31 May

Weaker-than-expected Canadian Q1’24 GDP Growth Increases Odds of a Rate Cut Next Week

General

Posted by: Dean Kimoto

The likelihood of a rate cut next week has increased due to disappointing Canadian GDP growth. Real gross domestic product (GDP) only rose by 1.7% (seasonally adjusted annual rate) in the first quarter of this year, which is well below the expected 2.2% and the Bank of Canada’s forecast of 2.8%. Fourth-quarter economic growth was revised to just 0.1% from 1.0%. These figures have led traders to increase their bets on a Bank of Canada rate cut when they meet again next week.

In the first quarter of 2024, higher household spending on services—primarily telecom services, rent, and air transport—was the top contributor to the increase in GDP, while slower inventory accumulation moderated overall growth. Household spending on goods increased modestly, with higher expenditures on new trucks, vans and sport utility vehicles.

On a per capita basis, household final consumption expenditures rose moderately in the first quarter, following three quarters of declines. Per capita spending on services increased, while per capita spending on goods fell for the 10th consecutive quarter.

Business capital investment rose in the first quarter, driven by increased spending on engineering structures, primarily within the oil and gas sector. Business investment in machinery and equipment also increased, coinciding with increased imports of industrial machinery, equipment and parts.

Resale activity picked up in Q1, driving the rise in housing investment, while new construction was flat. Ontario, British Columbia and Quebec posted the most significant volume increases in resales, while prices in these provinces fell in the first quarter.

New housing construction (+0.1%) was little changed in the first quarter, as work put in place decreased for all dwelling types except double houses. Costs related to new construction, such as taxes and closing fees upon change in ownership, increased in the quarter and were mainly attributable to newly absorbed apartment units in Ontario.

The household savings rate reached 7.0% in the first quarter, the highest rate since the first quarter of 2022, as gains in disposable income outweighed increases in nominal consumption expenditure. Income gains were derived mainly from wages and net investment income.

Investment income grew strongly in the first quarter of 2024 due to widespread gains from interest-bearing instruments and dividends. Higher-income households benefit more from interest rate increases through property income received.

Household property income payments, comprised of mortgage and non-mortgage interest expenses, posted the lowest increases since the first quarter of 2022, when the Bank of Canada’s policy rate increases began.

Bottom Line
This is the last major economic release before the Bank of Canada meets again on June 5. Traders in overnight markets put the odds of a rate cut at next week’s meeting at about 75%, up from 66% the day before. Bonds rallied, and the yield on the Canadian government two-year note fell sharply, reflecting this change in sentiment.

The Bank of Canada has good reason to cut the overnight policy rate next week. Core inflation measures have decelerated sharply in recent months, and the economy is growing at a much slower pace than the central bank expected. The Bank has been very cautious, and there remains the possibility that they will wait another month before pulling the trigger on rate cuts, but at this point, we see no reason to delay any further.

Please Note: The source of this article is from SherryCooper.com/category/articles/
24 May

OSFI says mortgage payment shock poses a key risk to Canada’s financial system

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Posted by: Dean Kimoto

Canada’s banking regulator says high borrowing costs and a wave of expected renewals in the coming 18 months pose key risks to Canada’s financial system.

With 76% of outstanding mortgages expected to come up for renewal by the end of 2026, OSFI says homeowners face the risk of payment shock, particularly those who took out mortgages between 2020 and 2022 when interest rates were at historic lows.

“Households that are more heavily leveraged and have mortgages with variable rates but fixed payments will feel this shock more acutely,” OSFI said in its Annual Risk Outlook for 2024-25. “We expect payment increases to lead to a higher incidence of residential mortgage loans falling into arrears or defaults.”

OSFI notes that financial institutions could face higher credit losses in the event of a weakened residential real estate market. It added that mortgages that have already experienced payment increases, such as adjustable-rate mortgages, are already showing higher rates of default.

In response to this risk, OSFI said its previously announced loan-to-income limits for lenders’ uninsured mortgage portfolios will help “prevent a buildup of highly leveraged borrowers.”

In March, OSFI confirmed that federally regulated banks will have to limit the number of mortgages that exceed 4.5 times the borrower’s annual income, or in other words those with a loan-to-income (LTI) ratio of 450%.

“We do not expect these limits to be binding under the current interest rate environment,” OSFI noted, adding that these institution-specific loan-to-income limits are “supervisory actions” and that no additional details could be disclosed.

Additionally, OSFI said its decision in December to leave the minimum qualifying rate for uninsured mortgages unchanged at the greater of the mortgage contract rate plus 2% or 5.25% will “help ensure borrowers can still make payments if they experience negative financial shocks…”

Fixed-payment variable-rate mortgages still a concern

OSFI also once again singled out variable-rate mortgages with fixed payments as a “specific concern.”

These mortgage products, which are offered by most big banks except for Scotiabank and National Bank, keep monthly payments fixed even as interest rates fluctuate. When rates rise, as they have over the past two years, less of the monthly payment goes towards principal repayment and a greater portion ends up going towards interest costs.

These mortgage products currently make up about 15% of outstanding residential mortgages in Canada.

“If mortgage rates remain elevated, the financial commitment required by borrowers to return to their contractual amortization (for example, lump-sum payment, mortgage payment increase) may put financial strain on many of those households,” OSFI said.

This isn’t the first time OSFI has voiced its concerns about fixed-payment variable-rate mortgages. Last fall, OSFI head Peter Routledge told a Senate standing committee that the regulator views such mortgages as a “dangerous product” that put certain borrowers at increased risk of default.

While he said OSFI’s role is not to “impose a judgment on product design,” Routledge did say OSFI believes “the system would be healthier with less of that product.”

Other risks facing Canada’s financial system

OSFI’s Annual Risk Outlook also addressed other risks facing the financial system. Those include:

  • Wholesale credit risk

OSFI says wholesale credit risk, which includes commercial real estate (CRE) lending as well as corporate and commercial debt, “remains a significant exposure for institutions.”

The regulator noted that higher interest rates, inflation and lower demand “have put CRE markets under pressure” and that it expects these challenges to extend into 2024 and 2025.

  • Funding and liquidity risks

OSFI notes that liquidity risks “are a persistent concern” and can arise if depositor behaviour shifts dramatically.

“Funding and liquidity risk remains linked to credit risk as deteriorating conditions can negatively impact securitization markets,” it said. “This can trigger increased liquidity risk for institutions that rely on securitization as a key source of funding.”

In response, OSFI said it plans to broaden and intensify its assessment of liquidity risk.

This article was wrtten for Canadian Mortgage Trends by:

Steve Huebl
Steve Huebl is a graduate of Ryerson University’s School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.
23 May

Canadian CPI Inflation Eased In April, Raising the Chances of a June Rate Cut

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Posted by: Dean Kimoto

The Consumer Price Index (CPI) rose 2.7% year-over-year (y/y) in April, down from 2.9% in March. This marks the fourth consecutive decline in core inflation. Food prices, services, and durable goods led to the broad-based deceleration in the headline CPI.

The deceleration in the CPI was moderated by gasoline prices, which rose faster in April (+6.1%) than in March (+4.5%). Excluding gasoline, the all-items CPI slowed to a 2.5% year-over-year increase, down from a 2.8% gain in March.

The CPI rose 0.5% m/m in April, mainly due to gasoline prices. On a seasonally adjusted monthly basis, it rose 0.2%.

While prices for food purchased from stores continue to increase, the index grew slower year over year in April (+1.4%) compared with March (+1.9%). Price growth for food purchased from restaurants also eased yearly, rising 4.3% in April 2024, following a 5.1% increase in March.

According to Bloomberg calculations, the three-month moving average of the rate rose to an annualized pace of 1.64% from 1.35% in March. That’s the first gain since December.

The Bank of Canada’s preferred core inflation measures, the trim and median core rates, exclude the more volatile price movements to assess the level of underlying inflation. The CPI trim slowed to 2.9% y/y in April, and the median declined to 2.6% from year-ago levels, as shown in the chart below. Rising rent and mortgage interest costs account for a disproportionate share of price growth, with shelter costs up 6.4% year-over-year. Growth in mortgage interest costs slightly decreased in April but remained 24.5% higher than a year ago.

The breadth of inflationary pressures narrowed again in April, with the proportion of the CPI basket experiencing growth exceeding 3%, decreasing to 34% from 38% in March.

Bottom Line

April’s inflation readings largely met expectations but with underlying details (including further slowing in the BoC’s preferred ‘core’ measures) pointing to a further reduction in inflationary pressures. The Bank of Canada is as concerned about where inflation will go in the future as where it is right now. Still, Canada’s persistently softer economic backdrop (declining per-capita GDP and rising unemployment rate) increases the odds that price growth will continue to slow. The case for interest rate cuts from the Bank of Canada continues to build. The central bank has every reason to cut rates at their next meeting on June 5. Still, given the BoC’s extreme caution, we must consider the possibility that they will wait until the July meeting to take action, and only if inflation continues to recede.

Please Note: The source of this article is from SherryCooper.com/category/articles/
22 May

Homebuyers Cautious As New Listings Surge In April

General

Posted by: Dean Kimoto

Canadian Home Buyers Remain On the Sidelines In April As New Listings Surge.

The Canadian Real Estate Association (CREA) announced today that national home sales dipped in April 2024 from its prior month, as the number of properties available for sale rose sharply to kick off the spring housing market.

Home sales activity recorded over Canadian MLS® Systems fell 1.7% between March and April 2024, a little below the average of the last ten years.

New Listings

The number of newly listed properties rose 2.8% month-over-month.

Slower sales amid more new listings resulted in a 6.5% jump in the overall number of properties on the market, reaching its highest level just before the onset of the COVID-19 pandemic. It was also one of the largest month-over-month gains, second only to those seen during the sharp market slowdown of early 2022.

“April 2023 was characterized by a surge of buyers re-entering a market with new listings at 20-year lows, whereas this spring thus far has been the opposite, with a healthier number of properties to choose from but less enthusiasm on the demand side,” said Shaun Cathcart, CREA’s Senior Economist.

Bottom Line

With sales down and new listings up in April, the national sales-to-new listings ratio eased to 53.4%. The long-term average for the national sales-to-new listings ratio is 55%. A sales-to-new listings ratio between 45% and 65% is generally consistent with balanced housing market conditions, with readings above and below this range indicating sellers’ and buyers’ markets, respectively.

There were 4.2 months of inventory on a national basis at the end of April 2024, up from 3.9 months at the end of March and the highest level since the onset of the pandemic. The long-term average is about five months of inventory.

“After a long hibernation, the spring market is now officially underway. The increase in listings is resulting in the most balanced market conditions we’ve seen at the national level since before the pandemic,” said James Mabey, newly appointed Chair of CREA’s 2024-2025 Board of Directors. “Mortgage rates are still high, and it remains difficult for many people to break into the market, but for those who can, it’s the first spring market in some time where they can shop around, take their time and exercise some bargaining power. Given how much demand is out there, it’s hard to say how long it will last.

The upcoming CPI data for April, released on May 21, will be crucial for the Bank of Canada. Given the strength in the April jobs report, the Bank is likely to hold off cutting interest rates until July.

Please Note: The source of this article is from SherryCooper.com/category/articles/
20 May

CMHC reports annual pace of housing starts in April down 1% from March

General

Posted by: Dean Kimoto

Canada Mortgage and Housing Corp. says the annual pace of housing starts in April edged down one per cent compared with March.

The seasonally adjusted annual rate of housing starts in Canada came in at 240,229 units for April, down from 242,267 in March, according to a report Wednesday by the national housing agency.

The overall drop came as the annual pace of starts in urban centres essentially flatlined in April month-over-month at 220,123.

The pace of multi-unit urban starts in April fell one per cent to 178,462, while single-detached urban starts rose two per cent to 41,661 units. The annual pace of rural starts was estimated at 20,106 units.

The downward trend in housing starts was largely driven by fewer multi-unit starts, particularly in Ontario, said CMHC chief economist Bob Dugan.

“The multi-unit volatility observed in Toronto, Vancouver, and Montreal in recent months is unsurprising as we continue to see last year’s challenging borrowing conditions reflected in multi-unit housing starts numbers,” he said in a press release.

“We expect to see continued downward pressure in these large centres.”

Housing starts were lower in all three of those major cities due to decreases in both multi-unit and single-detached starts, the agency said. Starts were down 38% in Toronto, 30% in Vancouver and 3% in Montreal compared with April 2023.

CMHC said the six-month moving average of the monthly seasonally adjusted annual rate was 238,585 units in April, down 2.2% from 243,907 units in March.

Despite the overall decline, TD economist Rishi Sondhi said starts “continue to run at a healthy level,” with government measures and rapidly rising rents supporting the construction of purpose-built rental units.

“In addition, solid gains in pre-sales made a few years ago when borrowing costs were low are boosting condo construction,” he said in a note.

Sondhi said TD is forecasting housing starts will continue to decline through the remainder of this year, “reflecting more recent weakness in pre-sale activity in key markets like Toronto, elevated construction costs, and high interest rates.”

Separately on Wednesday, The Canadian Real Estate Association released its latest home sales data for April, which showed the number of homes changing hands for the month rose 10.1% compared with a year ago, but fell 1.7% from March.

Slower monthly sales amid more new listings meant there was a 6.5% jump in the overall number of properties on the national housing market, which marked the highest inventory levels since just before the onset of the COVID-19 pandemic.

This report by The Canadian Press was first published May 15, 2024.

Article found on Canadian Mortgage Trends.

17 May

2024 recession now expected to be “shallower and shorter,” says Oxford Economics

General

Posted by: Dean Kimoto

While Canada’s economy is still expected to enter a technical recession this year, Oxford Economics now believes the downturn will be less severe than initially thought.

In a recent research report, the firm said it expects GDP growth will contract in the second and third quarters before turning positive again in the fourth quarter.

“GDP is now expected to contract 0.5% peak to trough from Q2 to Q3, 0.2 [percentage points] shallower and one quarter shorter than last month’s forecast,” they wrote. “The shallow downturn reflects the enduring impact of mortgage renewals at higher rates on consumers, as well as weakening new homebuilding, muted business investment, and much slower inventory accumulation.”

Oxford said it now expects GDP rose 0.1% in the first quarter, an upward revision from its previous expectation of a 0.1% quarter-over-quarter decline.

“The upward revision largely reflects broad-based strength in domestic demand, including stronger government spending as the 2024 Federal Budget showed little restraint,” they wrote.

The improved economic forecast follows the release of the Bank of Canada’s latest quarterly Market Participants Survey, which showed that most financial experts anticipate a reduced likelihood of an imminent economic downturn.

Based on the median of results, the respondents believe there is a 35% chance of the economy being in recession in the next six months, down from 48% in the previous quarter.

Expectations of a Canadian recession keep being pushed back as the economy continues to perform better than expected by certain metrics, including strong employment growth. Last year, many economists saw the economy slipping into recession by the end of 2023.

But Oxford Economics says consumption is still expected to contract modestly in the second quarter and remain weak throughout the year as consumers are faced with the impact of mortgage renewals at higher interest rates.

“Moreover, muted business capital spending, weaker new housing investment, and a slowdown in inventory accumulation will help push the economy into a modest recession this year,” they said.

Improvements by year-end

However, the economy should start to improve once again by the end of the year, according to Oxford.

“We anticipate a modest recovery will emerge in Q4 as interest rates ease in Canada and abroad, economic sentiment improves, and federal and provincial budget measures support growth,” the Oxford economists noted. “Consumers will slowly start to increase outlays as hiring resumes and real incomes grow, while business investment should pick up with returning demand and stronger profits.”

They add that housing starts should also pick up by the end of the year due to easing mortgage rates and government efforts helping to boost housing supply.

Overall, Oxford expects 2024 GDP growth of 0.1% expansion, which it revised up from its previous forecast of a 0.3% contraction.

“This mainly reflects stronger Q1 GDP growth and a shallower recession due to higher government spending in the 2024 federal and provincial budgets,” Oxford noted. “The Canadian economy is still forecast to grow at a moderate 2% pace in 2025, unchanged from our previous view.”

15 May

Why you shouldn’t fear a credit score drop when applying for a mortgage

General

Posted by: Dean Kimoto

In the complex world of home financing, a common concern among our clients involves the impact of credit inquiries on their credit scores. Often, the thought of a mortgage credit check can make potential borrowers hesitant and fear it might lower their overall credit scores.

We’ve all heard it before…

“Can’t you just use my free Borrowell report?”

“I don’t want anyone to pull my credit, it will hurt my score!”

Oh sure, sometimes our prospective clients just want a judgment call on their borrowing power and in most cases, I am comfortable assessing files without having to pull their official credit history. I’ve taken several client files pretty far without going through a hard inquiry.

However, without a complete history and proper credit report, my advice and opinions on their borrowing power will be filled with disclaimers, just in case there are any outstanding balances, loans, or late payments my client has either forgotten or has not yet disclosed to me. And, of course, sometimes there are outright errors in the credit report.

Understanding credit inquiries in mortgage applications

As mortgage professionals, it’s our duty to clarify and reassure clients about the realities of credit inquiries and the minimal impact they typically have.

Let’s dive into why borrowers shouldn’t worry excessively about their mortgage credit inquiry. To be clear, if someone wants a formal mortgage pre-approval or even a rate hold, then yes, absolutely, we have to pull a credit report.

Here’s the reality:

  • Minimal impact: A single credit inquiry usually has a very small effect on your credit score, potentially lowering it by just 5 to 8 points.
  • Credit score buffer: Most diligent credit users have a score buffer that more than compensates for the minor deductions caused by inquiries.
  • Purpose of building credit: Remember, a big reason for maintaining a good credit history is to utilize it when making significant decisions like buying or refinancing a home.

In essence, avoiding a credit check could hinder your ability to get pre-approved for a mortgage. It’s crucial to let your mortgage professional proceed with the necessary checks to ensure you’re on the right track to securing your home loan.

Canadian home sames soften in June

Real-world insights into credit inquiries

Note to our readers: For client privacy, the names of the subjects in this story have been changed. The values mentioned in this story are accurate and true. These case studies are presented to educate Canadians in a couple of different home purchase situations. One is for move-up buyers, and the other is about first-time homebuyers.

Case Study 1: The high achievers with credit concerns

  • Client Story: Tiana & Leo
  • Combined household income: $181,600
  • Current home value: $695,000
  • New home value: $910,000
  • Client goal: Selling their townhome to purchase their forever home

Tiana and Leo live in a townhome in Kitchener and recently they came to us wanting to be pre-qualified for a mortgage. They and their two kids are excited about moving up to their forever home. But there was a snag—Tiana was very hesitant about us pulling her credit report. She feared it might negatively impact her credit score.

Their outcome: Why it pays to check even if you’re scared!

With a bit of guidance and reassurance about the process, Tiana and Leo agreed to let us proceed with the credit inquiry, which of course is a standard step in the mortgage pre-approval process.

Drum roll please…

When we checked her credit, Tiana had a pristine score of 900! The absolute pinnacle, something we only see once in a blue moon! Clearly, she had nothing to worry about. It doesn’t get any better than 900!

Naturally with that credit score (Leo’s score was also very high), securing the pre-approval they wanted became a piece of cake!

Case Study 2: Multiple inquiries, minimal impact

  • Client story: Fiona & Bart
  • Combined household income: $251,700
  • Current home value: N/A – they are first-time buyers
  • New home value: $1,600,000
  • Client goal: They Are Ready To Purchase Their First Home

Fiona and Bart, a forward-thinking couple in their early thirties, approached us with a clear goal: they were ready to purchase their first home. Unlike many first-time buyers, they were quite relaxed about the entire credit scoring process, understanding its necessity in the home-buying journey.

Their outcome: Stable scores through multiple inquiries

Given that a credit report’s validity lasts only 30 days, we found ourselves needing to pull their reports multiple times as we journeyed from pre-approval to final approval, while at the same time negotiating with two different lenders over a few months.

Additionally, each bank required their own credit pull. Despite the frequency of all these inquiries, the impact on their credit scores was really minimal.

Here’s how it played out:

  • Initial score: Fiona started with 823, and Bart with 834.
  • During the process: Fiona’s score fluctuated slightly, dropping to 817 before returning to 823, showing her credit score’s resilience. Bart’s score dipped modestly to 822.
  • Final score: By the end of the process, both scores remained strong and high, demonstrating that multiple inquiries (in this case, five consecutive inquiries in the span of three months), when done within a proper context, do not have a significant detrimental effect.

Credit score comparison

This is a comparison chart for all the dates and inquiries we made for Fiona and Bart. You can clearly see that even with five credit inquiries, there were minimal changes to both of their scores.

This experience underscores the importance of not sweating the small stuff. Multiple inquiries might sound daunting, but in the structured environment of mortgage applications, they are just part of the process and are less impactful than often feared.

Why mortgage credit inquiries should not deter you

Understanding the nuances of credit inquiries can significantly ease the concerns of both mortgage professionals and their clients. Personal credit expert Richard Moxley notes that multiple mortgage-related inquiries over 45 days only impact your Equifax Canada score as a single inquiry, and with TransUnion Canada, the same is true over a 15-day period.

This minimizes the impact on your credit score and highlights the importance of proceeding with necessary credit checks during the mortgage application process.

Key takeaways:

  • Educate clients: As mortgage professionals, it is our responsibility to educate clients about the true impact of credit inquiries.
  • Reassure borrowers: Reassure your clients that a high credit score is built to withstand such inquiries, particularly when they are crucial for securing a mortgage.
  • Encourage transparency: Encourage clients to consent to credit pulls to facilitate a smoother pre-approval process.

By demystifying the impact of mortgage credit inquiries, we can help clients move forward with confidence, knowing their credit health is secure and their home financing is on track.