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

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.