Alternative lender Equitable Bank revealed today that a majority of its residential mortgage clients have already renewed at higher interest rates and have largely absorbed the increases.

In the bank’s fourth-quarter earnings call, President and CEO Andrew Moor said over 80% of its uninsured single-family mortgage customers have either originated or renewed their loans at today’s higher interest rates. As of year-end, its alternative mortgage clients had an average rate of 5.99%.

Moore said he is encouraged that the “vast majority of our customers are able to absorb this increase.”

“I have a lot of empathy for our customers here. I think lots of people wouldn’t have expected interest rates to rise as fast as they have,” he said during the bank’s earnings call.

“Most people, because the employment situation is still fairly good, are able to accommodate this shock to the mortgage payment,” he continued.

However, like other banks and mortgage lenders that have reported fourth-quarter earnings, Equitable has also seen delinquencies start to rise. Net impaired loans among its residential mortgage lending rose to 0.37% of the portfolio, up from 0.25% in the previous quarter.

“We are seeing some people at the margin…having a little bit of challenge to make those payments, but it’s not really translating into anything in the way of losses,” Moor noted.

Highlights from the Q4 earnings report

• Net income (adjusted): $147 million (+59% YoY)
• Earnings per share (adjusted): $3.80
• Assets under management and administration: $111 billion (+8%)
• Single-family alternative portfolio: $30 billion (+%)
• Insured multi-unit portfolio: $20 billion (+27%)
• Net interest margin: 2% (+13 bps)
• Net impaired loans (residential loans): 0.37% (+12 bps QoQ)
• Reverse mortgage loans: $1.5 billion (+43%)
• Avg. LTV of Equitable’s uninsured single-family residential portfolio: 62%
• Provisions for credit losses (PCLs): $19.6M (+50% QoQ)
• CET1 ratio: 14% (+30bps)

Notables from its call

• Equitable noted that it does not offer single-family variable-rate mortgages that could trigger negative amortization.
• Nearly 100% of EQB’s lending portfolio is secured and approximately 52% is insured.

CEO Andrew Moor commented on the following topics during the company’s earnings call:

• On retention rates: “…loan retention is much higher, and this is a tailwind we expect to continue into 2024…We’re sort of 10% ahead of where we would normally be…it’s been the case throughout the last year or so. It’s fairly consistent.”
• On Bank of Canada interest rate moves: “I have a strong view that it looks like the Bank of Canada is going to be into easing sooner rather than later.”
• On the impact of mortgage rate spreads in a falling-rate environment: “What I’ve observed over the years in a dropping interest rate environment, mortgage spreads and just general lending spreads expand…Somebody is going to make a decision to drop mortgage rates in a competitive market that tends to lag a little bit…If you look at prime mortgage spreads in the market today, they’re actually quite wide based on the fact that the bonds rallied 90 basis points over the last 30, 45 days over the five year, and yet we haven’t really seen much in the way of dropping 5-year rates.”
• On mortgage volume growth in 2024: “I think we’ll see low single-digit…annualized rates through the middle of next year. As the market starts to anticipate rate cuts, you will see a bit more activity in the housing market. There’s clearly pent-up [demand], potential buyers sitting on the sidelines, a bit of a stand-off between sellers and buyers. So, I’m rather optimistic, frankly, that as we get through the first third of the year or so, we’ll see some more activity.”
• On the federal government’s recently announced Mortgage Charter: “What’s being asked for is entirely reasonable. So, it seems sensible. We’re always working with our customers if they’re looking for things to help them get through the period. But, generally, we’re very disciplined on giving relief because our experience has been that people getting too far behind on their mortgages, they can never catch up.”

Source: EQB Q4 earnings call

Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.

This article was written for Canadian Mortgage Trends by:

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 continues to slow and inflation has eased further. In the United States, growth has been stronger than expected, led by robust consumer spending, but is likely to weaken in the months ahead as past policy rate increases work their way through the economy. Growth in the euro area has weakened and, combined with lower energy prices, this has reduced inflationary pressures. Oil prices are about $10-per-barrel lower than was assumed in the October Monetary Policy Report (MPR). Financial conditions have also eased, with long-term interest rates unwinding some of the sharp increases seen earlier in the autumn. The US dollar has weakened against most currencies, including Canada’s.

In Canada, economic growth stalled through the middle quarters of 2023. Real GDP contracted at a rate of 1.1% in the third quarter, following growth of 1.4% in the second quarter. Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year. Exports and inventory adjustment subtracted from GDP growth in the third quarter, while government spending and new home construction provided a boost. The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly. Even so, wages are still rising by 4-5%. Overall, these data and indicators for the fourth quarter suggest the economy is no longer in excess demand.

The slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices. Combined with the drop in gasoline prices, this contributed to the easing of CPI inflation to 3.1% in October. However, shelter price inflation has picked up, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs. In recent months, the Bank’s preferred measures of core inflation have been around 3½-4%, with the October data coming in towards the lower end of this range.

With further 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. Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed. Governing Council wants to see further and sustained easing in core inflation, and continues to focus 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 January 24, 2024. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.

This article is a media release from the Bank of Canada, Dec 06, 2023.

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.

60% of Canadians exceeding the recommended 30% limit on housing expenses

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:

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.

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.

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:

• Toronto
• Vancouver
• Montreal
• Calgary
• Ottawa

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Greater Toronto Area

“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

“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

“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

“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

“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:

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:

Mortgage providers across the country have been busy raising rates over the past week, and it could continue next week as bond yields continue to rise.

On Thursday, the Government of Canada 5-year bond yield briefly surged to an intra-day high above 4.41%. It pulled back slightly, but remains at a 16-year high.

As a result, mortgage providers—including RBC and TD Bank—have been hiking fixed mortgage rates across all terms by up to 30 basis points (0.30%).

“Higher fixed mortgage rates again next week if this keeps up,” tweeted Ron Butler of Butler Mortgage.

The role of risk “spreads”

In a note to clients, TMG The Mortgage Group broker Ryan Sims touched on the intricacies of mortgage rate pricing, including both the influence of bond yields as well as the spread banks apply to manage risk.

While lower interest rates are desirable, they often coincide with economic downturns—and occasionally an economic “train wreck,” as was seen during the 2008 Financial Crisi—resulting in banks increasing spreads to offset perceived risks.

“I would think that if we were to see any economic wobbles over the next 60 to 180 days, we would see bond yield start to drop,” he wrote. “[But] if we see bond yields drop quickly, I would expect the [higher spreads] to start to eat away at any—or all—of the savings.”

He pointed to March 2020 as an example. At that time, the Bank of Canada drastically cut its target overnight rate, yet 5-year fixed mortgage rates actually went up based on the risk at the time.

Federal government increasing CMB program by 50%

The Canadian government has announced a significant increase in the annual limit for Canada Mortgage Bonds from $40 billion to $60 billion, unlocking $20 billion in new financing to facilitate the construction of an additional 30,000 rental apartments per year.

This initiative is part of a comprehensive strategy to address the surging housing costs and meet the growing demand for rental housing. The additional financing is designated for multi-unit rental projects, including apartment buildings, student housing and senior residences.

However, this expansion of the mortgage-bond program marks a temporary reversal of the government’s earlier proposal to phase out the program, leading to some market uncertainties.

Despite the program’s AAA-rating and government guarantee, the inconsistent signalling around its continuation and size has raised concerns among market participants.

RBC: Government’s GST measure no “silver bullet”

Earlier this month the federal government announced the elimination of GST on new rental construction in an effort to encourage developers to pursue purpose-built rental apartment projects.

While the move is expected to “improve the financial viability” of such construction projects, a report from RBC Economics said that it “won’t be a silver bullet” insofar as delivering new supply to the rental market.

This is due to the “severe deficit position” the rental market finds itself in, as well as the fact it will take time to get such projects off the ground and complete, noted report author Rachel Battaglia.

“More policy action—at all levels of government—will be needed to really move the needle on rental supply and affect rent,” she wrote. “This includes modernizing zoning by-laws to accommodate high density development, streamline the permitting prices for new construction, and ensure other fees, taxes, and policies are in line with the broader goal of expanding the rental housing stock in Canada.”

B.C. government unveils measures to speed up homebuilding

In an effort to speed up the pace of homebuilding in British Columbia, the provincial government has unveiled two new initiatives, including the Single Housing Application Service (SHAS) and the Home Suite Home guide.

SHAS aims to streamline permitting for builders, potentially cutting timelines by two months, while the guide assists homeowners in developing secondary suites. A pilot program, launching in spring 2024, will offer forgivable loans up to $40,000 for below-market rate secondary suites.

“We are going at this problem from all different directions, because that’s what it requires,” Premier David Eby said. “People in our province deserve a decent place to live they can actually afford to rent or buy, but a chronic housing shortage and long permit approval times are frustrating that achievable goal.”

The initiatives have garnered industry support but also faced criticism regarding their substance and potential bureaucracy. These measures, part of the Homes for People action plan, prioritize diverse housing solutions, including social and Indigenous housing, and aim to leverage approximately 228,700 units eligible for conversion into secondary suites across the province.

RBC’s $13B acquisition of HSBC approved by Competition Bureau

The Royal Bank of Canada (RBC) has received approval from the country’s Competition Bureau for its $13.5-billion acquisition of HSBC’s Canadian unit.

The deal, marking RBC’s largest acquisition, will see the bank, already Canada’s largest with 1,200 branches and $1.8 trillion in assets, acquire HSBC Canada’s 130 branches and $134 billion in assets.

The Competition Bureau did say the deal would “result in a loss of rivalry between Canada’s largest and seventh-largest banks.”

The deal, while still subject to further regulatory approvals, is expected to close by the end of 2023. The implications of the deal on HSBC’s mortgage products remain uncertain. HSBC has consistently offered market-leading pricing among the big banks for select mortgage terms.

When the acquisition was announced in November 2022, RBC CEO Dave McKay had called it a “unique and once-in-a-generation opportunity,” adding it would position RBC as the “bank of choice for commercial clients with international needs, newcomers to Canada and affluent clients who need global banking and wealth management capabilities.”

This article was written for Canadian Mortgage Trends by: