30 Oct

Latest in mortgage news: Equitable Bank unveils 40-year amortization mortgage

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Posted by: Dean Kimoto

Equitable Bank has announced that, in partnership with a third-party lender, it is introducing a new 40-year amortization mortgage product.

Equitable, Canada’s seventh-largest bank, which provides both prime and alternative lending options, made the exclusive announcement at the National Mortgage Conference that took place in Toronto.

By extending the amortization period beyond the standard 25 or 30 years, the bank seeks to lower monthly payment obligations, making home ownership or investment in properties more accessible amidst the current economic and affordability challenges.

As part of the funding structure for this product, Equitable has partnered with a third-party lender, meaning Equitable will not take on any credit or default risk as the loans won’t appear on its balance sheet.

In essence, Equitable will act as the originator and service provider to its funding partner, providing the underwriting, closing and servicing over the life cycle of the loans.

Here’s what we know about the product:

Product Availability

  • The product will cater not only to regular owner-occupied purchases and refinances, but also to rental properties and investor portfolios
  • Initially, it will be available in British Columbia, Alberta and Ontario, with a vision for expansion based on its success and market demand.
  • Specific target markets will be based on where there is high demand and where it is likely to benefit clients the most

Launch date:

  • Details of the product are expected to be available to mortgage professionals this week

Pricing:

  • Although exact pricing was not yet available, rates are expected in the 9% range given that this is an uninsured alternative lending product with an extended amortization and potential higher risks

Response to market conditions:

  • The product is being introduced at least partially in response to affordability concerns exacerbated by high prices and the rising cost of living. CMT was told it aims to provide financial relief for clients seeking debt consolidation through refinancing, as well as those looking to purchase in challenging economic circumstances.


“Sizeable” rate hike impacts yet to be felt: National Bank

Following the release of declining retail sales in August, National Bank said consumer consumption is expected to remain weak for “some time” given the lag of previous rate hikes.

“Given the long lag between interest rate hikes and their full impact on consumption, there is every reason to believe that weakness will continue for some time, economists Matthieu Arseneau and Alexandra Ducharme wrote in their research note.

By the Bank of Canada’s own estimation, the impact of interest rate hikes can take up to eight quarters, or two years, to be entirely felt at the consumer level.

“…we calculate that 42% of the impact of the huge rate hikes announced since March 2022 has yet to be felt,” Arseneau and Ducharme noted.

“For this reason, it would be perilous for the Central Bank to focus on the resilience of core inflation in its rate decision [this] week, as this indicator reacts with a lag to the economic situation which looks set to be moribund over the next 12 months,” they added. “We expect the Bank to hold its policy rate steady [on] Wednesday.”

One in six mortgage holders finding their mortgage “very difficult”

A new survey has found that one in six mortgage holders (15%) say they find their mortgage payments “very difficult.”

That’s double the amount compared to March, according to the Angus Reid Institute.

Even if the Bank of Canada leaves rates unchanged going forward, many mortgage holders say they are concerned about the financial impact at the time of their mortgage renewal.

The survey found 40% are worried while 39% are “very worried” about the prospect of higher payments at renewal.

Those facing renewal in the next year are most concerned, with 57% saying they are “very worried” that their monthly payments will rise significantly.

Meanwhile, nearly half of all Canadians (49%) say they are in a worse financial position than they were compared to a year ago.

More than 6 in 10 Canadians (61%) are spending more than the CMHC’s recommended limit of 30% of pre-tax income on housing.

That’s according to a Leger survey commissioned by ratefilter.ca, which surveyed both renters and homeowners.

On average, Canadians are spending 41% of their pre-tax income on housing. Meanwhile, Canada’s housing agency, the Canada Mortgage and Housing Corporation (CMHC), recommends a limit of 30%.

Consumer confidence dips into negative territory

For the first time since April, consumer confidence in Canada has fallen into negative territory, according to a weekly survey by Bloomberg and Nanos.

The Bloomberg Nanos Canadian Confidence Index (BNCCI) fell to 49.45, down from 50.93 four weeks ago and a 12-month high of 53.12. A score below 50 indicates a net negative economic outlook by Canadians. The average for the index since 2008 is 55.58.

The outlook on real estate dipped to 40.79 (from 45.12 four weeks ago), while sentiment on personal finances fell to 13.68 (from 16.04).

This article was written for Canadian Market Trends by:

27 Oct

OSFI report reveals largely unknown mortgage exemption: no stress test on insured switches

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Posted by: Dean Kimoto

Many in the mortgage industry reacted with surprise after learning about a little but very important nugget buried in an OSFI report released earlier this week.

In its report on industry feedback concerning its proposed underwriting changes to B-20, Canada’s banking regulator said this:

“Insured borrowers…are exempt from the re-application of the MQR (Minimum Qualifying Rate) when switching lenders at renewal. This is because the borrower’s credit risk has been transferred for the life of the loan to the mortgage insurer.”

The revelation caught many mortgage professionals off guard. Based on current lending practices, it had been widely presumed that the mortgage stress test on transactionally insured mortgages (borrower-paid), which falls under the purview of the Department of Finance, was federally mandated for both purchases and mortgage switches.

In a statement to CMT, default-mortgage insurer CMHC confirmed the practice.

“It has been a long-standing policy to allow the transfer of a CMHC-insured loan from one Approved Lender to another subject to certain terms and conditions, which include the requirement that the loan is not increased and continues to amortize in accordance with the amortization period approved by CMHC,” the agency said.

It’s important to note that even though the Department of Finance doesn’t require insured switches to be re-qualified under its mortgage stress test, lenders may still choose to do so at their own discretion.

“It is expected that an Approved Lender complete due diligence reviews when accepting the transfer of CMHC-insured loans, as in so doing they assume all responsibilities of the original Approved Lender,” CMHC added.

  • What is the mortgage stress test? The mortgage stress test for default-insured mortgages (those with a down payment of less than 20%), was introduced by the Department of Finance in 2016. Similar to the stress test for uninsured mortgages, which is overseen by OSFI, borrowers must qualify at the higher of the MQR (currently 5.25%), or two percentage points above their contract rate, whichever is higher. In today’s high rate environment, practically all mortgages are being qualified at the latter.
  • What is a mortgage switch? A mortgage switch is the process of a borrower taking their existing mortgage from one lender to another, either at or prior to renewal.

“We recognize that this may be new information to some brokers and lenders,” Lauren van den Berg, President and CEO of Mortgage Professionals Canada, told CMT. “However, this does not mean that lenders will not conduct their own prudential risk assessment, such as employment or income verification, to mitigate against any fraud or misrepresentation.”

Tyler Hildebrand, a mortgage broker with Saskatchewan-based oneSt. Mortgage, said he was excited to learn about the exemption, particularly since he believes it will lead to more choice for borrowers and should “open up the competitive landscape” for the vast majority of his high-ratio clients.

“There’s no question that a certain percentage of borrowers had the impression that they had no choice but to accept a less-than-attractive offer from their existing lender,” he said.

For OSFI’s part, while uninsured mortgage switches still face re-qualification under its own stress test, the regulator says it will “continue to monitor for evidence of uncompetitive rates for borrowers who may be unable to switch lenders, and we will take action if warranted.”

More insured switches are likely to take place, some say

Now that this exemption is becoming widely known, expect to see more lenders stepping in to offer these kinds of deals and brokers offering switches as an option to their insured mortgage clients, some say.

“Small lenders are likely to step up and offer it,” Ron Butler of Butler Mortgage told CMT.

Hildebrand agrees that they’re about to become more prevalent.

“I imagine in short order the entire landscape will adopt the policy pretty quickly,” he said, adding that will be a good thing for borrowers.

“Increased consumer choice, especially in a rising rate environment, will protect a lot of borrowers from a ‘take it or leave it’ type scenario,” he noted. “That said, I don’t believe this will have a material, or really any impact on market rates.”

Sources told CMT that just two lenders, Radius Financial and THINK Financial, were aware of the exemption prior to this week and had already been doing insured mortgage switch deals.

Dan Eisner, founder of THINK Financial, told CMT the news that insured switches aren’t federally mandated to be re-qualified under the stress-test is a bit of a “red herring.”

“Just because the insurer doesn’t require a new stress test doesn’t mean the lender doesn’t,” he said.

Asked when he first became aware of the exemption in the federal regulation, Eisner said “it was always a fact.”

“These were always the rules. The government didn’t hide anything here,” he said. Eisner added that the volume for these kind of deals is “very small,” and that he doesn’t expect many lenders will rush to offer them.

Switches still require thorough underwriting

While many in the industry are learning that insured switches don’t need to be qualified under the mortgage stress test, Canada’s national association representing mortgage professionals made clear that default-insured mortgage switches still face rigorous underwriting standards.

“As is well known, lenders are required to immediately report to the mortgage insurers if false or misleading information has been provided or is suspected in an insured mortgage application,” MPC’s van den Berg noted. “If a lender does not do an appropriate risk assessment and misrepresentation is found, any insurance claim may be null and void leaving them responsible.”

Hildebrand echoed the stringent due diligence that takes place for such deals.

“On a switch to a new lender, the file receives full underwriting, including an evaluation of LTV and verification of income,” he said. “There is no situation where a lender or investor would onboard risk without properly assessing said risk.

 

This article was written for Canadian Mortgage Trends by:

25 Oct

Bank of Canada maintains policy rate, continues quantitative tightening

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Posted by: Dean Kimoto

The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is continuing its policy of quantitative tightening.

The global economy is slowing and growth is forecast to moderate further as past increases in policy rates and the recent surge in global bond yields weigh on demand. The Bank projects global GDP growth of 2.9% this year, 2.3% in 2024 and 2.6% in 2025. While this global growth outlook is little changed from the July Monetary Policy Report (MPR), the composition has shifted, with the US economy proving stronger and economic activity in China weaker than expected. Growth in the euro area has slowed further. Inflation has been easing in most economies, as supply bottlenecks resolve and weaker demand relieves price pressures. However, with underlying inflation persisting, central banks continue to be vigilant. Oil prices are higher than was assumed in July, and the war in Israel and Gaza is a new source of geopolitical uncertainty.

In Canada, there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures. Consumption has been subdued, with softer demand for housing, durable goods and many services. Weaker demand and higher borrowing costs are weighing on business investment. The surge in Canada’s population is easing labour market pressures in some sectors while adding to housing demand and consumption. In the labour market, recent job gains have been below labour force growth and job vacancies have continued to ease. However, the labour market remains on the tight side and wage pressures persist. Overall, a range of indicators suggest that supply and demand in the economy are now approaching balance.

After averaging 1% over the past year, economic growth is expected to continue to be weak for the next year before increasing in late 2024 and through 2025. The near-term weakness in growth reflects both the broadening impact of past increases in interest rates and slower foreign demand. The subsequent pickup is driven by household spending as well as stronger exports and business investment in response to improving foreign demand. Spending by governments contributes materially to growth over the forecast horizon. Overall, the Bank expects the Canadian economy to grow by 1.2% this year, 0.9% in 2024 and 2.5% in 2025.

CPI inflation has been volatile in recent months—2.8% in June, 4.0% in August, and 3.8% in September. Higher interest rates are moderating inflation in many goods that people buy on credit, and this is spreading to services. Food inflation is easing from very high rates. However, in addition to elevated mortgage interest costs, inflation in rent and other housing costs remains high. Near-term inflation expectations and corporate pricing behaviour are normalizing only gradually, and wages are still growing around 4% to 5%. The Bank’s preferred measures of core inflation show little downward momentum.

In the Bank’s October projection, CPI inflation is expected to average about 3½% through the middle of next year before gradually easing to 2% in 2025. Inflation returns to target about the same time as in the July projection, but the near-term path is higher because of energy prices and ongoing persistence in core inflation.

With clearer signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. However, Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed. Governing Council wants to see downward momentum in core inflation, and continues to be focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Information note

The next scheduled date for announcing the overnight rate target is December 6, 2023. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR on January 24, 2024.

This article was published on the Bank of Canada website.

23 Oct

OSFI shelves some of its regulatory proposals in response to stakeholder feedback

General

Posted by: Dean Kimoto

Canada’s banking regulator confirmed today that it will no longer pursue at least several of the proposed mortgage regulations it had introduced earlier this year after they were met with widespread concern and criticism during its public consultation period.

Nine months after the Office of the Superintendent of Financial Institutions (OSFI) unveiled its proposed measure related to debt serviceability and kicked off a public consultation period, the regulator today released the results of its discussions with industry stakeholders.

“The majority of stakeholders agreed that risks to lenders arising from high household indebtedness are important,” OSFI concluded in a report published today. “However, stakeholders were generally not supportive of additional debt serviceability measures.”

Respondents warned that OSFI’s latest proposed measures would have a disproportionate effect on smaller institutions with unique business models and wouldn’t adequately address the root cause of Canada’s household debt problem.

However, OSFI confirmed that it would no longer pursue two of its proposals at this time: debt-to-income (DTI) restrictions (while keeping LTI restrictions on the table) and debt service loan coverage restrictions.

While these comments were included in OSFI’s consultation feedback report, it hasn’t yet made final decisions in terms of the implementation of its remaining proposals.

In January, OSFI asked the public for feedback on three new regulatory changes to Guideline B-20 which were intended to restrict mortgage lending in response to record levels of household indebtedness.

Stakeholders expressed concerns over the proposed changes

The proposals included loan-to-income (LTI) and debt-to-income (DTI) restrictions, debt service coverage restrictions and more “risk-sensitive” interest rate affordability stress tests.

The following is the feedback OSFI received in response to each proposal.

Loan-to-income (LTI) and debt-to-income (DTI) restrictions

Specifically, the proposed LTI and DTI restrictions would limit lenders to a certain volume of loans that exceed a “prudent” threshold “to help financial institutions better manage the risks associated with significant buildups of household debt in their loan books,” according to OSFI’s Annual Risk Outlook semi-annual update. This would effectively cap 75% of all mortgage customers to loan amounts of up to 450% of their income.

According to the feedback published on Monday, respondents were generally not supportive of the measure, suggesting some would be redundant, too late to implement effectively and would disproportionately impact smaller lenders.

OSFI’s response:

“We consider a DTI (total indebtedness) restriction to be too complex to implement at this time,” it said in the report.

“We agree that debt service ratios (i.e., GDS and TDS), under certain conditions, can produce similar outcomes to LTI/DTI although they are focused on debt affordability as opposed to limiting exposure to high indebtedness. We also acknowledge that most lenders do not use LTI/DTI measures in underwriting,” it added. “We also believe proportional implementation, versus a one-size-fits-all approach, would be most appropriate given differences in FRFIs’ business models.”

“We appreciated lenders’ analysis on predictors of default and agree that credit score and other factors can be better predictors than high LTI or DTI,” OSFI noted. “That said, high household indebtedness is still relevant to credit risk, the safety and soundness of FRFIs, and the overall stability of the financial system.”

Debt-service coverage restrictions

This would involve measures that restrict ongoing debt service (principal, interest and other related expenses) obligations as a percentage of borrower income.

Respondents expressed “mixed views,” with some supporting a qualifying amortization limit but most expressing opposition to regulatory limits and alignment with insured mortgage criteria. Instead, the feedback found strong support to preserve the lender-determined risk-based limits and criteria for debt service coverage.

OSFI’s response:

“We believe there is merit in lenders applying an explicit, qualifying amortization limit and we will continue to evaluate this proposal,” OSFI said. “Such a limit would add more rigour to qualifying debt service calculations while still permitting lenders flexibility to offer a longer contractual amortization to some qualified borrowers.”

However, OSFI added that “After careful consideration of stakeholder feedback, we agree that regulatory limits on debt service coverage should not be pursued. While such limits could result in greater consistency, they would remove too much risk-based decision-making and risk ownership from lenders.

Interest rate affordability stress test

This measure would impose a more “risk-sensitive” test beyond the current Minimum Qualifying Rate (currently 5.25%), including implementing different MRQs for different product types, such as mortgage terms.

Respondents were similarly opposed to MQR adaptations and other affordability tests, specifically due to the negative effect on other public policy objectives and concerns over unintended consequences.

OSFI adds that any regulatory measures it considers would be implemented “incrementally and sequentially” with debt service coverage measures taking the priority, followed by adjustments to the MRQ, with an LTI limit as a last resort.

OSFI’s response:

“We will continue to reflect on how best to encourage lenders to apply more rigorous affordability tests, especially when higher risk attributes are present in a mortgage application. We should be able to observe variation in qualifying debt service ratios as evidence of this,” OSFI said.

“Encouraging longer borrowing terms and payment stability through MQR design has merit from a risk perspective.”

Other feedback

In addition to feedback specifically on the three proposals, respondents also commented on the importance of improved income verification in deterring mortgage misrepresentation.

They suggested that OSFI could work with the Canada Revenue Agency (CRA) to allow independent income verification, something Mortgage Professionals Canada has identified as a priority as part of its advocacy initiatives.

“We welcome any initiative that advances our B-20 expectation that FRFIs use income sources that are independently verifiable and difficult to falsify. We and our federal financial sector partners are aware of ongoing CRA efforts in this regard,” OSFI said.

Respondents also encouraged a focus on higher risk markets like the Greater Toronto and Vancouver markets, though OSFI said it’s against any geography-based measures, as vulnerabilities and risks are common regardless of geography.

At the end of the day, OSFI agrees with other industry watchers in acknowledging the only real way to address Canada’s housing affordability crisis is by addressing supply shortages.

“We believe that housing market imbalances are driven by both demand and supply-side factors,” the report states. “Adequate housing supply that keeps pace with demographic needs supports a stable, well-functioning mortgage market and the broader Canadian economy.”

20 Oct

Residential Mortgage Commentary – Housing starts stagnate

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Posted by: Dean Kimoto

While Canada’s main political Parties have been doing a lot of talking about getting people into homes, actual construction continues to lag.

The latest figures from Canada Mortgage and Housing Corporation show housing construction, in the country’s six biggest metropolitan areas, increased by a mere 1.0% in the first half of 2023, compared to a year earlier.  That small increase was driven by apartment starts which were up 15% (48,029 units) for the period.  All other categories were down.  Row house starts dipped 17%, semis dropped 22% and the benchmark, detached single-family home fell 25%.

Two markets dominated the numbers.  Toronto and Vancouver accounted for nearly two-thirds of the starts with increases of 32% and 49%, respectively.  Montreal took the biggest hit with a 58%, overall decline.

In a previous report CMHC said that by 2030 Canada needs to build 3.5 million additional housing units, over and above the 2.3 million that are already forecast, in order to meet the expected demand.

The housing agency says high interest rates, reduced access to credit and elevated costs for construction and labour have put homebuilders in a tough spot.  That has led to a reduction in project starts and an increase in completion times.

CMHC says it expects the economic challenges to take an even bigger bite out of building starts through the second half of the year, with starts dropping back to levels seen last year.  The agency also expects to see an ongoing increase in demand for rental housing driven by record high levels of immigration and the ever-rising barriers to home ownership, including high prices and high interest rates.

 

This article was written by the First National Financial LP marketing team.

16 Oct

Home listings surge and buyer demand cools in Canada’s largest markets

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Posted by: Dean Kimoto

Real estate listings in the country’s largest metro areas continued to grow in September while buyer demand is trending downward.

The shifting market dynamic was so pronounced in the greater Vancouver and Toronto areas that they are now officially in a buyer’s market.

New listings in the GTA were up 44% in September to a total of 16,258 properties. The increase was even more pronounced in the city’s downtown condo market where listings are up 50% compared to last year.

Listings were also up in other cities, but to a lesser degree, including Vancouver (+28%), Calgary (+21%) and Ottawa (+10%).

“The most striking trend that emerged in recent months has been the return of sellers to the housing market,” noted RBC’s Robert Hogue. “The factors driving this trend are many but soaring interest costs no doubt are prompting a growing number of owners to move.”

Analyst Ben Rabidoux of Edge Realty Analytics notes that Toronto’s new listings are now “well above” typical levels, which has pushed the sales-to-new listings ratio down to levels not seen since the Financial Crisis in 2008.

“This market is severely tilted towards buyers, and it looks like significant price declines are on deck,” he wrote in a note to clients.

Expect this trend to continue

Hogue says the trend of growing inventory and falling prices is likely to continue as long as interest rates remain high and continue to impact affordability.

“We expect little change in this broad picture in the months ahead. We think buyers will stay on the defensive in many parts of Canada despite more choice becoming available to them,” he wrote, adding that high interest rates, ongoing affordability issues and a looming recession are “poised to pose major obstacles.”

“Any material acceleration in the market recovery will have to wait until interest rates come down in 2024,” he added.

Regional housing market roundup

Here’s a look at the September statistics from some of the country’s largest regional real estate boards:

QUICK LINKS:

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Greater Toronto Area

September 2023 YoY % Change
Sales 4,642 -7.1%
Benchmark price (all housing types) $1,119,428 +3%
New listings 16,258 +44.1%
Active listings 18,912 +39.8%

“GTA home selling prices remain above the trough experienced early in the first quarter of 2023. However, we did experience a more balanced market in the summer and early fall, with listings increasing noticeably relative to sales,” said TRREB chief market analyst Jason Mercer.

“This suggests that some buyers may benefit from more negotiating power, at least in the short term. This could help offset the impact of high borrowing costs.”

Source: Toronto Regional Real Estate Board (TRREB)


Greater Vancouver Area

September 2023 YoY % Change
Sales 1,926 +13.2%
Benchmark price (all housing types) $1,203,300 +4.4%
New listings 5,446 +28.4%
Active listings 11,382 +9.2%

“A key dynamic we’ve been watching this year has been the reluctance of some homeowners to list their homes given that mortgage rates are the highest they’ve been in over 10 years,” said Andrew Lis, REBGV Director of Economics and Data Analytics.

“With fewer listings coming to the market earlier this year than usual, inventory levels remained very low, which led prices to increase throughout the spring and summer months.”

Source: Real Estate Board of Greater Vancouver (REBGV)


Montreal Census Metropolitan Area

September 2023 YoY % Change
Sales 2,738 +9%
Median Price (single-family detached) $549,000 +3%
Median Price (condo) $402,000 +6%
New listings 5,872 +2%
Active listings 16,398 +10%

“The Montreal CMA market continued to stabilize in September, with transactional activity comparable to that of a very quiet month of August. If sales are up compared to the same period last year, it is because 12 months ago activity had started to drop towards an all-time low,” said Charles Brant, Director of the QPAREB’s Market Analysis Department.

“While the economic context is deteriorating against a backdrop of persistent inflation, the new wave of interest rate hikes at the start of summer translated into a more cautious approach by buyers in September,” he added. “For their part, sellers are trying to cash in their added value while market conditions, supported by a solid migratory flow, are still favourable to them.”

Source: Quebec Professional Association of Real Estate Brokers (QPAREB)

Calgary

Calgary housing statistics
September 2023 YoY % Change
Sales 2,441 +29%
Benchmark price (all housing types) $570,300 +8.7%
New listings 3,191 +21.6%
Active listings 3,369 -24.5%

“Supply has been a challenge in our market as strong inter-provincial migration has elevated housing demand despite higher lending rates,” said CREB Chief Economist Ann-Marie Lurie. “While new listings are improving, it has not been enough to take us out of sellers’ market conditions.”

Source: Calgary Real Estate Board (CREB)


Ottawa

September 2023 YoY % Change
Sales 946 No change
Average Price (residential property) $675,412 +2.7%
Average Price (condominium) $425,968 +1%
New listings 2,259 +9.8%
Active listings 2,997 +14%

“Sales activity came in right on par with where it stood at the same time last year but was still running well below typical levels for a September,” said OREB President Ken Dekker.

“New listings have surged in the past several months, which has caused overall inventories to begin gradually rising again. However, available supply is still low by historical standards, and we have ample room to absorb more listings coming on the market,” he added. “Our market is also right in the middle of balanced territory, and while MLS Benchmark prices are down from last year they are still trending at about the same levels from 2021.”

Source: Ottawa Real Estate Board (OREB)

This articel was written for Canadian Mortgage Trends by:

13 Oct

Residential Mortgage Commentary – Positive housing market sentiment

General

Posted by: Dean Kimoto

An interesting new survey suggests a growing number of Canadians may be getting ready to move back into the housing market.

The newly launched survey by Dye and Durham indicates one in ten are looking to sell their primary residence and move into a new one within the next 12 months; double the number who made the move in the past year.

The number of respondents planning to expand their holdings is also up significantly with 8.0% saying they intend to buy an investment property or vacation home in the next year.  That is nearly double the 5.0% who did so in the past year.  First-time buying decisions are also getting stronger.  Eight percent of respondents expect to jump into the market, up from 4.0% who actually made a purchase in the last 12 months.

The sidelines of the housing market will still be crowded though.  The survey suggests 23% of Canadians will bide their time until interest rates come down.  Nearly a quarter (24%) say they are waiting for prices to ease.

A separate survey of people who have bought a home in the last 4 years (by a popular real estate marketplace) shows that the buying decisions of 93% of respondents were influenced by rising interest rates and competitive markets.  At the same time 43% said they wanted to buy before prices increased further.

Nearly a third (30%) of the respondents say their finances are tight right now, with 10% saying they are unable to meet basic needs.  Still, they do not regret their purchase with 45% saying they will still be happy even if there is another interest rate increase this year.

This article was written by First National’s marketing team.

9 Oct

Larger and more regular price hikes by businesses keeping inflation “sticky,” says BoC

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Posted by: Dean Kimoto

The Bank of Canada says larger and more frequent price increases by businesses have contributed to keeping inflation higher than the Bank would like.

The comments were made by BoC Deputy Governor Nicolas Vincent during a speech on Tuesday on the topic of pricing practices and monetary policy.

Vincent said the way in which businesses set their prices has changed “substantially” since the pandemic.

“Price increases were larger than normal during this period, driven by the higher costs that firms were facing and helped along by strong demand,” he said, adding that the increases have been more frequent than normal. “We believe that this behaviour by firms—both here and abroad—is intimately linked to the stronger-than-expected inflation we’ve seen.”

After reaching a peak of 8.1% last June, headline CPI inflation then fell to a low of 2.8% this summer, but has since risen again to 4%.

Vincent said that inflation has proven “stickier than many expected,” due in part to global supply disruptions and higher commodity prices that have pushed the cost of goods and transportation higher.

But the impact of price setting by businesses has been another factor that, until recently, the Bank hadn’t fully factored into its modelling, Vincent said.

Previously, most firms avoided frequent price changes for a variety of reasons, Vincent noted, including its complexity, the cost of doing so and for competitive reasons.

But while this is the case in an environment of low and stable inflation, Vincent said the Bank’s previous assumptions about price-setting “may not be appropriate in all situations.”

“When costs are rising fast and demand is robust…we may expect firms to have larger and more frequent price adjustments,” he said. “And while pricing behaviour has been shifting closer to normal since the beginning of the year, progress is slow.”

The government’s response

On the issue of rapidly rising prices, the federal government took direct aim at Canadian grocers last month for what it deems as excessive profits having been made “on the backs of people who are struggling to feed their families,” Prime Minister Justin Trudeau said.

NDP leader Jagmeet Singh has also been critical of the country’s grocery CEOs, noting that food prices have outpaced inflation for 21 months in a row.

As a result, the government has asked the five largest grocery companies to come up with a plan to stabilize food prices by Thanksgiving.

The Retail Council of Canada, however, said any discussions on food pricing would also need to include other relevant businesses in the supply chain, including processors and manufacturers.

Vincent said the current situation drives home the need for the Bank of Canada to get inflation back to its 2% target, which he said would bring back the competitive forces in the economy.

“When inflation is low, price changes stand out more. This forces firms to be more careful about passing cost changes through to their prices,” he said.

 

This article was written for Canadian Mortgage Trends by:

5 Oct

Bond yields surge to new heights, mortgage rates expected to jump another 20 bps

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Posted by: Dean Kimoto

“It ain’t good.”

That’s the assessment from Ron Butler of Butler Mortgage following the latest surge in bond yields this week, and as mortgage providers continue to raise mortgage rates.

On Tuesday, the Government of Canada 5-year bond yield jumped to an intraday high of 4.46%, but have since retreated to around 4.32% as of this writing. Over the past two weeks, yields have risen by over 30 basis points, or 0.30%.

Since bond yields typically lead fixed mortgage rate pricing, rates have been steadily on the rise. And rate-watchers say that’s likely to continue.

Butler told CMT he expects rates to rise another 20 bps or so by Friday.

Following this latest rise, by and large the only remaining discounted rates under 6% will be for default-insured 5-year fixeds, meaning those with a down payment of less than 20%. Conventional 5-year fixed mortgages will be right around 6%, or just a hair under, Butler notes.

Two-year fixed terms are now all in the 7% range, while 3-year terms are now starting to break the 7% mark, Butler added.

Higher-for-longer rate expectations driving latest increases

The biggest driver of this latest surge in yields is due to markets re-pricing the “higher-for-longer” expectation for interest rates, as well as expectations that Canada will avoid a serious recession, says Ryan Sims, a rate expert and mortgage broker with TMG The Mortgage Group.

In a recent email to clients, Sims explained the reason for falling bond prices, which is leading to higher yields, since bond prices and yields move inversely to one another.

Since the interest rates offered on newly issued bonds has been rising, it has made older bonds with lower rates less attractive. This means those older bonds need to be sold for a lower price in order to make the investment worthwhile for the purchaser.

“When yields (interest rates) are up, then the price of the bond is down,” Sims explained. “Bond prices have dropped quite substantially since March of 2022 and are on track for one of their worst track records since the late 1970s.”

While rising interest rates can be a problem, Sims noted that falling bond values can also be a concern for bond owners, with Canada’s big banks being among some of the largest holders of bonds.

“As bond prices drop, they must set aside more capital against dropping prices, which in turn leads to needing higher margin on funds they loan out on new mortgages—and around and around we go,” Sims wrote.

Could 5-year fixed mortgage rates reach 8%?

Sims had previously told CMT that 4% was a major resistance point for bond yields. Since they’ve broken through that, he said 4.50% is the next major hurdle.

“Here we are knocking on the door. If we break 4.50%, we could zoom to 5.00% very easily,” he said.

“If we see further highs on the Government of Canada 5 year bond yield, then who knows how high we go. It is completely possible, based on some technical charts, to see a 5-year uninsured mortgage around the 8% range,” Sims continued. “Although that would take another leg up in yields and higher risk pricing to achieve, but it is certainly possible. It’s not my base case at this point, but certainly in the realm of possibilities.”

While an 8% 5-year fixed-rate mortgage from a prime lender is only hypothetical at this point, today’s new borrowers and those switching lenders are in fact having to qualify at 8% (and higher) rates due to the mortgage stress test, which currently qualifies them at 200 percentage points above their contract rate.

The pain being felt at renewal

Over a third of mortgage holders have already been affected by higher interest rates, but by 2026 all mortgage holders will have seen their payments increase, according to the Bank of Canada.

Mortgage broker Dave Larock of Integrated Mortgage Planners told CMT recently that those with fixed-rate mortgages have so far largely avoided the pain of higher rates that’s been more prominently felt by variable-rate borrowers. But that’s now changing as about 1.2 million mortgages come up for renewal each year.

“They know higher payments are coming and it hangs over them like the sword of Damocles,” he said.

Data from Edge Realty Analytics show that the monthly mortgage payment required to purchase the average-priced home has risen to nearly $3,600 a month. That’s up 21% year-over-year and over 80% from two years ago.

 

This article was written for Canadian Mortgage Trends by: