Canadians of all stripes were blindsided on June 4, when the Canadian Mortgage and Housing Corporation suddenly revised certain key underwriting guidelines. The story got a little more interesting on Monday, when CMHC’s competitors in the mortgage insurance space, Genworth Canada and Canada Guaranty, both announced they would not be following suit.

“Genworth Canada believes that its risk management framework, its dynamic underwriting policies and processes and its ongoing monitoring of conditions and market developments allow it to prudently adjudicate and manage its mortgage insurance exposure, including its exposure to this segment of borrowers with lower credit scores or higher debt service ratios,” said Stuart Levings, Genworth Canada’s president and CEO.

In an online statement, Canada Guaranty said “[O]ur underwriting policies are consistently updated to reflect evolving economic environments and emerging mortgage default patterns. This philosophy has resulted in the lowest loss ratio in the industry.” The statement went on to question the logic of CMHC’s lowering of debt servicing ratios, arguing they are not a “significant predictor of mortgage defaults.”

There tends to be a lot of static whenever CMHC makes an announcement; this time will be no different, especially among Canadians who may not be familiar with the intricacies of the mortgage insurance space. That would be almost all of them.

“First-time homebuyers don’t really know who Genworth is, or who Canada Guaranty is,” says Centum FairTrust’s Jimmy Hansra. “The majority of them only know CMHC.”

Many of these buyers, once the only mortgage insurance company they’ve ever heard of tells them they’re ineligible, are going to think they’ve been shut out of the market completely. They’ve never been taught that most lenders work with all three companies, or that credit unions and even behemoths like Scotiabank regularly work with Genworth or Canada Guaranty.

Hansra says CMHC’s tighter lending guidelines may simply drive more business toward its competitors, particularly if they are able to reach first-time buyers with the message that their homebuying window of opportunity hasn’t been nailed shut.

While there may be some short-term confusion among headline-gobblers following the divergence of policies at CMHC, Genworth and Canada Guaranty, one thing is clear: The added competition should benefit everyone.

“It’s great for borrowers. It’s great for brokers, too. CMHC has programs that Genworth doesn’t have, and Genworth has specific mortgage programs that CMHC doesn’t have. Canada Guarantee is a nice little niche mix in there, too,” Hansra says.

“When you have good people like that out in the market, it definitely helps the consumer, and it helps the broker because there’s more choice. You always want your clients and your lenders to have more choice.”

Some still baffled by CMHC’s underwriting changes

CMHC’s underwriting changes haven’t drawn much support, a less than shocking development considering they are expected to decrease spending power by 11 or 12 percent. CMHC’s decision to slow homebuying seems in direct opposition to federal, provincial and central bank policies meant to increase liquidity as a means of nurturing Canada’s economic rebound from COVID-19.

“How else does [CMHC CEO Evan Siddall] expect the economy to get humming along again?” wonders Hansra. “You’re going to handcuff the real estate market, which tends to account for a large percentage of your GDP.”

Leor Margulies of Robins Appleby Barristers and Solicitors, who deals with a range of Schedule 1 banks, private and alternative lenders, was slightly more incensed.

“Why now?” Margulies asks. “People are suffering now, so let’s make it even more difficult? Are people buying houses like crazy right now?”

For Margulies, blame for the potential damage CMHC’s recent moves will inflict on first-time buyers belongs to Siddall himself, who Margulies sees as being overly paranoid of a Canadian housing crash.

“It’s this view that real estate is bad,” he says. “‘If we don’t put a lid on it – and squeeze the lid down – there’s going to be an explosion. People will take on too much debt and it’s going to be 2007 in the U.S.’ It’s ridiculous. It’s never happened before. It didn’t happen in 2008 here. It didn’t happen here 1990 to 1995.”

“[Siddall’s] said some terrible things,” Margulies goes on. “And he continues to say terrible things. He wants to ratchet this industry down. He sees it as a real threat to the economy.”

In Hansra’s eyes, Siddall may have tipped his hand on May 19, when he first told Canadians that CMHC is expecting a decline in average home prices of up to 18 percent, an estimate few have echoed.

“CMHC needed to justify why they came out of the blue, without any actual facts or hard figures, and said home prices are going to drop by nine to eighteen percent,” he says. “In my opinion, they needed some validation. ‘Let’s go out in the market and say this is going to happen, and then this gives us an excuse to change our mortgage underwriting guidelines.’ That’s my take on it.”

The controversial new guidelines – and their arrival in the midst of a global pandemic – were enough to break a long-standing habit of Genworth and Canada Guaranty following CMHC’s underwriting path. The break is largely one of philosophy: Do you try to administer a tailored underwriting process that attempts to take into consideration each borrower’s unique circumstances, or do you make those borrowers, as diverse as they and their circumstances are, follow a single standard that will inevitably cause many of them to suffer through no fault of their own?

“It’s really taking away the common sense of lending,” Hansra says of CMHC’s sledgehammer approach. “And it’s going out the door because CMHC has a fear that the real estate market is going to go down by nine to eighteen percent.”

The doomsayers have been proven wrong by this employment report and by the high-frequency data that have been pointing to the start of a rebound in Canada’s economic activity. We have been signalling green shoots in the economy for several weeks, and while these are early days, those green shoots are surely growing. We are optimistic but mindful that just under 5 million Canadians remain without work or with substantially reduced hours.

Job Market Has Improved From Mid-April to Mid-May

Canada’s  Labour Force Survey (LFS) results for May, released this morning by StatsCanada, reflect jobs market conditions as of the week of May 10 to May 16. By then, some provinces had begun to gradually ease the pandemic lockdown that has thrown our economy into recession. Already, as of mid-May, the jobs market had shown a marked improvement, and no doubt, it has subsequently continued to revive.

From February to April, 5.5 million Canadian workers were affected by the pandemic shutdown. This included a drop in employment of 3.0 million and a COVID-related rise in absences from work of 2.5 million. Economists were expecting another 500,000 job losses last month. They were wrong.

In May, employment rose by 289,600 (1.8%), while the number of people who worked less than half their usual hours dropped by 292,00 (-8.6%). Combined, these changes represented a recovery of 10.6% of the pandemic-related employment losses and absences recorded in the previous two months. Three-quarters of the employment gains from April to May were in full-time work. The growth was across most industries and provinces, though largely driven by higher employment in Quebec, the province hardest hit by the pandemic.

Compared to February–prior to the lockdown–however, full-time employment was down 11.1% in May, while part-time work was down 27.6%.

Unemployment Rate Rises As More Canadians Look For Work

Even though we posted employment gains from mid-April to mid-May, the jobless rate rose to 13.7%–up from 13.0%–as easing restrictions caused more discouraged workers to actively look for employment (see chart below). The 13.7% figure is the highest jobless rate recorded since comparable data became available in 1976. In February, prior to the economic shutdown, the unemployment rate was a mere 5.6%. It shot up to 7.8% in March and to 13% in April.

Unlike previous economic downturns. the bulk of the job losses were felt first in the services sector. The pandemic impact subsequently spread to the goods-producing and construction industries in April. Last month, employment rebounded more sharply in the goods-producing sector ( +5.0% or 165,000) than in services (+1.0% or 125,000). The construction industry enjoyed the largest gains in hours worked from April to May with 19.0% growth.

Quebec Accounts For Nearly 80% Of Overall Employment Gains in May

The Quebec provincial government eased restrictions on business activity before the jobs report reference week of May 10 to May 16, notably in construction from mid-April, and in retail trade and manufacturing outside Montréal from May 4. The proportion of workers labourers from a location other than home increased from 60% in April to 65% in May.

The largest employment increases in Quebec were in construction (+58,000), manufacturing (+56,000) and wholesale and retail trade (+54,000), three industries with a relatively high proportion of jobs that are difficult to do from home.

Employment increased by 97,000 (+5.3%) within the Montréal census metropolitan area.

Employment Declines Continued in Ontario But At A Slower Pace

Ontario was the only province where employment continued to fall in May. This is consistent with the fact that most restrictions on economic activity remained in place in Ontario during the week of May 10 to May 16.

While employment declined in Ontario in May (-65,000), it did so at a much slower pace than in March (-403,000) and April (-689,000). All of the employment decline in the province in May was in the services-producing sector (-80,000). At the same time, employment rose by 15,000 in the goods-producing sector, driven by manufacturing (+14,000).

The proportion of employed people in Ontario who worked less than half their usual hours dropped from 22.1% in April to 21.2% in May.

In Ontario, 55% of workers worked from a location other than home in May, the lowest proportion of all provinces and little changed from April.

As most restrictions on economic activity remained in place in Ontario, the number of people who were not in the labour force but wanted to work and did not look for a job was little changed. The unemployment rate continued its upward trend, rising from 11.3% in April to 13.6% in May (see the table below).

Employment Picture Mixed In Western Provinces

Employment in British Columbia increased by 43,000 in May and the unemployment rate rose 1.9 percentage points to 13.4%, as more people looked for work. Almost all of the employment increase in the province was in the services-producing sector (+41,000), led by accommodation and food services (+12,000), educational services (+12,000), and wholesale and retail trade (+12,000).

British Columbia announced a first phase of reopening on May 6, with a plan to lift restrictions on non-essential medical services and parts of the retail trade industry starting May 19, after the reference week.

The number of employed people in Alberta grew by 28,000 in May, following a cumulative decline of 361,000 from February to April. The employment increase in the province was entirely driven by the services-producing sector (+33,000). The unemployment rate increased by 2.1 percentage points to 15.5%.

Alberta allowed some businesses such as restaurants and non-essential shops to start operating from May 14.

In Manitoba, employment increased by 13,000 in May. At the same time, the proportion of employed Manitobans who worked less than half their usual hours fell by 1.7 percentage points to 12.9%. In May, most of the employment increase in Manitoba was in the services-producing sector (+12,000), the majority of which was in wholesale and retail trade (+7,000).

On May 4, Manitoba allowed a number of services businesses to resume their activities, with limited occupancy and physical distancing requirements.

There was little change in overall employment in Saskatchewan. Increases in wholesale and retail trade, manufacturing and accommodation and food services were offset by declines in many sectors, led by information, culture and recreation as well as in construction.

Employment increases in all Atlantic provinces

With the exception of Nova Scotia, provincial governments in the Atlantic provinces started to ease restrictions in early May, with New Brunswick reopening most of its economy from May 8. The number of employed people increased in New Brunswick (+17,000), Newfoundland and Labrador (+10,000), Nova Scotia (+8,600) and Prince Edward Island (+2,600).

Green Shoots

There is increasing evidence that the economy has bottomed and is gradually improving. Business shutdowns are easing, and while it will be some time before we see a complete reopening, early signs of improvement are evident.

A Bloomberg News poll taken at the end of May found that 30% of respondents who had lost their job or seen hours decline because of the coronavirus pandemic said they were re-employed or working more. The survey, conducted by Nanos Research, is consistent with other high-frequency data from Indeed Canada and Google that suggest stabilization in labour conditions and economic activity over the past few weeks.

The rebound story is also reinforced by Canadians’ movement patterns. Mobility data from Apple and Google smartphones during the latter half of May suggest more people present in retail stores and parks — coinciding with re-openings across Canada. While transit usage remains down, driving and walking have picked up, a positive sign for commerce.

In addition, the Office of the Superintendent of Bankruptcy Canada reported that the total number of insolvencies (bankruptcies and proposals) decreased by 38.7% in April compared to the previous month. Bankruptcies decreased by 41.5% and proposals decreased by 37.2%. The total number of insolvencies in April 2020 was 43.5% lower than the total number of insolvencies in April 2019. Consumer insolvencies decreased by 43.1%, while business insolvencies decreased by 54.8%.

On another positive note, commodity prices have rebounded. Most notably for Canada, oil prices have risen sharply–great news for Alberta and Saskatchewan. As well, the Canadian stock market has rebounded significantly and the Canadian dollar is up. The Bank of Canada noted this week that the worst of the pandemic decline is behind us.

The Royal Bank economists survey of consumer spending in May shows continued recovery as discretionary spending is returning.

• “As Canadian provinces take steps to reopen their economies, consumers have begun spending more on the discretionary items they shunned during the early phase of the pandemic.
• Entertainment and art spending has benefited most from easing restrictions.
• Spending on dining out continues to recover from lows, as restaurants adapt to take-out and other delivery models.
• Formerly slow spending at merchants selling apparel, gifts & jewelry picked up steam in early May; Canadians spent more at clothing stores in particular.
• Spending at merchants selling household goods remains strong, reflecting spending at DIY construction stores, and on appliances and furniture.
• Canadians began to drive more through early May, and card spending on auto expenses continued to pick up.
• In mid-May, spending at entertainment and art merchants was down 37% from a year earlier, compared with a 58% drop in late April.
• Golfers dusted off their putters as golf courses opened up around the country. Those who prefer playing inside continued to spend on online and console gaming.”

Concerning the housing market, before the pandemic, we were going into the spring season with the prospect of record sales activity in much of the country. Aside from oil country–Alberta and Saskatchewan–all indications were for a red-hot housing market. So the underlying fundamentals for housing remain positive as the economy recovers. How long that will take depends on the course of the virus and whether we see a second wave in the fall.

Real estate boards report a pick-up in home sales in May in the GTA and GVA.

Interest rates have plummeted. Thanks to the 150 basis point decline in the prime rate, variable rate mortgage rates have fallen for the first time since late 2018. Once the Bank of Canada was able to establish enough liquidity in financial markets, even fixed-rate mortgage rates have fallen.

The posted mortgage rate finally fell to 4.94% last week, but it remains well above contract rates; but with any luck at all, this qualifying rate for mortgage stress tests will ease in coming months and the regulators will change the qualifying rate to a contract rate plus 200 basis points, as planned to happen in April before the pandemic hit.

The Bank of Canada will remain extremely accommodating. In my view, interest rates will not rise until 2022.

One piece of bad news for housing was yesterday’s CMHC announcement of a tightening in mortgage qualification rules for mortgage borrowers with less than a 20% down payment. As I wrote yesterday, I believe this action flies in the face of measures taken by the Bank of Canada, OSFI, and the Department of Finance to cushion the blow of the pandemic and prevent unnecessary insolvencies. CMHC’s tightening measures reduce housing affordability, especially for first-time home buyers, by more than 10% and are totally unwarranted from a prudential perspective. For more on that, see yesterday’s report. As well, Bloomberg News also suggested the same in their article, Canadian Housing Agency Draws Fire For Tightening Mortgage Rules.

On the heels of a devastating decline in the Canadian economy, the Bank of Canada suggested today that the worst of the pandemic’s negative impact on the global economy is behind us, conceding, however, that uncertainty remains high. The Bank today maintained its target overnight rate at 0.25%. No additional rate cut was expected as the Bank has described the 0.25% level as the effective lower bound of the policy rate. Governor Poloz has all but ruled out negative interest rates unless the economy deteriorates dramatically further.

Today’s Governing Council meeting is Stephen Poloz’s swan song, as the new Governor, Tiff Macklem, takes the helm today. Macklem took part as an observer in the Governing Council’s deliberations and endorsed today’s rate decision and measures announced in the press release, thereby assuring continuity in monetary policy.

The Bank has taken very aggressive action to support liquidity and the full functioning of financial markets by buying short- and long-term securities. The central bank’s balance sheet holdings of securities have grown to about 20% of Canada’s GDP, up from 5% pre-crisis. That’s still well below the levels seen at the US Federal Reserve, the Bank of Japan, and the European Central Bank, which have conducted these quantitative easing operations since the financial crisis more than a decade ago. However, the Bank of Canada’s securities purchases have been extraordinary in relation to the size of our economy.

“Decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown on disposable income and helping to lay the foundation for economic recovery.” According to the central bank, the Canadian economy appears to have avoided the most severe scenario presented in the Bank’s April Monetary Policy Report (MPR).

The level of real GDP in Q1 was 2.1% below the level in the fourth quarter of 2019. The Bank of Canada is now predicting that real GDP in Q2 will likely post a further decline of 10%-to-20%, as continued shutdowns and sharply lower investment in the energy sector take an additional toll on output. That suggests a peak-to-trough decline of 12% to 22%, instead of the 15% to 30% scenario the central bank had previously been estimating. “The Canadian economy appears to have avoided the most severe scenario,” the Bank of Canada said.

Bottom Line: While the degree of uncertainty remains high, there is evidence that the worst of the economic downturn is behind us. Preliminary data for May suggests that home sales picked up on a month-over-month basis in May in the GTA and GVA, although home sales continued to be down significantly from levels one year ago.

Some people are concerned that the extraordinary stimulus in monetary and fiscal measures in recent months might, in time, be inflationary. Governor Poloz has made it clear that the dire results of the economic shutdown would have been highly deflationary had these actions not been taken. Deflation, coupled with high debt levels, would have triggered a depression. Economic models are ill-equipped to deal with the fallout of the pandemic. Policymakers need to be nimble in responding, and when the economy has recovered sufficiently, they will begin the unwinding of all of this stimulus, which will require an equally deft response on both the fiscal and monetary side.

Near-Record Decline in Q1 GDP Better Than Flash Estimate

The hand-wringing about the Q1 GDP data released today misses the point that the data were actually better than expected. The Canadian economy declined at an 8.2% annualized rate in the first quarter, less harsh than the earlier estimate by StatsCan of -10%. Of course, every sector of the economy was hit by the enforced shutdown, but not by nearly as much as most economists anticipated. For the month of March, the decline was 7.2%, less dire than the -9% earlier estimate.

In light of the current unprecedented national and global economic environment, StatsCan is providing leading indicators of economic activity. Their preliminary flash estimate for April is an 11% decline in real GDP. This estimate will be revised as more info becomes available, but the March and April decreases are likely to be the largest consecutive monthly declines on record.

The Economy Has Bottomed

It looks increasingly likely that we are already past the bottom of the latest economic downturn, with GDP potentially getting back on a positive growth trajectory as early as May.

That won’t be enough to prevent a historically large drop in Q2 output– likely multiples of the decline in Q1–but it would leave the data tracking along the more “optimistic” end of the -15% to -30% growth range estimated by the Bank of Canada in their last Monetary Policy Report. Government support programs for those losing work have been unprecedented–household disposable income actually edged up slightly in Q1 despite the large drop in overall economic activity, boosted by government transfers. With the decline in spending in March and April and the rise in disposable income, the savings rate is soaring. All of us are saving money by doing our own cooking and cleaning. We aren’t travelling and shopping is certainly limited, not to mention the savings on gasoline, entertainment, hairstyling and gym memberships. Hopefully, this could provide a cushion to support spending and the economy will turn sharply higher in Q3.

Still, the three million jobs lost over March and April will not be recouped quickly. The lockdown is easing only gradually, and any activities requiring large gatherings–think tourism, conferences, concerts, movies and sports–will remain closed until there is a vaccine or effective treatment. We expect things will begin to get better from this point, but still look for the unemployment rate to remain elevated at 8.5% in Q4 of this year. It is currently 13%.

The Housing Outlook

Much has been made of the recent CMHC Housing Market Outlook report released this week. The gloomy outlook of up to an 18% drop in home prices, a delayed recovery not until 2022, and a 20% arrears rate garnered headlines. First-time homebuyers were warned that housing was no longer a good investment, at least not over a three-year horizon. But the CMHC’s own data shows that home prices have risen an average of 5% annually over the past twenty-five years. And though no one’s retirement nest egg should consist solely of their residential real estate, a home is one of the few investments that you can actually use. People buy homes for many reasons well beyond wealth accumulation. The pride of ownership and lifestyle choice dominates the decision to buy for many.

Also this week, the Governor of the Bank of Canada suggested that the doomsters were overly pessimistic and asserted his view that the economy would recover from its medically induced coma much faster than the pessimists were suggesting. Clearly, none of us have a crystal ball, nor have we ever before experienced a pandemic recession. While we rise from the abyss, the pain may well be far from over. People are still losing jobs and many businesses continue to sink. Any recovery is dependent on whether the virus cases keep slowing and whether there is a second wave of infections.

But oil prices have risen sharply, a major boon for Alberta and some high-frequency data have improved. The stock market is well off its lows, interest rates have fallen sharply and the qualifying rate for mortgage stress tests has fallen to 4.94%. Actual mortgage rates are near record lows and are likely to remain low for the foreseeable future.

In time, immigration to Canada will restart, and foreign students will return. New businesses are blossoming even now and many sectors will continue to advance. To name a few, we are seeing burgeoning growth in telemedicine, artificial intelligence, big data analysis, cloud services, cybersecurity, 5G, home entertainment, virtual everything, home fitness, DYI renovations, indeed, DIY anything.

The Bank of Canada is set to reduce its qualifying rate ten basis points, from 5.04 to 4.94 percent, sources tell Mortgage Broker News. After the decrease, which is expected to be announced by Monday, the five-year fixed mortgage rate will have inched another step closer to a level not seen since 2016, when it was reduced to 4.64 percent.

It’s a small change to be sure, but in the current environment, says BMO chief economist Doug Porter, every bit helps.

“Any change can make a difference at the margin, even if tiny,” he says. “I believe the much bigger issue for the housing market will be the broader economic outlook and the extent to which activity and jobs can recover as the re-opening progresses. Rates still matter, but much less so than in the recent past.”

John Vo of Spicer Vo Mortgage doesn’t expect the decrease to work wonders for his clients, but he applauds the Bank of Canada for the move all the same.

“Is it going to make a huge difference in affordability?” Vo asks. “No. But it’s encouraging to see that the Bank of Canada is cautiously looking at ways of helping people qualify.”

Centum Intouch Mortgage Solutions broker Anthony Venuto sees the lower qualifying rate as being primarily helpful to borrowers are on the verge of receiving funding who still need a slight boost.

“It’s not like a person was going to qualify for $500,000 and all of a sudden they can qualify for $550,000,” he says.

But the extra few thousand dollars the lower qualifying rate may provide could be a game-changer for first-time buyers, especially at a time when so many of them are struggling to set enough capital aside for down payments and closing costs.

Venuto thinks the lower rate may have one more benefit.

“With those posted rates changing on the five-year fixed, that’s going to help Canadians if they potentially have to break their mortgages with their institutions, because [the competing rates] might be lower,” he says.

In comments delivered to the Standing Committee on Finance on Tuesday, Canadian Mortgage and Housing Corporation CEO Evan Siddall laid out a potentially bleak scenario for the country’s homeowners. Siddall told parliamentarians that by September, if Canada’s economic recovery fails to generate enough momentum, 20 percent of mortgages could be in arrears.

“A team is at work within CMHC to help manage a growing debt ‘deferral cliff’ that looms in the fall, when some unemployed people will need to start paying their mortgages again,” Siddall said during the Committee’s videoconference. “As much as one fifth of all mortgages could be in arrears if our economy has not recovered sufficiently.”

It was one of many disturbing claims made by Siddall, who also told the Committee that the nominal house price in Canada could fall by as much as 18 percent over the next six to 12 months, with the biggest losses expected in oil-driven economies like Alberta and Saskatchewan and in overheated markets like Toronto. If prices fall by 10 percent, Siddall said first-time buyers could lose as much as $45,000 on a $300,000 home.

But the deferral issue didn’t seem to phase him.

“Canadians do a very good job of paying their mortgages, even when they’re under water, so our loss forecasts are not extreme,” he said in an exchange with Progressive Conservative MP Pierre Poilievre. When asked by Poilievre for CMHC’s potential loss forecast, Siddall estimated that it could be as high as $9 billion.

According to DLC’s Dr. Sherry Cooper, Siddall’s claim that 20 percent of mortgages could be delinquent by September borders on the ridiculous.

“It’s kind of bizarre to me,” she says. “Most economists are finding fault with it.”

An arrears rate of 20 percent would essentially mean that the Bank of Canada’s efforts to ensure the availability of credit and the federal government’s pumping of billions of dollars into the economy to prevent business closures and forced bankruptcies will actually accelerate the rate at which Canadian mortgages are turning sour.

“The Bank of Canada estimates that the delinquency rate could possibly move up from .25 percent to .8 percent. And now we’re talking about 20 percent delinquency rates?” Cooper says. “Give me a break.”

When asked if there was a possibility that Siddall was referring to deferrals when he used the word “arrears”, Cooper was doubtful.

“No, he’s a very smart guy,” she says, despite the unlikelihood of his prediction.

“It’s not going to happen. The highest delinquency – which is what ‘arrears’ is – rates we’ve ever seen in history are nowhere near [the projected 20 percent],” she says.

Centum FairTrust owner Jimmy Hansra agrees with Cooper’s assessment.

“The government has been pretty proactive in terms of providing as many programs as they possibly can to weather the storm,” he says, adding that there’s “no way” Siddall’s arrears projection is accurate.

“Even his comments about CMHC seeing housing prices falling by 18 percent I think are overblown, too,” says Hansra. “Nobody knows what’s happening with house prices.”

Hansra isn’t preparing for the kind of worst-case scenario Siddall laid out. Instead, he says his team is readying themselves for a potential, although still unlikely, stream of borrowers looking for refinancing or equity take-out solutions that will require private money.

“I don’t see it happening,” he says, “But if it does, I think that’s the only way mortgage professionals are going to be able to provide financing for their customers. Because if they’re not going to be able to make their mortgage payments and they have equity sitting in their home, either people are going to look to use home equity lines of credit to make those payments or they’ll look for some sort of second or third mortgage financing.”

Hansra stresses that projections like Siddall’s, particularly when they’re made at a time with no parallel in human history, need to be taken with a few million grains of salt.

“It’s all a guess,” he says.

If CMHC did envision a 20 percent arrears rate by fall, a fair question to ask, says RateSpy founder Robert McLister, is why they are not acting now to mitigate what would be an utter catastrophe for the Canadian economy.

“I think that if the government really thought there was going to be 20 percent arrears, they would take action,” McLister says. “You can’t have one in five homeowners not paying their mortgage, with a large percentage of those leading to liquidation. You know what that would do to home prices. You know what that would do to the economy. It’s not going to happen.

Record Declines in Canadian Home Sales and Listings in April

The pandemic shutdown has put every sector of the economy into a medically induced coma, so, of course, the housing sector is no exception. Data released this morning from the Canadian Real Estate Association (CREA) showed national home sales fell a record 56.8% in April, compared to an already depressed March, in the first full month of COVID-19 lockdown (see chart below). Transactions were down across the country.

Among Canada’s largest markets, sales fell by 66.2% in the Greater Toronto Area (GTA), 64.4% in Montreal, 57.9% in Greater Vancouver, 54.8% in the Fraser Valley, 53.1% in Calgary, 46.6% in Edmonton, 42% in Winnipeg, 59.8% in Hamilton-Burlington and 51.5% in Ottawa.

The residential real estate industry is not standing still, however. Technological innovation is creating new ways of buying and selling homes. According to Shaun Cathcart, CREA’s Chief Economist, “Preliminary data for May suggests things may have already started to pick up a bit for both sales and new listings, in line with evidence that realtors and their clients have adopted new and existing virtual technology tools. These tools have allowed quite a bit of essential business to safely continue, and will likely remain key for some time.”

I have heard agents discussing software that virtually “stages” properties, allowing potential buyers to see the possibilities of existing and renovated floor plans and options in decor and design. The software replaces the need for expensive “physical” staging and can be far more creative. Where there is challenge, there is opportunity, and the people that create and adopt these innovative virtual solutions could be big winners.

Keeping the lid on price pressures, the number of newly listed homes across Canada declined by 55.7% m-o-m in April. The Aggregate Composite MLS® Home Price Index declined by only 0.6% last month, the first decline since last May. While some downward pressure on prices is not surprising, the comparatively small change underscores the extent to which the bigger picture is that both buying and selling is currently on pause.

Mortgage Qualifying Rate Set To Drop

The mortgage qualifying rate, the so-called Big Bank posted rate, has been above 5% since the OSFI stress test began on January 1, 2018. Despite dramatic declines in the government of Canada bond yield, which currently hovers at a mere 0.388%, and a huge fall in contract mortgage rates, the banks have kept their posted rates elevated. The minimum stress test rate began in 2018 at 5.34%, then finally fell to 5.19% and more recently to 5.04%–all still at a historically wide margin above market-determined rates.

In the past week, RBC and BMO have cut their 5-year posted rates slightly further to 4.94%. If no other banks follow, the Bank of Canada’s OSFI stress test rate will fall to 4.99%. If at least one other bank goes to 4.94%, the qualifying rate will drop to 4.94%. Every little bit helps.

Highlights of the Bank of Canada ‘Financial System Review’ (FSR)

With the first news of the COVID-19 pandemic threat, the BoC report said that “uncertainty about just how bad things could get created shock waves in financial markets, leading to a widespread flight to cash and difficulty selling assets. Policy actions are working to:

• restore market functioning
• ensure that financial institutions have adequate liquidity
• give Canadian households and businesses access to the credit they need”

The Bank of Canada’s actions have put a floor under the economy. These along with the federal government spending initiatives and the mortgage deferral program have cushioned the blow to households and businesses. Governor Poloz said, “our goal in the short-term is to help Canadian households and businesses bridge the crisis period. Our longer-term goal is to provide a strong foundation for a recovery in jobs and growth.”

With the economic outlook remaining highly uncertain, the BoC erred on the side of caution in projecting mortgage arrears and non-performing business loans based on the more severe economic scenario it laid out in the April Monetary Policy Report. The pessimistic reading would be that even with policymakers’ extraordinary actions, that scenario would see mortgage and business loan delinquencies eclipse previous peaks. A more optimistic reading would be that policy support has prevented a significantly worse outcome, and a resilient financial system will be able to absorb losses and leave the foundation in place for an eventual economic recovery. And, as Governor Poloz mentioned, a better economic scenario is still within reach as many provinces are beginning to gradually re-open their economies.

The projections in today’s FSR are based on a scenario in which Canadian GDP is 30% lower in Q2 and recovers slowly thereafter. In that scenario, mortgage arrears are projected to increase to 0.8% by mid-2021 from 0.25% at the end of 2019–nearly double the peak in arrears seen in 2009. Meanwhile, non-performing business loans are forecast to rise to 6.4% at the end of this year from 1% at the end of last year, significantly higher than past peaks of less than 5% in 2003 and 2010.

The upshot is that while we might see a significant increase in mortgage arrears and troubled loans over the next two years in this pessimistic economic scenario, these outcomes would have been much worse without the extraordinary programs that have been put in place to support businesses and households. That has important implications for the banking sector. The BoC’s analysis suggests that, with these policy measures, large bank’s existing capital buffers should be sufficient to absorb losses. Without those interventions, “banks would be faring much worse, with important negative effects on the availability of credit to households and businesses.”

Households:

• 1 in 5 households don’t have enough cash or liquid assets to cover two months of mortgage payments
• Government support programs (CERB payments and CEWS wage subsidies) will cover a large share of households’ “core” spending (food, shelter, and telecoms)
• Loan payment deferrals (banks have allowed more than 700,000 households to delay mortgage payments) and new borrowing can help offset remaining income losses
• Still, some households are likely to fall behind on their debt payments (first credit cards and auto loans, then mortgages)—something we’re already seeing in Alberta and Saskatchewan

Businesses:

• There have been some signs of reduced funding stress in April: The Bank of Canada’s bankers’ acceptance program is shrinking, the drawdowns of credit lines have slowed as some borrowers are repaying, and corporate debt issuance picked up significantly in April after ceasing in March.
• Surveys show higher-than-normal rejection rates for small- and medium-sized businesses requesting additional funding from financial institutions
• Upcoming corporate debt refinancing needs are in line with historical levels, but many borrowers will face in increased costs of funds owing to elevated corporate risk spreads
• Nearly three-quarters of investment-grade corporate bonds are rated BBB (the lowest investment grade rating)—downgrades would double the stock of high-yield debt and significantly increase funding costs for those borrowers
• Firms in the industries most affected by COVID-19 tend to have smaller cash buffers, and a sharp drop in revenues will make it difficult to meet fixed costs including debt payments. What started as a cash flow problem could develop into a solvency issue for some businesses
• The energy sector is facing particular challenges: it has had to rely more on credit lines, has the highest refinancing needs over the next six months and faces the most potential downgrades

Banks:

• BoC’s term repos have provided ample liquidity to the banking system and reduced funding costs, hence the drop in some banks’ posted and contract mortgage rates
• Take-up of term repos has slowed in recent weeks—an indication of improved market functioning
• Regulators have eased capital and liquidity requirements

Governments:

• The BoC’s asset purchases have helped improve liquidity in the key Government of Canada securities market (the baseline for many other bond markets)
• The FSR made little mention of government debt sustainability, but in his press conference Governor Poloz noted that overall government debt levels are similar to 20 years ago, and federal debt is significantly lower, giving the federal government plenty of room to maneuver

Bottom Line:

Of course, the pandemic shutdown has strained the financial wherewithal of many households and businesses. That was deemed the price we must pay to mitigate the severe health threat and contain its spread. The BoC report acknowledges the economic fallout of the necessary measures and promises to take additional actions to assure the economy returns to its full potential growth path as soon as feasibly possible. Cushioning the blow for those most in need.

Nevertheless, there are businesses that will close permanently and others that will scoop up declining competitors. Some will benefit from the new opportunities created by social distancing, enhanced sanitation, remote activity, new forms of entertainment and advances in healthcare. Others will no doubt die, although many of these companies were at death’s door before the pandemic emerged. Creative destruction is always painful for the losers, but it opens the way for many new winners and those existing businesses and individuals that are creative enough to adapt quickly to the changing environment.

Pandemic Batters Canadian Jobs Market

A Recession Like No Other

The Canadian economy has been put in a medically induced coma. Never before in modern history have we seen a forced shutdown in the global economy so, not surprisingly, the incoming data for April is terrible. There is a good chance, however, that April will mark the bottom in economic activity as regions begin to ease restrictions.

The economy will revive, but the psychological shock is perhaps the most unnerving. Rest assured, however that, as severe as this is, there are real opportunities here along with the challenges. There are economic winners, not just losers. More on that later.

Employment in Canada collapsed in April, with 2 million jobs lost, taking the unemployment rate to 13.0%, just a tick below the prior postwar record of 13.2% in 1982 (see chart below). The record decline is on the heels of the 1 million job loss in March, bringing the cumulative two-month total to 15.7% of the pre-virus workforce.

Economists had been expecting double the job destruction–a 4 million position decline in April–in reaction to the reports that over 7 million Canadians had applied for CERB. Today’s news reflected labour market conditions during the week of April 12 to April 18. The applications for CERB are more recent, so we may well see these additional losses reflected in the May report.

The 13% unemployment rate underestimates the actual level of joblessness. In April, the unemployment rate would have been 17.8% if the labour force participation rate had not fallen. Compared to a year ago, there were 1.5 million more workers on permanent layoff not looking for work in April – and so not counted as unemployed.

Also, the number of people who were employed but worked less than half of their usual hours for reasons related to COVID-19 increased by 2.5 million from February to April. As of the week of April 12, the cumulative effect of the COVID-19 economic shutdown—the number of Canadians who were either not employed or working substantially reduced hours—was 5.5 million, or more than one-quarter of February’s employment level.

In April, both full-time (-1,472,000; -9.7%) and part-time (-522,000; -17.1%) employment fell. Cumulative losses since February totalled 1,946,000 (-12.5%) in full-time work and 1,059,000 (-29.6%) in part-time employment.

Decline In Employment is Unprecedented

The magnitude of the decline in employment since February (-15.7%) far exceeds declines observed in previous labour market downturns. For example, the deep 1981-1982 recession resulted in a total employment decline of 612,000 (-5.4%) over approximately 17 months.

More of the drop in employment now is the result of temporary layoffs. In April, almost all (97%) of the newly-unemployed were on temporary layoff, whereas in previous recessions, most of the dismissals were considered permanent.

In April, more than one-third (36.7%) of the potential labour force did not work or worked less than half of their usual hours, illustrating the continuing impact of the COVID-19 economic shutdown on the labour market. But job losses were also still weighted, on balance, more heavily in lower-wage jobs. Average wage growth for those remaining in employment spiked sharply higher as a result to 11% above year-ago levels.

All provinces have been hard-hit

Employment declined in all provinces for the second month in a row. Compared with February, employment dropped by more than 10% in all regions, led by Quebec (-18.7% or -821,000). Quebec leads the country in the number of COVID-19 cases and deaths.

The unemployment rate rose markedly in all provinces in April. In Quebec, the rate rose to 17.0%, the highest level since comparable data became available in 1976, and the highest among all provinces (see table below). The number of unemployed people increased at a faster pace in Quebec (+101.0% or +367,000) than in other regions.

Employment dropped sharply from February to April in each of Canada’s three largest census metropolitan areas (CMAs). As a proportion of February employment, Montréal recorded the largest decline (-18.0%; -404,000), followed by Vancouver (-17.4%; -256,000) and Toronto (-15.2%; -539,000).

In Montréal, the unemployment rate was 18.2% in April, an increase of 13.4 percentage points since February. In comparison, the unemployment rate in Montréal peaked at 10.2% during the 2008/2009 recession. In Toronto, the unemployment rate was 11.1% in April (up 5.6 percentage points since February), and in Vancouver, it was 10.8% (up 6.2 percentage points).

Employment Losses By Sector

In March, almost all employment losses were in the services-producing sector. In April, by contrast, employment losses were proportionally larger in goods (-15.8%; -621,000) than in services (-9.6%; -1.4 million). Losses in the goods-producing sector were led by construction (-314,000; -21.1%) and manufacturing (-267,000; -15.7%).

Within the services sector, employment losses continued in several industries, led by wholesale and retail trade (-375,000; -14.0%) and accommodation and food services (-321,000; -34.3%).

Industries that continued to be relatively less affected by the COVID-19 economic shutdown included utilities; public administration; and finance, insurance and real estate.

In both the services-producing and the goods-producing sectors, the employment decreases observed in the two months since February were proportionally larger than the losses observed during each of the three significant labour market downturns since 1980.

As economic activity resumes industry by industry following the COVID-19 economic shutdown, the time required for recovery will be a critical question.

After the previous downturns, employment in services recovered relatively quickly, returning to pre-downturn levels in an average of four months. On the other hand, it took an average of more than six years for goods-producing employment to return to pre-recession levels following the 1981-1982 and 1990-1992 recessions. After the 2008-2009 global financial crisis, it took 10 years for employment in the goods-producing sector to return to pre-crisis levels.

Green Shoots

As bad as things are, there is some evidence that the economy is approaching a bottom. Business shutdowns are easing in most provinces, and while it will be some time before we see a complete reopening, early signs of improvement are evident. Business sentiment appears to have improved somewhat towards the end of April, as evidenced by data from the Canadian Federation of Independent Business. The Royal Bank economists report that credit card spending looked less weak at the end of April. Housing starts for April held up better than expected. And, most importantly, the spread of Coronavirus has eased, and regions are starting to relax some of the rules to flatten the curve.

Concerning the housing market, before the pandemic, we were going into the spring season with the prospect of record sales activity in much of the country. Aside from oil country–Alberta and Saskatchewan–all indications were for a red-hot housing market. So the underlying fundamentals for housing remain positive as the economy recovers. How long that will take depends on the course of the virus and whether we see a second wave in late fall.

Interest rates have plummeted. Thanks to the 150 basis point decline in the prime rate, variable rate mortgage rates have fallen for the first time since late 2018. Once the Bank of Canada was able to establish enough liquidity in financial markets, even fixed-rate mortgage rates have fallen.

The posted mortgage rate appears stuck at 5.04%, far above contract rates; but with any luck at all, this qualifying rate for mortgage stress tests will ease in the coming months. The Bank of Canada will remain extremely accommodating. In my view, interest rates will not rise until 2022.

Opportunities–There Will Be Winners

Even now, some businesses are enjoying a surge in revenues and profitability. Just to put a more positive note on this period of rapid change, I jotted down a list of companies that are thriving. Top of the list is Shopify, a Canadian company that helps businesses provide online shopping services. Shopify is now the most highly valued company in Canada, as measured by its stock market valuation, surpassing the Royal Bank.

Many who never relied on online shopping have become converts during the lock-down. Amazon is another business that is benefiting, but Amazon needs more competition, and many Canadians would welcome some homegrown online rivals.

Loblaws, with its groceries and drug stores, is booming. So are the cleaning products companies like Clorox and paper products company Kimberly Clark. Staying at home has boosted sales at Wayfair, the online furniture and home products site. Peloton and suppliers of dumbbells and other fitness equipment are seeing increased revenues as people look for in-home alternatives to the locked-down gyms and health clubs.

Demand for cloud services has boosted revenues at Microsoft and Dropbox. Home entertainment is booming, think Netflix and YouTube. Zoom and Cisco (Webex) are also big winners. Qualcomm stands to gain from a more rapid move to 5G. And Accenture and Booz Allen, among other business and government consultants, are busy helping companies reinvent their operations in a post-pandemic world.

In times of enormous uncertainty and volatility, people need expert advice and hand-holding, particularly concerning their finances. That’s where mortgage professionals come in along with financial planners, realtors, accountants and tax lawyers.

On the heels of a devastating decline in the Canadian economy, the Bank of Canada is taking unprecedented actions. With record job losses, plunging confidence and a shutdown of most businesses, this month’s newly released Monetary Policy Report (MPR) is a portrait of extreme financial stress and a sharp and sudden contraction across the globe. COVID-19 and the collapse in oil prices are having a never-before-seen economic impact and policy response.

The Bank’s MPR says, “Until the outbreak is contained, a substantial proportion of economic activity will be affected. The suddenness of these effects has created shockwaves in financial markets, leading to a general flight to safety, a sharp repricing of risky assets and a breakdown in the functioning of many markets.” It goes on to state, “While the global and Canadian economies are expected to rebound once the medical emergency ends, the timing and strength of the recovery will depend heavily on how the pandemic unfolds and what measures are required to contain it. The recovery will also depend on how households and businesses behave in response. None of these can be forecast with any degree of confidence.”

“The Canadian economy was in a solid position ahead of the COVID-19 outbreak but has since been hit by widespread shutdowns and lower oil prices. One early measure of the extent of the damage was an unprecedented drop in employment in March, with more than one million jobs lost across Canada. Many more workers reported shorter hours, and by early April, some six million Canadians had applied for the Canada Emergency Response Benefit.”

“The sudden halt in global activity will be followed by regional recoveries at different times, depending on the duration and severity of the outbreak in each region. This means that the global economic recovery, when it comes, could be protracted and uneven.”

Today’s MPR breaks with tradition. It does not provide a detailed economic forecast. Such forecasts are useless given the degree of uncertainty and the lack of former relevant precedents. However, Bank analysis of alternative scenarios suggests the level of real activity was down 1%-to-3% in the first quarter of this year and will be 15%-to-30% lower in the second quarter than in Q4 of 2019. Inflation is forecast at 0%, mainly owing to the fall in gasoline prices.

“Fiscal programs, designed to expand according to the magnitude of the shock, will help individuals and businesses weather this shutdown phase of the pandemic, and support incomes and confidence leading into the recovery. These programs have been complemented by actions taken by other federal agencies and provincial governments.”

The Bank of Canada, along with all other central banks, have taken measures to support the functioning of core financial markets and provide liquidity to financial institutions, including making large-scale asset purchases and sharply lowering interest rates. The Bank reduced overnight interest rates in three steps last month by 150 basis points to 0.25%, which the Bank considers its “effective lower bound”. It did not cut this policy rate again today, as promised, believing that negative interest rates are not the appropriate policy response. The Bank has also conducted lending operations to financial institutions and asset purchases in core funding markets, amounting to around $200 billion.

“These actions have served to ease market dysfunction and help keep credit channels open, although they remain strained. The next challenge for markets will be managing increased demand for near-term financing by federal and provincial governments, and businesses and households. The situation calls for special actions by the central bank.”

The Bank of Canada, in its efforts to provide liquidity to all strained financial markets, has, in essence, become the buyer of last resort. Under its previously-announced program, the Bank will continue to purchase at least $5 billion in Government of Canada securities per week in the secondary market. It will increase the level of purchases as required to maintain the proper functioning of the government bond market. Also, the Bank is temporarily increasing the amount of Treasury Bills it acquires at auctions to up to 40%, effective immediately.

The Bank announced new measures to provide additional support for Canada’s financial system. It will commence a new Provincial Bond Purchase Program of up to $50 billion, to supplement its Provincial Money Market Purchase Program. Further, the Bank is announcing a new Corporate Bond Purchase Program, in which the Bank will acquire up to a total of $10 billion in investment-grade corporate bonds in the secondary market. Both of these programs will be put in place in the coming weeks. Finally, the Bank is further enhancing its term repo facility to permit funding for up to 24 months.

The Bank will support all Canadian financial markets, with the exception of the stock market, and it “stands ready to adjust the scale or duration of its programs if necessary. All the Bank’s actions are aimed at helping to bridge the current period of containment and create the conditions for a sustainable recovery and achievement of the inflation target over time.”

This is exactly what the central bank needs to do to instill confidence that Canadian financial markets will remain viable. These measures are a warranted offset to panic selling. Too many investors are prone to panic in times like these, which has a snowball effect that must be avoided. As long as people are confident that the Bank of Canada is a backstop, panic can be mitigated. The Bank of Canada deserves high marks for responding effectively to this crisis and remaining on guard. Governor Poloz and the Governing Council saw it early for what it is, a Black Swan of enormous proportions.

As a result, Canada will not only weather the pandemic storm better than many other countries, but we will come out of this economic and financial tsunami in better condition.

The Bank of Canada announced that it will maintain the overnight rate at 0.25%, which it considers its “effective lower bound.”

The BoC has lowered its target for the overnight rate an unprecedented three times in March to support an economy reeling from the impact of the COVID-19 pandemic.

“For its part, the Bank of Canada has taken measures to improve market function so that monetary policy actions have their intended effect on the economy,” the BoC said in a statement. “This helps ensure that households and businesses continue to have access to the credit they need to bridge this difficult time, and that lower interest rates find their way to ultimate borrowers.”

Read more: Big Six banks cut prime lending rates yet again

While the overnight rate was maintained, the BoC announced several new measures to ease the pressure on borrowers amid the pandemic – including the purchase at least $5 billion in Government of Canada securities per week in the secondary market, as well as increasing the level of purchases as required to “maintain proper functioning of the government bond market.” The BoC is also temporarily increasing the amount of treasury bills it acquires at auctions to up to 40% percent.

Additionally, the bank announced the development of a new provincial bond purchase program of up to $50 billion to supplement its provincial money market purchase program. A new corporate bond purchase program, in which the BoC will acquire up to a total of $10 billion in investment grade corporate bonds in the secondary market, was also revealed. Both of these programs will be put in place in the coming weeks.

The BoC also said that it is enhancing its term repo facility to permit funding for up to 24 months.