Year End Report – Michael Campbell – Verico Economic Consultant

Take a few minutes and read this interesting report by Michael Campbell.  He is one of Canada’s most respected Business Analysts and also the host of Canada’s top rated syndicated business radio shows, MoneyTalks.  Click below to download the PDF

Year End Report – 2016

Bank of Canada rate cut still on the table for 2018 – doesn’t mean mortgage rates will drop

There is no pressure in Canada to raise rates says VERICO Economist, Michael Campbell.

“While 3rd quarter economic growth was good, the recovery in energy in the aftermath of production cuts due to the Fort McMurray fires played a huge part.  After consistently revising their economic growth forecasts downward for the past four years, most financial institutions are predicting in the neighbourhood of 2 ½% growth in 2017,” says Mr. Campbell.

“Bank of Canada Chair, Stephen Poloz has been dropping broad hints that there is no rate hike until 2018 at the earliest.  In fact, he hinted last week that a rate cut was still on the table. But as we’ve seen in the last month that doesn’t mean that mortgage rates remain unchanged.  Mortgage rates are being influenced by the increase in bond yields and the reduction in competition from non-bank lenders in the aftermath of the new mortgage rules,” adds Mr. Campbell.

If you are in the market for a new home purchase or need to renew your mortgage, contact me to find out how raising rates will impact you.  As a mortgage professional, I can help you develop money saving strategies that will save you more over the lifetime of your mortgage.

Why homeowners and buyers can expect more mortgage rate hikes from the big banks

Falling government-bond yields are usually good for homeowners in Canada because mortgage rates tend to follow suit. Not this time.

Three of Canada’s biggest lenders have raised mortgage rates and more increases are expected as new regulations, a weak economy and higher costs prevent banks from capitalizing on lower borrowing rates in the debt market where they finance their mortgages.

“When you look at the funding picture, it’s getting more expensive for the banks,” Meny Grauman, a financial analyst at Cormark Securities in Toronto, said by phone Wednesday. “We’ve started to see cracks in credit and we know that’s probably going to continue to intensify. If it continues, the same logic that caused the banks to raise will continue to apply.”

The higher mortgage rates add to measures by the federal government and the national housing agency to cool the housing market, which the Bank of Canada has identified as one of the major risks to the economy. Housing prices in Vancouver and Toronto have almost doubled in the past decade, raising concern that a market crash could lead to a rash of loan defaults.

Even as speculation mounts the Bank of Canada could return interest rates to a record low this year, homeowners face higher mortgage costs as the banks look to protect their bottom lines in a deteriorating economy. This week, Royal Bank of Canada became the latest lender to raise its mortgage rates, following Toronto-Dominion Bank and Bank of Nova Scotia.

Rate cut

Yields on five-year benchmark government bonds, the part of the market where banks usually fund their mortgage lending, touched the lowest since August on Wednesday as new signs of slowing growth in China pushed the price of crude oil below US$35 per barrel. That led derivatives traders to assign a more than 50 per cent chance the Bank of Canada will cut the benchmark interest rate to its record low of 0.25 per cent by mid-year.

The only other time Canada’s benchmark interest rates were that low was 2009, and it kicked off a housing boom fueled by rising oil prices and cheap mortgage rates. This time around, bond yields are falling because the economic trouble is hitting much closer to home, with a deteriorating outlook for exports along with an inflated housing market.

The banks are feeling the pinch with higher borrowing costs as pressures on the economy make them look less credit-worthy. Investors now demand about 129 extra basis points of yield to hold five-year bonds from top-rated Canadian banks compared with government benchmark notes, the biggest premium tracked by Bloomberg data since 2010. That premium was 51 basis points at the end of 2009.

Paying up

“Given the Canadian banks are a play on the Canadian economy, a slowdown in the economy can’t really be seen as positive for the banks,” Kris Somers, a Canadian debt analyst at Bank of Montreal, said by phone from Toronto. “Banks are paying more money for debt than they have in the past.”

In addition to the higher borrowing costs generally, new government rules are also imposing higher costs on mortgage lending. Canada Mortgage & Housing Corp. increased the fees it charges banks to securitize mortgage debt and the Department of Finance increased the minimum down payment requirement for insured mortgages. The Office of the Superintendent of Financial Institutions, the bank regulator, also proposed higher capital buffers to back the loans. Canadian lenders hold 75 per cent of the country’s mortgages.

Margin buffer

With the bank increases, the rate on a five-year fixed mortgage at Royal Bank rises to 3.04 per cent on Jan. 8, from 2.94 per cent. The five-year variable rate, tied to the bank’s prime rate, rises to 2.6 per cent from 2.45 per cent. Toronto-based Royal is the country’s No. 2 bank by assets.

The government announcements were made to cool a housing market that’s been on a tear, with housing prices nationwide rallying 27 per cent in the last five years, according to the Canadian Real Estate Association. Vancouver and Toronto have outpaced other cities, prompting concern from the Bank of Canada and Fitch Ratings Inc., among others. Home sales flew to a record in Toronto and Vancouver in 2015 and prices continued their climb. The average price rallied 9.5 per cent to $609,110 in December in Toronto and jumped 19 per cent to $760,900 in Vancouver, according to those cities’ real estate boards.

The trend of banks maintaining a margin buffer even with lower costs in the public debt market started last year, when the Bank of Canada cut its overnight lending rate and the banks didn’t pass the full savings onto consumers through their prime lending rate. The prime rate is used to price everything from variable mortgage rates to lines of credit. The same thought process prevails this year, Grauman said, as banks try to eke out profit in a tough economic environment.

“‘Flat’ is the new ‘up,’” Grauman said. “You’re just trying to hold the line on your margin.”

 

Katia Dmitrieva and Ari Altstedter, Bloomberg News | January 7, 2016 4:34 PM ET

Property Purchase Transfer Tax Changes in BC – Finally!!!

Screen Shot 2013-04-29 at 9.55.28 AMThe government has announced, effective February 19, 2014, under the Property Transfer Tax (PTT) First-Time Home Buyers’ Exemption program, qualifying first-time buyers can buy a home worth up to $475,000 and be exempt from paying the tax.  The previous threshold was $425,000.

  • The purchase must be a principal residence and a first time purchase
  • The value must be $475,000 or less and registered on or after February 19, 2014
  • The partial exemption continues and will apply to homes valued between $475,000 and $500,000
  • This cost can not be incorporated into a mortgage, so it must come out of cash funds the buyers had to save along with their down payment.

PTT is calculated as 1% on the 1st $200,000 of the home value & 2% on the balance and is charged on all residential purchases.   With this change, the government estimates 1,700 additional first-time buyers will annually be eligible to save up to $7,500 in PTT when they buy their first home.   Every bit helps especially with the outrageous cost of living in the lower mainland and the ridiculous amount of tax we pay here!

Apparently government estimates this measure will cost $8 million in lost tax revenue each year.  And we are supposed to feel sorry for the government for lost revenue?   Despite the fact that B.C. has the highest home prices in Canada, the province perversely imposes one of the most onerous such taxes in Canada.  The Real Estate Board of Greater Vancouver points out that B.C.’s tax, introduced in 1987, “is structured to reflect home prices in the 1980s, not the prices home buyers pay today.”

We would all like to see  more changes to the Property Transfer Tax, but this is definitely a step in the right direction.

 

Housing market in Canada is unexpectedly rock strong

Couple in new homeIn the last couple of years, the analysts are unnecessarily predicting dwindling real estate market. However, the numerical figures in relation to consumer debt and home prices that need to be worried about is low. But the situation can take a negative turn if the consumers fail to understand the housing market.

The economists in Canada are skeptical because of the colossal collapse of the US housing market. Its effect is predicted to influence the Canadian real estate market. Well, it’s really difficult for the analysts to believe that Canada being closer in terms of geographical proximity can be so different.

In Canada, the housing market seems to have a firm grip as the condition is stable after a mild tremor followed with the tight mortgage lending standard. In the meantime, the condition of the consumer debt has reduced. Previously the scenario changed as the consumers in the Canada incurred overwhelming debt. The situation was quite similar to that of the US before it crashed. However, in last two quarters, the number of indebted consumers is dropping. In fact, the figure is not that high as it has been reported. The debt to income ratio is diminishing and reaching a sustainable level.

Canada can be in a similar condition like that of the US market if the housing prices rise with an increase in consumer indebtedness.

According to OECD report, Canada is considered as one of the overvalued housing markets in the world. Well, it is required to accept that both the price as well as debt are at undesirable level. However, the consumer debt is stably reducing, but housing prices needed to be stagnant for a few years to improve the housing affordability as income increases.

In reality, the OECD analysis is based on the high ratio of home prices to home rental costs. The economist, Adrienne Warren at the Bank of Nova Scotia opined that the rental properties have poor quality in comparison to the purchased ones. Therefore, comparing the monthly rent with one time purchase price can be a wrong calculation.
In fact, comparison should be drawn between rent and monthly payment as the interest rate is at record low. Well, this type of market condition may not stay low forever. It is expected to rise but in a snail’s pace in the next few years.

In the US, housing crash was ignored for years as only warning signs. But this type of alert signal is not identified yet in Canada. Well, the fraudulent mortgage lending was widespread while it is very rare in Canadian market. In America, people defaulted on their mortgage payment U.S. saw rising numbers of delinquent mortgage-holders. Fortunately, this number seems to be less as well as stable in Canada.
But Canada needs to be cautious of two thing that can bring economic downturn– a very big rise in unemployment and increase in the interest rate.

This article is a contribution from  http://www.mortgagecases.com/

 

Canada’s impending housing collapse not in sight

LOWEST RATE MORTGAGEOTTAWA — Not so fast. The purported collapse of Canada’s housing market does not appear to be in sight, and any correction down the road could likely be a mild one.

Recent data have defied warnings from market watchers of an impending plunge — caused mainly by the impact of tighter mortgage rules imposed by the federal government last summer to slow the race by consumers for record-low lending rates.

The latest figures show sales of existing homes strengthened for a second month in May, up by a seasonally adjusted 3.6%, after declining 10% between July and March.

The Canadian Real Estate Association, in a report Monday, also said home prices were up 3.7% in May from the same month a year earlier, to a national average of $388,910.

For all of this year, CREA pegs the average price rise at 2.1%, to $370,900, weaker but far removed from correction territory. And in 2014, the average value is expected to rise 1.8% to $377,700, the Ottawa-based industry group said.

“Prices remain stable, perhaps maddeningly so for the legions of bubble mongers,” said Douglas Porter, chief economist at BMO Capital Markets.

Mr. Porter noted the May data show “housing remains on track for a fabled soft landing … making a mockery of talk of an imminent collapse.”

    Prices remain stable, perhaps maddeningly so for the legions of bubble mongers

While CREA still anticipates sales to fall 2.5% in total during 2013 compared to 2012 — to 443,400 units from 454,573 — home buying should rebound to 464,300 units in 2014, a jump of 4.7%.

Last July, Finance Minister Jim Flaherty announced stricter mortgage lending rules, the fourth such move in four years. The changes included a shorter amortization period for mortgages insured by government-owned Canada Mortgage and Housing Corp. in an effort to limit lending to those least able to afford it.

Mr. Flaherty went even further, subsequently warning banks not to pursue “race-to-the-bottom” rates for mortgages that could further pile on household debt beyond already record-high levels and reignite those concerns over a possible housing bubble.

Much of his expressed concern was focused on condominium building in Toronto and Vancouver, which it was feared might result in a glut and possible crash in those markets.

“History tells us that the impact from changes to mortgage insurance rules tend to be temporary, lasting up to three quarters,” said Diana Petramala, at TD Economics.

Ms. Petramala agrees Canada’s housing market appears to be headed for a soft landing, “with sales and prices growing at more sustainable levels than had been the case through 2010 and 2011.”

The spark that helped ignite the housing frenzy initially came from policymakers at the Bank of Canada. Led by then-governor Mark Carney, the bank slashed its trendsetting lending rate to 25 basis points in 2009 to spur spending by households and businesses coming out of the recession.

While that rate was subsequently raised to 1% in September 2010, it has not been adjusted since. Many economists do not expect that to change until at least late 2014.

“As long as interest rates stay low, affordability will remain relatively high. We have many times changed the mortgage rules, and we were attacking the wrong source of the problem,” said Charles St-Arnaud, an economist at Nomura Global Economics in New York.

History tells us that the impact from changes to mortgage insurance rules tend to be temporary

“The reason why the housing market was so strong was, basically, interest rates were so low. The issue was not the availability of credit, it was the price at which it was given,” he said.

“If you were to give the same availability but, let’s say, 200 basis points higher, I don’t think we would be here in terms of the housing market.”

Mr. Carney has also been adamant — along with Mr. Flaherty — that consumers need to tighten their belts, warning household debt posed the biggest threat to the Canadian economy.

That mantle of concern has been passed to Stephen Poloz, who on June 3 replaced Mr. Carney — soon to be the new Bank of England governor.

Mr. Poloz delivers his first public speech on Wednesday. Titled “Recovery: Rebuilding Confidence in Canada,” he is expected to touch on business and consumer spending during his address and a news conference that follows.

Gordon Isfeld | 13/06/17 | Last Updated: 13/06/17 4:51 PM ET
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Canadians are paying off mortgages quickly — so is Ottawa’s crackdown really necessary?

Surrey Mortgage BrokerCanadians end up paying off their mortgages in about two-thirds of the time originally intended, according to a new survey which questions whether Ottawa’s crackdown on the real estate market is needed.

The Canadian Association of Accredited Mortgage Professionals predicts Toronto faces an especially big slowdown, with construction to drop off more than 50%

A report by the Canadian Association of Accredited Mortgage Professionals released Wednesday paints us as a very conservative lot not in need of increased government regulation.

The group notes of the mortgages paid off in 2010-2013, the original amortization length was on average 17.9 years but ended up with an actual amortization length of 11.7 years.

Despite the fact Canadians pay off their mortgages quickly, the federal government has continually cracked down on amortization of insured mortgages it backs. The length of amortizations — a longer amortization lowers monthly payments and allows consumers to qualify for larger mortgages at the expense of paying more interest — has been dropped from a high of 40 years to the present 25 years.

Consumers may have gotten the message. Amortization lengths have shrunk since Ottawa started dropping the maximum length. From 2005-2009, mortgages paid off during the period had an average original amortization lengths of 19.9 years compared with an average actual amortization length of 12.8 years.

Now CAAMP is arguing that changes to government rules have actually gone too far and have resulted in a 15% decline in new home construction this year from highs reached in 2011 with a further 25% to 30% predicted by 2015, which would cost 150,000 jobs.

Garry Marr | 13/05/22 | Last Updated: 13/05/22 6:53 PM ET

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Transition Year Expected for BC Housing Market

Vancouver, BC – May 9, 2013. The British Columbia Real Estate Association (BCREA) released its 2013 Second Quarter Housing Forecast today.

BC Multiple Listing Service® (MLS®) residential sales are forecast to edge up 1.9 per cent to 68,900 units this year, before increasing a further 6.5 per cent to 73,400 units in 2014. The five-year average is 74,600 unit sales, while the ten-year average is 86,800 unit sales. A record 106,300 MLS® residential sales were recorded in 2005.

“Stricter mortgage credit regulation combined with slower economic growth has kept BC home sales at a cyclical low over the past three quarters,” said Cameron Muir, BCREA Chief Economist. “However, a faster growing economy is expected during the second half of the year and through 2014 which will support a growth trend in provincial housing demand.”

“The BC average home price forecast is revised upward for 2013, from a decline of 1 per cent to remaining unchanged, as a result of stronger than expected market conditions in Vancouver,” added Muir. The average MLS® residential price in BC is forecast at $515,800 this year, before rising 1.7 per cent to $524,500 in 2014.

BCREA 2013 Second Quarter Housing Forecast

Even in a real estate slump, Canadians lured into bidding wars

People still willing to jump into real estate bidding wars might want to ask themselves why they want to be part of such a buying frenzy in this softening market.

It always costs you, if you are buying. But apparently some Canadians are still willing to do the bidding of organized real estate and go to war over price.

A new survey from Bank of Montreal finds 72% of buyers are unwilling to get into a bidding war. Among first-time buyers, 37% are willing to go “over budget,” BMO said in a news release Tuesday.

Taken the other way, there are still 28% of people ready to play this shell game and it’s even higher among the novices who might not be expected to know better.

First of all, people need to understand that the whole idea of a so-called asking price is nothing more than an artificial construct. It’s meaningless, many times just a marketing game to draw people into the home.

There was a case two years ago where an agent purposely listed a home for $1 in Toronto to attract interest. That would be a heck of a market crash.

Real estate sellers have the option of listing something for sale at a certain price with zero obligation to sell it at that price. I’d love to see a retailer try that trick.

In the $1 sale, no buyer made an offer for what the seller really wanted and no sale took place — at least based on that marketing trick.

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“All that really matters is the actual sale price,” says noted housing bear Dave Madani, an economist with Capital Economics who has called for a 25% reduction in Canadian home prices.

The problem for would-be buyers is an auction process that leaves them blind to what the other guy is bidding.

It’s not a guy with a gavel yelling out “do I hear” this much for the house. It’s an agent telling you you are not the only bidder and you should come in with your “best price” or potentially lose the property.

You could have a home listed for $500,000, you bid $525,000 because there is one other offer and never find out that the other offer was for $480,000.

The multiple offer game creates an inflationary environment that these days the real estate market just might need. The latest statistics from the Canadian Real Estate Association show average prices in Canada up 2.2% from a year ago. March sales were off 15.3% from a year ago and active listings are still climbing in many markets.

Of course, real estate is a very local game. And many of you just want that property on the part of the street that is in the school district you crave.

“In a housing boom, when you’ve got multiple people bidding, the buy side becomes crowded. Prices can lose touch with fundamentals. Bidding wars are part of the housing bubble narrative,” said Mr. Madani.

Laura Parsons, a mortgage expert at Bank of Montreal, said there are number of variables that produce a bidding war and that includes a shortage of listings.

It’s called the winner’s curse

“If there is not a lot to choose from, that creates an anxiety in buyers,” said Ms. Parsons. “You can have variables like the time of year, your need to get your kids in school.”

The online survey was conducted among 2,000 Canadians 18 and older between Feb. 25 and March 3 and is considered accurate to within 2.2 percentage points, 19 times out of 20 based on most studies of that size.

“[Buyers] can be very anxious. You know when you see a sale on in the mall at Christmas, everybody wants it and they come and say after ‘why did I buy this’,” says Ms. Parsons.

There is something called game theory in economics which Mr. Madani says causes people to bid on something just for the sake of winning. “It’s called the winner’s curse,” he says.

If you’re part of a bidding war, maybe you need to ask if you’ve put a hex on yourself based on today’s real estate market.

The Financial Post – Garry Marr | 13/04/23 | Last Updated: 13/04/23 6:34 PM ET
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