prices remain elevated in the GTA, there has been a 13% drop in four months and Porter expects softening to continue with a “full-blown buyer’s market ahead.”

He believes that further interest rate rises will continue to affect affordability even as prices ease, with first-time buyers still facing challenges to homeownership.

29 Aug

Housing Not Canadian Households’ Largest Expense Says Study


Posted by: John Dunford

Housing costs and other expenses such as food and clothing may have increased in recent years but the average Canadian family spent more on taxes in 2016 according to a new study by the Fraser Institute.

Average family earnings in 2016 were $83,105, the study says. Housing including rent and mortgage payments, together with food and clothing totalled $31,069 while total taxes came to $35,283.

Housing costs accounted for 22.1% of Canadian household costs while taxes took a 42.5% share. Other necessities made up 37.4%.

“Taxes help fund important public services that Canadians rely on, but the issue is the amount of taxes governments take compared to what Canadians get in return,” said Charles Lammam, director of fiscal studies at the Fraser Institute.

“With more than 42% of their income going to taxes, Canadians might ask whether they’re getting good value for their tax dollars,” added Lammam.

22 Aug

Institute Makes Mortgage Warning


Posted by: John Dunford

Think tank crunches mortgage stats, urges policy makers to take a close look at mortgage habits and the impact of interest rates.

Canadians have qualified for much larger mortgages over the past two decades due to record-low interest rates, and that has impacted affordability according to the Fraser Institute.

“Increased borrowing power, brought about by falling interest rates and rising incomes, is potentially the most overlooked and least understood factor influencing home prices across Canada,” Niels Veldhuis, president of the Fraser Institute, said.

In its new study, Interest Rates and Mortgage Borrowing Power in Canada, the institute found mortgage interest rates fell from 7% to 2.7% between 2000 and 2016 and increased the maximum mortgage for Canadians by 53%.

“Based on average family incomes in 2000, falling interest rates resulted in increased mortgage borrowing power in the four main regions over the same period: Vancouver from $183,751 to $280,893; Calgary from $221,214 to $352,671; Toronto from $221,214 to $338,161; and Montreal from $171,692 to $262,459,” the institute said in the study.

Incomes increased in lockstep, jumping 53% nationwide – and contributing to even more purchasing power among Canadians.

And the results have the Fraser Institute warning policymakers about the potential implications of increased borrowing power.

“This increase in borrowing power — in simple terms — means that an average Canadian family, dedicating the same share of their income to monthly mortgage payments, can afford a mortgage that’s more than twice as big now as it would have been in 2000,” Veldhuis said. “As would-be homebuyers and governments contend with rising prices across Canada, policy makers should look closely at the impact of interest rates, rising incomes and increased mortgage borrowing power on home prices.”

16 Aug

Housing Market Weakens Further in July, But Drag From GTA Dissipates

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Posted by: John Dunford

This morning’s release of the Canadian Real Estate Association (CREA) data for July confirmed that key housing markets in Canada continued to slow, led by the Greater Golden Horseshoe (GGH) region surrounding Toronto. This region’s marked slowdown began in late April with the announcement of a 15% foreign tax credit and a sixteen-point program to enhance housing affordability in the Ontario provincial budget.
Notably impacting psychology, was the Bank of Canada rate hike in July, the first such hike in seven years. Positive surprises in the Canadian economy this year caused the Bank to preempt inflation pressures sooner than many had expected. The Canadian dollar and mortgage rates rose in response to the Bank’s action. The posted mortgage rate has now increased 20 basis points to 4.84%, which is of particular importance because this is now the assumed borrowing rate at which mortgage applicants must qualify for insured loans. There is a proposal to extend this qualification criterion to uninsured borrowers as well–that is, those that put at least 20% down on their home purchase. Before October 2016, the eligibility rate was the contract rate, which is meaningfully lower than 4.84%.

CREA’s national data showed that the number of homes sold on the MLS Systems fell 2.1% in July, the fourth consecutive monthly decline. While this decrease in sales was about one-third the magnitude of those in May and June, it leaves sales activity 15.3% lower than the record set in March. Sales were down from the previous month in close to two-thirds of all local markets, led by the Greater Toronto Area (GTA), Calgary, Halifax-Dartmouth and Ottawa.

On a year-over-year basis, sales were down 11.9% last month. Sales were down from year-ago levels in about 60% of all local markets. However, excluding the GGH region, net national sales activity was little changed from one year ago.

“July’s interest rate hike may have motivated some homebuyers with pre-approved mortgages to make an offer,” said CREA President Andrew Peck. “Even so, sales activity continued to soften in the Greater Golden Horseshoe region. Meanwhile, sales and prices in Montreal continue to strengthen.” Anecdotal reports suggest that foreign buyers were more active in Montreal where, in contrast to Toronto and Vancouver, there is no international buyers tax.

New Listings Slipped in July

The number of new listings edged down by 1.8% last month, led by the GTA. Many other markets in the Greater Golden Horseshoe region also saw new supply pull back after having surged immediately after the Ontario government housing policy changes in April 2017. New listings were also down in Calgary, Edmonton, Montreal and northern British Columbia, with the latter-most region hit by wildfires.

With sales down by about the same amount as new listings in July, the national sales-to-new listings ratio stabilized at a well-balanced 53.5%. By contrast, the ratio was in the high-60% range in the first quarter of 2017. The ratio in the range of 40%-to-60% is considered consistent with balanced housing market conditions. Above 60% is considered a sellers’ market and below 40%, a buyers’ market.

Based on a comparison of the sales-to-new listings ratio with its long-term average, more than 60% of all local markets are in balanced market territory. In the Greater Golden Horseshoe region, housing markets that recently favoured sellers for an extended period are now balanced, with some beginning to tilt toward buyers’ market territory.

Number of Months of Inventory

The number of months of inventory is another important measure of the equilibrium between housing supply and demand. It represents how long it would take to completely liquidate current inventories at the current rate of sales activity. There were 5.2 months of inventory on a national basis at the end of July 2017, the highest level since January 2016. The 5.2 figure was up from 5.0 months in June and up by more than a full month from where it stood in March.

The number of months of inventory in the Greater Golden Horseshoe region is up sharply from where it was before the April provincial announcements. For the region as a whole, there were 2.6 months of inventory in July 2017. While this remains below the long-term average of just over three months, it is more than triple the all-time low of 0.8 months reached in February and March.

Prices Continue to Decline

Home prices continued to fall in July, extending the decline that began in late April. The Aggregate Composite MLS House Price Index rose by 12.9% year-over-year in July, a further deceleration from the pace earlier this year. The decline in price growth from June to July was the result of softening prices in the GGH.

The MLS Home Price Index (MLS HPI) provides the best way of gauging price trends because average price trends are prone to be strongly distorted by changes in the mix of sales activity from one month to the next.

Price gains diminished in all benchmark categories, led by single family homes. Apartment units posted the largest y-o-y gains in July (+20%), followed by townhouse/row units (+15.9%), two-storey single family homes (+10.7%), and one-storey single family homes (+9.7%).

After having dipped in the second half of last year, benchmark home prices in the Lower Mainland of British Columbia have recovered and are now at new highs (Greater Vancouver: +8.7% y-o-y; Fraser Valley: +14.8% y-o-y).

Meanwhile, y-o-y benchmark home price increases were running a little below 20% in Victoria and just above 20% elsewhere on Vancouver Island.

Benchmark price gains slowed again on a y-o-y basis in Greater Toronto, Oakville-Milton and Guelph but remain well above year-ago levels (Greater Toronto: +18.1% y-o-y; Oakville-Milton: +12.7% y-o-y; Guelph: +23% y-o-y).

Calgary benchmark prices further edged into positive territory on a y-o-y basis in July (+1.1%). While Regina home prices popped back above year-ago levels (+3.6% y-o-y), Saskatoon home prices remained down (-2.2% y-o-y).

Benchmark home price growth accelerated in Ottawa (+5.8% overall, led by a 6.8% increase in two-storey single family home prices) and Greater Montreal (+4.9% overall, driven by a 7% increase in prices for townhouse/row units). Prices were up 5.4% overall in Greater Moncton, led by one-storey single family home prices which set a new record (+8.9%).

9 Aug

Canadian Unemployment Rate in July Falls to 6.3 percent–Lowest in Nearly Eight Years


Posted by: John Dunford

Canada’s red-hot jobs market took a breather in July, posting employment gains of 10,900, up just 0.1 percent following much stronger job gains since late last year. As the labour force participation rate edged downward, the jobless rate fell 0.2 percentage points to 6.3 percent, its best reading in almost nine years. Canada’s economy remains strong, causing the Bank of Canada to raise interest rates last month for the first time in seven years and we believe that another rate hike is likely later this year despite still muted inflation. According to Bloomberg News,”traders were pricing in 64 percent odds of a Bank of Canada interest rate increase in October” following the release of this morning’s employment report, “versus 60 percent yesterday”.

In recent weeks, the Canadian dollar has risen sharply and borrowing rates have increased significantly. Canada’s economy is now the strongest in the G7, posting growth of 3.7 percent in the first quarter, likely followed by a whopping 4 percent gain in the second quarter. Consumer spending, business investment, exports and residential construction all contributed to the strength in the first half.

With the Canadian dollar near 80 cents U.S. and a slowdown in home resales–particularly in the Greater Toronto Area–growth in the second half is likely to come in at about 2-1/4 percent, still above the potential long-term pace estimated by the Bank of Canada at about 1-3/4 percent. Indeed, in a separate release today, the government reported that exports fell 4.3 percent in June due mainly to lower exports of unwrought gold and energy products. In consequence, Canada’s merchandise trade balance posted a $3.6 billion deficit in June, a sharp increase from May.

Ontario and Manitoba enjoyed hiring gains, while employment declined in Alberta, Newfoundland and Labrador as well as in Prince Edward Island (see Table below). Nevertheless, Alberta’s job market is still in recovery mode as payrolls in the province increased by 35,000 (+1.5 percent) compared to year-earlier levels, led by gains in natural resources.

July saw continued job strength in the retail and wholesale trade sectors as well as in information, culture and recreation. Manufacturing gains were notable as well.

Hours worked increased sharply in the past year, a reliable indicator of rising incomes, as employment shifted from part-time to full-time jobs. However, wage rates continue to rise only modestly, up 1.3 percent in July, unchanged from the prior month, but still better than the record-low gain of 0.7 percent in April.