A key factor in determining whether an individual is likely to become a homeowner is whether or not their parents were property owners, a new study shows.

The adult children of homeowners were more than twice as likely to own a home compared to the children of non-owners, according to findings released by Statistics Canada last week.

The report found that children of non-homeowners had an overall homeownership rate of 8.1% vs. 17.4% for the offspring of owners. The correlation increased in families that owned multiple properties, rising to a homeownership rate of 22% for those whose parents owned two properties and 27.8% for those whose parents owned three or more.

The study, which focused on those born in the 1990s and compared ownership rates as of 2021, found the positive association between the homeownership rate of adult children and their parents was greatest among adult children with individual incomes of $80,000 or less.

“The income of adult children may be correlated to the income and wealth (including property ownership) of their parents, in part because of patterns of childhood socialization, existing social networks and the amounts invested in education, the report notes.

However, even when accounting for the adult children’s age, income and province of residence, parents’ property ownership is “strongly associated with an increased likelihood of homeownership for their adult children,” it added.

MBRCC unveils principles for mortgage product suitability

Mortgage brokers across the country are being asked to follow a set of six principles to ensure they are making suitable product recommendations to their clients.

In an ongoing effort to strengthen mortgage consumer protections, the Mortgage Broker Regulators’ Council of Canada (MBRCC) last week unveiled its final Mortgage Product Suitability Assessment Principles.

“Given high interest rates, elevated inflation and reduced mortgage affordability, many consumers are looking to the mortgage brokering sector for sound advice,” said MBRCC chair Antoinette Leung. “The Principles developed by MBRCC will support the industry’s provision of suitable recommendations to clients, enhancing the protection of Canadian consumers during a period of challenging financial conditions.”

The draft principles were first released over the summer, and the MBRCC since made two amendments following public feedback.

The mortgage product suitability assessment principles include:

1. Know your client
2. Know your product
3. Assess options and make suitable recommendations
4. Clearly communicate and explain rationale of the recommended option
5. Ensure adequate oversight and accountability
6. Document suitability assessment and oversight

More details on the above principles are available at the MBRCC website.

FSRA releases guidance for mortgage administrators

Effective today, mortgage administrators in Ontario must comply with new rules that govern financial reporting.

The new guidance was released by the Financial Services Regulatory Authority of Ontario (FSRA), which regulates and licences all mortgage brokers, agents, brokerages and administrators in the province.

“Mortgage administrators play the crucial role of handling people’s funds and investments, and we want to ensure that borrower and investor funds are protected,” Huston Loke, Executive Vice President, Market Conduct at FSRA, said in a release. “The guidance we are releasing today aims to reduce the risk of funds and investments being misplaced, stolen, or otherwise treated improperly.”

The guidance will help ensure:

• administrators file the required statements and auditor’s reports on time
• the auditor’s report is certified by a licensed public accountant
• the auditor’s Reasonable Assurance report on compliance with legislation is in a form approved by the CEO and addresses all the required areas of compliance

The full text of FSRA’s new guidance is available here.

Pineapple Financial completes IPO on New York Stock Exchange

Pineapple Financial made history recently by becoming the first Canadian mortgage brokers to launch an Initial Public Offer (IPO) on the New York Stock Exchange (NYSE).

Founded in 2016, Pineapple is a tech-focused brokerage with a network of over 650 partner brokers and agents across the country. It said it will use the capital raised from the IPO to fund research and development and expansion into new product offerings and tech infrastructure.

That includes expanding to every province in the country, adding insurance as a new product offering, and developing digital innovation to “increase productivity and efficiency” across all of its channels.

“The decision to go public was driven by our vision to expand market reach, accelerate growth initiatives, and capitalize on new opportunities,” Pineapple CEO and co-founder Shubha Dasgupta said in a release. “With this successful IPO, Pineapple achieved a milestone that reflects its market potential, growth trajectory, and our commitment to excellence.”

This article was written for Canadian Mortgage Trends by:

Canada’s banking regulator recently confirmed it will move ahead with new capital requirements for lenders and insurers with negatively amortizing mortgage portfolios.

Starting in early 2024, the Office of the Superintendent of Financial Institutions (OSFI) will require lenders to hold more capital for negative amortization mortgage balances with loan-to-values (LTVs) above 65%.

• What’s a negative amortization mortgage? Negative amortization can impact borrowers with fixed payment variable-rate mortgages in an environment when prime rate rises significantly, resulting in the borrower’s monthly payments not covering the full interest amount. This causes the mortgage to grow rather than shrink.

“We have updated several of our capital guidelines to promote prudent allocation of capital against risks that lenders and insurers take,” OSFI superintendent Peter Routledge said in a statement.

The changes were first announced by OSFI in July and were subject to a consultation period over the summer. They will primarily impact four of Canada’s big banks that currently offer fixed-payment variable rate mortgages: BMO, CIBC, RBC and TD.

For these banks, variable-rate mortgages comprise about a third of their overall portfolios (32%-39%), with roughly a quarter of those mortgages with extended amortizations beyond 30 years—or some $277 billion as of July, according to data from Fitch Ratings.

Scotiabank and National Bank of Canada, on the other hand, offer adjustable-rate mortgages where the borrower’s monthly payment fluctuates as prime rate changes. As a result, both banks have less than 1% of their variable-rate portfolios with amortizations above 30 years.

The new requirements will also impact Canada’s three mortgage insurers, which insure between 20% and 30% of all mortgages. Also effective in January, the maximum LTV ratio for individual mortgages in the Mortgage Insurer Capital Adequacy Test (MICAT) capital formula will increase from 100% to 105%. This adjustment aligns the MICAT capital formula with the maximum permitted LTV ratio for insured mortgages.

The new guidelines also set a limit of 40 years on the mortgage’s remaining amortization length for the purpose of calculating regulatory capital.

“Given the relatively low prevalence of negative equity mortgages, the overall impact for mortgage insurers is expected to be minimal, resulting in an immaterial decline in the capital ratio,” DBRS Morningstar noted in a report.

“Our expectation is that underwriting profitability will weaken somewhat but be manageable from a credit quality perspective given mortgage insurers’ strong capital buffers and conservative credit underwriting criteria,” the report added.

Impact on banks to be manageable, Fitch says

In its own report, Fitch said the Capital Adequacy Requirements (CAR) for the banks are likely to be “comfortably absorbed.”

The ratings agency said the changes should impact common equity tier 1 (CET1) ratios by only 7 to 22 basis points, “or less than 2% of the average 3Q23 13.5% CET1 capital for the four banks with exposure,” it said. “As of 3Q23, all banks had CET1 ratios comfortably above regulatory minimums.”

OSFI’s reasoning for cracking down on fixed payment variable-rate mortgages

OSFI has repeatedly voiced its concerns about fixed payment variable-rate mortgages, first singling them out in its Annual Risk Outlook for 2023-2024.

Most recently, during testimony before the Standing Senate Committee on Banking, Commerce and the Economy earlier this month, Routledge said increasing mortgage balances associated with negative amortization “increases their vulnerability, and increases the risk of default.”

“The variable rate product with fixed payments is a dangerous product in our view because it puts the homeowner in the position of an extended extended period—not always, but in this environment certainly—it can put the homeowner in the position of paying a flat rate of, say, $2,000 a month, and the interest on their mortgage is $3,000 a month,” Routledge said.

And while Routledge said OSFI’s role is not to “impose a judgment on product design,” he did say OSFI would “like less of that product.”

In response to stakeholder feedback on these new capital requirements that the implementation timeframe is “very tight,” OSFI responded by saying it was important to “address the risk in a timely manner.” As such, the new capital requirements will take effect in fiscal Q1.

This article was written for Canadian Mortgage Trends by:

The average asking rent in Canada has increased by about $175 over the past six months, and is now nearly 10% higher compared to a year ago.

As of October, the average rent price for all unit types reached $2,178, according to data from Rentals.ca‘s latest monthly data. That’s up 1.4% compared to September, but slower than the 1.8% monthly increase seen back in August thanks to seasonable factors.

One-bedroom rent prices were up a whopping 29% year-over-year in Red Deer, Alberta, while Halifax, NS (+20.6%) and Markham, ON (+20%) also saw outsized gains.

The national average rent for two-bedroom units has now surpassed $2,300 a month, up 1.7% from September and +11.7% compared to a year ago. The largest increases were seen in Oakville, ON (+23.5%) and Quebec City, QC (+17.6%).

High rents are contributing to inflation

Average rents in Canada are now up over 31% compared to the low of $1,662 reached in April 2021.

This steep rise means rent prices are now a leading contributor to the country’s headline inflation rate, which the Bank of Canada is desperately trying to bring back to its target rate of 2%.

As of September, rent inflation has shot up to 7.3%, according to data from Statistics Canada—the fastest pace since 1983. It’s now the second leading contributor to overall inflation, after mortgage interest cost, which is up 30.6%.

On a monthly basis, rent inflation from August to September was 0.8%. That means that of the headline CPI inflation reading of 3.8% in September, 0.8% came from rent inflation alone. Another 2.6% came from mortgage interest cost.

“It’s a big issue,” noted analyst Ben Rabidoux of Edge Realty Analytics. He pointed to the more than 700,000 non-permanent residents added to the population over the past 12 months—which includes international students and foreign workers—as a major contributing factor to the upward pressure on rent prices.

In response to housing affordability concerns, the federal government recently announced it plans to level out its targets for new permanent residents coming to Canada. The target for 2024 and 2025 will increase as planned to 485,000 and 500,00, respectively, and hold steady at 500,000 in 2026.

“These immigration levels will help set the pace of Canada’s economic and population growth while moderating its impact on critical systems such as infrastructure and housing,” Immigration Minister Marc Miller said.

Alberta leads the provinces in rent price growth

Rentals.ca reported that Alberta once again posted the fastest year-over-year increase in rent prices, which were up 16.4% in October to $1,686.

Rents were also up sharply in Nova Scotia (+13.6%) and Quebec (13.3%), thanks to both strong population growth and “large infusions of new rental supply priced at above-average market rents,” Rentals.ca noted.

The slowest annual increases were once again seen in Manitoba (+5.5%) and Saskatchewan (+4%).

Calgary and Montreal lead rent growth in Canada’s largest cities

Calgary continued to lead rent price growth in October, with an average year-over-year increase of 14.7% to reach $2,093. Montreal saw the second-fastest pace of growth at 10.8%, with an average price of $2,046.

Here’s a look at the year-over-year rent increases in some of the country’s key markets:

• • Calgary, AB: +14.7% ($2,093)
  • Regina, SK: +13.7% ($1,273)
  • Montreal, QC: +10.8% ($2,046)
  • Ottawa, ON: +10.6% ($2,197)
  • Halifax, NS: +9.5% ($2,017)
  • Winnipeg, MB: +7.4% ($1,521)
  • Vancouver, B.C.: +4.4% ($3,215)
  • Toronto, ON: -0.8% ($2,908)

This article was written for Canadian Mortgage Trends by: