The Canadian government is monitoring whether tougher mortgage rules are having the desired effect but doesn’t favour allowing longer mortgage terms, Prime Minister Justin Trudeau said.

Trudeau, speaking to an industry group Thursday, was asked about raising the maximum amortization of a mortgage to 30 years, from 25 years, for first-time buyers. The prime minister said he opted instead to introduce a program that sees the government take a stake in some home purchases, as well as increasing the funds a buyer can take from retirement savings.

“We’re looking at things that are not going to disrupt the market in unexpected ways,” Trudeau said at the Canadian Home Builders’ Association conference in Niagara Falls. “We’re listening to everyone about their concerns and we are going to keep watching that stress test and make sure that it is having the desired effect, but we are seeing fewer and fewer people take on those overreaching debt-loads, particularly in the higher sectors of the market.”

Canada’s housing market has been a preoccupation of policymakers for years — grappling with a surge in prices in Vancouver and Toronto, and fears that a bubble could develop. Officials have tightened mortgage eligibility rules and imposed other measures to curb runaway growth. Bank of Canada Governor Stephen Poloz said this week he’s confident the sector will return to growth.

Trudeau said his government tried to take measures that would stabilize Vancouver and Toronto but not “have an overly negative impact elsewhere around the country.”

The tougher stress test for mortgage eligibility was about “taking some of the froth out of those markets but also ensuring that people weren’t stretching themselves further than was wise, particularly given the fact that we can see interest rates rising in the future, and recognizing Canadians carry a high level of personal indebtedness that we need to respond to.”

He acknowledged the industry’s call for 30-year mortgages, but said “yes, it can lower your mortgage payments on a monthly level but actually, overall, increases the amount that you’re going to be paying out in interest over time. Which is why, when we looked at all the different measures we had, we really, really liked the shared equity program.”

Canada posted a record job gain last month, along with a decline in the jobless rate and a pick-up in wages, providing the strongest signal yet that the economy is coming out of a six-month slowdown. Other data this week portend a rebound in economic activity, including a strong bounce-back in exports and a surge in housing starts.

Statistics Canada announced this morning that employment rose by a whopping 106,500 in April, the biggest one-month gain since the start of this data series in 1976. This was dramatically above the median forecast of economists of 12,000 net new positions. The Canadian jobless rate fell a tick to 5.7%, near a four-decade low.

This report showed broadly based strength across regions, sectors and provinces. Full-time jobs jumped by 73,000, part-time positions rose as well by 33,600.

On a year-over-year basis, employment grew by 426,000 (+2.3%), with gains in both full-time (+248,000) and part-time (+179,000) work. Over the same period, total hours worked were up 1.3%.

Employment increased in Ontario, Quebec, Alberta, and Prince Edward Island. It declined in New Brunswick and was little changed in the other provinces. Quebec posted an unemployment rate of 4.9%, the lowest in recorded history. Jobs in Alberta gained steam following two months of little change.

Employment gains were spread across several industries: wholesale and retail trade; construction; information, culture and recreation; “other services”; public administration; and agriculture. At the same time, employment decreased in professional, scientific and technical services.

Construction punched above its weight for the first time in many months. Gains were concentrated in Ontario and British Columbia. This likely foreshadows a stronger spring season in existing home sales.
Provincial Unemployment Rates
(% 2019, In Ascending Order)

Province                                      April     March
British Columbia                        4.6            4.7
Quebec                                         4.9            5.2
Manitoba                                     5.2            5.0
Saskatchewan                             5.4            4.9
Ontario                                         6.0            5.9
Alberta                                          6.7            6.9
Nova Scotia                                 6.9            6.2
New Brunswick                          8.0            7.9
Prince Edward Island               8.6            8.9
Newfoundland and Labrador 11.7            11.5

For many months the labour market strength has been the mainstay of the economy. Many had warned as recently as last month that Canada could be headed for recession amid a perfect storm of negative factors — falling oil prices, volatile financial markets, higher interest rates, cooling housing markets and global trade tensions. But many of these elements have begun to dissipate.

Exporters showed across-the-board resiliency in March after shipments tumbled in February. Toronto’s housing market, the country’s largest, is stabilizing after a recent slump. There are also signs consumers continue to spend and borrow, aided in large part by the buoyant labour market, even amid worries about the outlook.

Even wages have strengthened. Pay gains for permanent employees rose to 2.6% year-over-year, the sharpest rise since August. Total hours worked also increased, rising by 1.3% annually in April, up from 0.9% in March. Youth unemployment fell to record lows.

Bottom Line: This very positive report opens up the possibility that the Bank of Canada might take a more hawkish stance at their next meeting. It might well be that a rate hike sometime later this year is no longer off the table. One critical uncertainty, however, is the heightened trade war between the US and China. If the two sides hike tariffs sharply, a possibility given the current sabre rattling, Canada’s economy could once again be hit in the cross-fire.

Foreign Investment in Montreal’s property market surged a whopping 183% in 2018 over the previous year—the likely the result of foreign buyer taxes in Toronto and Vancouver.

“It’s not a coincidence that after the foreign investor taxes in Toronto and Vancouver, interest moved to the Montreal market,” said Altus Group’s Senior Director of Innovation and Growth Strategies Vincent Shirley. “Foreign investors originally looked at the Vancouver and Toronto markets but they also recognized Montreal as a discounted market. There are more factors involved than just that: The fundamentals in Montreal are really strong right now and the job market is very good too.”

According to Altus Group’s Montreal Flash Report 2019, year-over-year investment property sales volume in the city increased 18% last year, hitting $6.5 billion, thanks in large part to renewed interest in Montreal Island properties located downtown and on either side of Mount Royal. Sales volume on the Island of Montreal reached $785 million.

The report also noted that almost half of total new condominium sales last year were concentrated in downtown Montreal, while the rest of Montreal Island received about one-third.

“There is a lot of job creation on Montreal Island and demographics are very strong,” said Shirley. “We had a lot of structural issues for about 40 years with a very high unemployment rate, but we’ve seen it go down the last two or three years. There’s a lot of compression with the unemployment rate and now we’re at 6% or so, but it’s forecasted to go down to 5.5% next year because job creation is very strong, as are prospects for future employment.”

In fact, Montreal is becoming a leading hub for artificial intelligence and its pharmaceutical sector is also robust. Shirley noted that Montreal’s universities serve as pipelines for those industries in particular.

Even more prominent is Montreal’s port, which is, bar none, Canada’s busiest.

“Montreal’s port accepts over 75% of commodities that come through all Canadian ports,” said Shirley. “A lot of venture capital is invested in Montreal’s technology and AI industries and our pharmaceutical sector is very strong.”

Despite Montreal’s good fortunes after decades of political upheaval surrounding language and Quebec’s place within Canada, there is reason for slight consternation. The Montreal municipal government intends to implement the so-called “20-20-20 rule,” says Shirley.

“It’s going to be 20% social housing, 20% affordable housing, and 20% family housing,” he said. “The real estate industry understands affordability and inclusionary zoning is important, but we just want to make sure the push for it doesn’t disturb the economics of Montreal and development doesn’t go into the suburbs.”

The Bank of Canada will announce its April interest rate decision next week but a survey shows little expectation that it will make a change.

Nine out of 10 economists including those from TD, Laurentian, the Conference Board of Canada and University of Manitoba – expect that the BoC will leave rates unchanged at 1.75%.

“All combined, the global slowdown and specific factors weighing down on Canadians households and the oil sector are justifying to keep the overnight rate at current level,” said Sebasiten Lavoie, chief economist at Laurentian Bank Securities.

However, the poll by Finder.com found that Atif Kubursi of Economic Research Ltd. and McMaster University, is predicting a rate cut, citing “sluggish growth and poor export performance.”

While the others are ruling out a cut in April, four now believe Governor Poloz could announce one in July and longer term we could see a 1.15% rate within the current cycle.

Recession fears

While a rate hold and cut will be good news for the housing market, the underlying reasons for economists making their predictions is more concerning.

Canada is either somewhat or very likely to go into recession in the next 12 months, according to half of the panellists.

“Uncertainty remains elevated, and recent trends (January notwithstanding) have been quite weak – domestic demand contracted over the latter half of 2018. Retail sales remain soft, as do housing markets,” said Brian DePratto, senior economist at TD Economics.

The panel expects the CMHC First Home Buyers Incentive to have either marginal or little to no impact on housing affordability but they believe that property prices will stabilise by the end of the year. Montreal house prices are expected to increase the most

The International Monetary Fund has expressed concern about rising risk in the Canadian housing market.

The IMF’s Global Financial Stability Report says that the risk has grown over the past two years and is near to levels seen during the financial crisis of the last decade.

However, there’s a major difference between then and now; the action taken by Canadian regulators to ensure that the financial system is robust and able to withstand another crisis.

While the B-20 mortgage guidelines – and the stress test in particular – has many critics, the IMF says that tougher mortgage policy and measures such as foreign buyers’ taxes, are the correct ones to protect the financial system from downside risks from the housing market.

Canada up, USA down
While Canada’s housing market has become riskier, the report says that the US risk is lower than it was due to declining levels of household debt and prices more in line with income.

But it says that Canadian markets have become riskier, especially Hamilton, Toronto, and Vancouver.

The employment report had long been a lone bright spot in an economy that had sunk across the board, so the March slump is not surprising. According to today’s jobs report from Statistics Canada, employment fell by 7,200 last month, mostly in full-time positions in the service sector. Canada’s jobless rate held steady at 5.8%, close to a multi-decade low and wage growth ticked modestly higher, although, at a 2.4% year-over-year gain, it remains lower than the reading earlier this cycle.

Employment was up 290,000 over the prior six months, so it was only a matter of time that the jobs numbers would reflect the weakness in the overall economy.

Bottom Line: The Bank of Canada will remain on hold and possibly even cut interest rates if the economy slows further. There is little evidence that underlying inflation trends will rise. The headwinds of global uncertainty, weak trade, energy market vulnerability and the housing slowdown contribute to the Bank’s cautious stance.

In another trade loss, China has stopped buying Canadian canola seeds. About 40% of Canadian canola seed exports usually go to China. The Huawei dispute and potential Meng Wanzhou extradition has escalated trade tensions between Canada and China, seriously hurting Canadian farmers. As well, the US tariffs on steel and aluminum exports continue to weigh on the economy. It appears there is little prospect that the renegotiated Canada-Mexico-US trade deal will be confirmed by the US Congress this year, adding to the uncertainty.

All of this has led some to begin calling for a Bank of Canada rate cut. Higher interest rates alongside regulatory changes have already contributed to significantly slower household debt growth and housing markets.

Housing Markets Remain Soft in March in Vancouver and Toronto

According to local real estate boards reporting this week, the end of winter did not spark a flurry of home buying in Vancouver and Toronto. Fragile market conditions deteriorated further in Vancouver where policy measures introduced by all levels of government continue to keep buyers on the sidelines. Home resales fell to their lowest level since 1986 (down another 7% from February), and the benchmark price eased for a ninth-straight month (down 8.5% since the June 2018 peak). Property values in the GVA are likely to remain under intense downward pressure in the near term.

March activity was the slowest in 10 years in Toronto. Resales increased a little less than 2% month-over-month (on a preliminary seasonally-adjusted basis)—minute in comparison to the 13% month-over-month drop in February. A lack of supply could have been a factor holding back activity as new listings fell 4.5% from a year ago. This possible explanation finds some support in the fact that the benchmark price rose at a faster pace in March (2.6% y/y) than February (2.3%)—suggesting that buyers had to bid more aggressively in the face of limited supply.

This winter has been particularly hard on residential real estate markets across most of Canada. The March results published in the last couple of days in Vancouver and Toronto—as well as in Victoria, Calgary and Hamilton—offer little in the way of a meaningful rebound during the all-important early spring season. While recent declines in mortgage rates and the new first-time home buyer incentive announced in the 2019 federal budget could be catalysts for a rise in activity later this year, the stress test and other market-cooling policy actions will continue to weigh heavily on buyers.

We will have more complete data on housing mid-month when the Canadian Real Estate Association releases national and local data.

The current decline in the bonds market is good news for Canadian fixed-rate mortgage borrowers with rates heading lower.

As the bond market yields invert – as they did Monday in Canada – the cost to banks of borrowing in the market declines, meaning they are able to finance mortgages at a lower rate and pass savings on to customers.

It’s not all good news though because the inverted yield, also seen in US bonds, is often a foreteller of weakening economic conditions and potentially recession.

However, this risk is likely to mean that the BoC will remain highly cautious of increasing interest rates.

An outlook from TD Economics’ Beata Caranci and James Orlando suggests that Canada may need “the real interest rate to remain close to or below zero for a long period” with the deleveraging process only just starting.

There is a growing cohort of investors and analysts that believe the BoC’s next move on rates will be a cut and that is proving good news for variable rate mortgage borrowers too.

Janine White, vice-president of Ratesupermarket.ca told CBC News that rates will climb in the next couple of years but “for the rest of 2019 the prediction is that the variable rate is going to be stable and maybe has a chance of coming down.”

A major item from this week’s federal budget will further reduce, rather than enhance, affordability for first-time homebuyers.

The First-Time Home Buyer Incentive—in which the Canada Mortgage and Housing Corporation will provide up to 10% on the purchase price of a new build and 5% on a resale—caps household income at $120,000. The policy further states that “participants’ insured mortgage and the incentive amount cannot be greater than four times the participants’ annual household incomes.”

First-time buyers who think the incentive raises their qualifying power are in for a surprise. According to Ratehub.ca, under current qualifying criteria, including the stress test, buyers qualify for homes that are 4.5-4.7% their household income. By using the First-Time Home Buyer Incentive, they would reduce their qualification amount by 15%.

“The total a first-time homebuyer gets between their mortgage and the incentive they receive from the government can’t exceed four times their household income,” said James Laird, Ratehub.ca’s co-founder and president of CanWise Financial. “This qualifying criteria is actually stricter than the regular qualifying criteria that exists today. I was surprised the policy itself was launched like this since that section of the budget is called ‘Affordability’ and it actually reduces affordability.”

According to calculations provided by Ratehub.ca, a household with $100,000 of income that puts a 5% down payment, qualifies for a $479,888 home.  This leaves a mortgage amount of $474,129 after down payment and the CMHC insurance premium.  The household qualifies for a mortgage of 4.74 times their income.

If the same household elected to participate in the First-Time Home Buyer Incentive their maximum purchase price drops to $404,858, because this is the maximum they can afford while keeping the total between their mortgage and the government incentive below 4.0 times their income ($400,000).

“The number one issue facing first-time homebuyers is how much they qualify for, not the monthly payment after the home closes, and that’s what this is aimed at,” continued Laird. “They qualify for less if they use this program.”

That might not be the only problem with the First-Time Home Buyer Incentive. A similar program launched by British Columbia’s Liberal government was axed last March by the NDP after it was revealed that only around 3,000 homebuyers used it—far fewer than the expected 42,000.

“Given the evidence provided through one of the largest provinces in the country trying a program that didn’t work, I’m not sure what the federal government thinks will be different,” said Laird, adding that housing measures in the budget were spare on details.

“I was amazed that one of the key parts of their budget hadn’t been properly thought through and didn’t contain detail. I expect that before this program actually goes live, one, we’ll get more detail, and two, it will be amended to take care of this issue.”

In its fourth fiscal plan, the Trudeau government spent its entire revenue windfall leaving the deficit projection little changed. In this election budget, Finance Minister Bill Morneau announced $22.8 billion over six years in new spending initiative mostly for homebuyers, students and seniors. Trudeau promised in his first budget to have eliminated all red ink by this year. He will instead head for an October election with an annual deficit of nearly $20 billion. Ottawa is projecting a string of double-digit deficits through the end of 2022.

The key debt-to-GDP ratio is expected to be 30.8% this fiscal year and edges downward only very slowly to 30% over the four-year forecast horizon.

Today’s budget offered help to young homebuyers, many of whom find it very difficult to afford to purchase in some of our more expensive cities. There were two measures targeted at first-time homebuyers:

Maximum Withdrawal from RRSPs Is Increased

The simplest to understand is the $10,000 increase in the federal Home Buyers’ Plan (HBP) maximum tax-free withdrawal from RRSPs to $35,000, effective immediately. This allowable withdrawal for first-time buyers will now also apply to people experiencing the breakdown of a marriage or common-law partnership who don’t meet the usual requirement of being a first-time homebuyer.

The new limit would apply to HBP withdrawals made after March 19, 2019.

Those taking advantage of the higher HBP limit will have to keep in mind that the repayment timeline is unchanged. Home buyers must put the money back into their RRSP over 15 years to avoid full ordinary income taxation on HBP withdrawal. Now Canadians using these funds will have to repay a maximum of $35,000 – instead of $25,000 – over the same period.

The Boldest Move: The CMHC First-Time Homebuyer Incentive

A $1.25 billion fund administered by the Canadian Mortgage and Housing Corporation (CMHC) over three years will provide 5% of the cost of an existing home and 10% of the price of a new home through what amounts to an interest-free loan to be repaid when the property is sold. The money would go to first-time home buyers applying for insured mortgages. The key stipulations are:
• Users must have a downpayment of at least 5%, but less than 20%;
• Household income must be less than $120,000;
• The purchase price cannot be more than four times the buyers’ household income.
For example, say you’re hoping to buy a $400,000 home with the minimum required 5% down payment, which works out to be $20,000. With the new incentive, you could receive up to $40,000 (for a new home) through the CMHC. Now, instead of taking out a $380,000 mortgage, you’d need to borrow only $340,000. This would lower your monthly mortgage bill from over $1,970 to less than $1,750. The incentive is 10% for buyers purchasing a newly built home and 5% for existing homes.

Homeowners would eventually have to repay this so-called ‘shared mortgage,’ likely at resale, though it is unclear how this would work. CMHC might share in any capital gain (or loss)– receiving 5% or 10% of the sale price (not the purchase price). At the time of this writing, these details had not been hammered out.

These stipulations effectively limit purchases under this plan to properties priced at less than $500,000 ($480,000 maximum in insured mortgage and incentive, plus the downpayment), which is close to the national average sales price of $468,350 (which is down 5.2% from the average price one year ago). However, the national average price is heavily skewed by sales in Greater Vancouver and the Greater Toronto Area, two of Canada’s most active and expensive markets. Excluding these two markets from the calculations cuts close to $100,000 off the national average price, trimming it to just under $371,000. What this tells us is that the relief for first-time homebuyers is pretty meagre for young people living in our two most expensive regions.

Arguably, the max price point of $500,000 for this plan is where the affordability challenge only really begins in our higher-priced housing markets. The most acute affordability problems surround medium-sized and larger condo units or single-detached homes in the GTA and GVA; yet, most of these are beyond the price range covered by the CMHC plan. The impact, of course, would be broader in other regions, but affordability in many of those is historically quite normal. The most significant impact will be in low-priced new builds.

Also, mortgage applicants under this plan still have to qualify under the federal stress test, which ensures that borrowers will be able to keep up with the payments even if interest rates rise by roughly two full percentage. The incentive, however, would substantially lower the bar for test takers, as applicants would have to qualify for a lower mortgage.

Before the budget, many stakeholders had been arguing that with the rapid slowdown in the economy and the Bank of Canada unlikely to raise interest rates this year, the B-20 stress test is too onerous and should be eased.

The government is hoping to have the plan up and running by September.

Bottom Line: These housing measures are focused on the demand side of the market, rather than encouraging the construction of new affordable housing. And while the budget does earmark $10 billion over nine years for new rental homes, it does not propose tax breaks or reduced red tape for homebuilders.

Statistics released today by the Canadian Real Estate Association (CREA) show that national home sales dropped sharply from January to February, plummeting 9.1% to its lowest level since November 2012. The month-over-month decline was the biggest since the B-20 stress test was introduced in January of last year.

The number of existing home sales was down in three-quarters of all local markets, including all major cities. Actual (not seasonally adjusted) sales activity was down 4.4% to reach the lowest level for the month of February since 2009. It was also almost 12% below the 10-year February average.In British Columbia, Alberta as well as Newfoundland and Labrador, sales were more than 20% below their 10-year average for the month.

New Listings
The number of newly listed homes declined by 3.2% in February, led by GTA regional municipalities that surround the City of Toronto, in addition to Hamilton-Burlington, Calgary, Edmonton and Winnipeg.

With sales down by more than new listings in February, the national sales-to-new listings ratio eased to 54.1% compared to 57.6% in January. Looking beyond its monthly volatility, this measure of market balance has remained close to the long-term average of 53.5% since early 2018.

Based on a comparison of the sales-to-new listings ratio with the long-term average, about 70% of all local markets were in balanced-market territory in February 2019.

There were 5.7 months of inventory on a national basis at the end of February 2019, a three-and-a-half-year high and above its long-term average of 5.3 months. That said, there are significant regional differences. The number of months of inventory has swollen far above its long-term average in Prairie provinces and Newfoundland & Labrador; as a result, homebuyers there have an ample choice of listings available for purchase. By contrast, the measure remains well below its long-term average in Ontario and the Maritimes.

Home Prices
The Aggregate Composite MLS® Home Price Index (MLS® HPI) was little changed (-0.1%) y/y in February 2019. That said, it still marked the first decline in almost a decade.

Condo apartment units recorded a y/y price increase of 2.4% in February, while townhouse/row unit prices were up 1%. By comparison, one and two-storey single-family home prices were down 1.7% and 1% y/y in February.

Trends continue to vary widely among the 17 housing markets tracked by the MLS® HPI. Results remain mixed in British Columbia, with prices down on a y/y basis in Greater Vancouver (-6.1%) and the Fraser Valley (-2.8%). By contrast, prices posted a y/y increase of 3% in Victoria and were up 7.7% elsewhere on Vancouver Island.

Among Greater Golden Horseshoe housing markets tracked by the index, MLS® HPI benchmark home prices were up from year-ago levels in Guelph (+6.8%), the Niagara Region (+6.5%), Hamilton-Burlington (+5%) and the GTA (+2.3%). By contrast, home prices were little changed (+0.2%) on a y/y basis in Oakville-Milton, while in Barrie and District prices remain below year-ago levels (-4.3%).

Across the Prairies, supply is historically elevated relative to sales, and home prices are down from year-ago levels. Benchmark prices were down by 4.4% in Calgary, 4.5% in Edmonton, 5.1% in Regina and 3% in Saskatoon. The home pricing environment will likely remain weak in these cities until demand and supply come back into better balance.

Home prices rose 7.4% y/y in Ottawa (led by a 10.8% increase in townhouse/row unit prices), 6.2% in Greater Montreal (led by a 7.8% increase in apartment unit prices) and 1.6% in Greater Moncton (led by a 7.9% increase in townhouse/row unit prices).(see Table 1 below).

Bottom Line

It appears that the housing slowdown is deepening, adding to the weakness in the overall economy. Some of the softening in February might have been weather-related, but tighter mortgage credit availability was no doubt an issue as well. Many are now calling for an easing in the stress test qualification rate from the posted five-year fixed rate, currently at 5.34%, to closer to the actual conventional rate, about 200 basis points lower.

Finance Minister Bill Morneau, who is set to deliver his pre-election budget next week, is also being pressured to extend mortgage terms from 25 years to 30 years to help ease the situation.

“For aspiring homebuyers being kept on the sidelines by the mortgage stress-test, it’s a bitter pill to swallow when policymakers say the policy is working as intended,” said Barb Sukkau, CREA’s president. “Fewer qualified buyers means sellers are affected too.”

Today’s housing release comes one day after Statistics Canada announced that Canadian home values fell last year for the first time in 30 years amid falling prices in the Vancouver region–the priciest in the country–even as household debt burdens hit another record high. The 0.6% decline in house prices is the first decrease in countrywide home values in data going back to 1990.

Households meanwhile experienced a rise in debt burdens at the end of last year, with the debt to disposable income ratio hitting a record 174% in the fourth quarter. The deterioration reflects a sharp slowdown in income growth at the end of 2018.

Canadians are also spending a larger proportion of their income on servicing the debt. The debt service ratio rose to 14.9%, the highest level since the fourth quarter of 2007.

In a separate report, the agency said new home prices fell 0.1% in January from a year earlier — the first decline since 2009. While the index doesn’t include condominiums, the weakness was driven by declines in the Toronto and Vancouver regions, which fell 1.5% and 0.3% respectively.