1 Sep

Canada’s mortgage stress test: Obsolete or still doing its job?

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Posted by: Dean Kimoto

Originally introduced to mitigate borrower default risks in the event of rising interest rates, some brokers now argue that Canada’s mortgage stress test is no longer needed with interest rates presumably near their peak.

Others, however, say it’s a tool that’s best left in place for the time being.

Back in 2016, the federal government rolled out the stress test as a way to curb risks associated with lending in times of low interest rates and high market prices. The test acts as a buffer, ensuring that potential homebuyers with a 20% or greater down payment are able to afford monthly mortgage payments at a rate of 5.25% or 2% over their contracted rate—whichever is greater.

Two years later, the Office of the Superintendent of Financial Institutions (OSFI) extended the test to apply to insured mortgages as well, or those with down payment of less than 20%.

As interest rates currently stand, this means today’s borrowers are having to qualify for mortgages at rates between 7% and 9%.

Is the stress test still necessary?

Though the stress test is still serving its purpose as a buffer for new homebuyers and investors, today’s economic and interest rate environment is quite different compared to when the stress tests were put in place.

That’s why some mortgage professionals say it’s time to take a hard look at the stress test.

“I would say that maybe the stress test applying 2% above what current rates are is exceeding what the risks are,” says Matt Albinati, a mortgage broker with TMG The Mortgage Group. “I am all for building a buffer for people’s financial situation, but the stress test limits the amount people can borrow.”

Albinati thinks that this change of environment does constitute a review of the stress test, something that OSFI does with its guidelines once a year.

“You look back a year, the stress test was doing a pretty good job. This time—or near in the future—it might be a good time to take a closer look at it,” he told CMT.

Others, however, like Tribe Financial CEO Frances Hinojosa, think the stress test should be left as is, at least for now.

“I don’t think we should be so quick to change the stress test until we’re out of the current economic storm that we’re in today,” she told CMT in an interview.

“At the end of the day, it is there to also protect the consumer [in addition to financial institutions] to ensure that they’re not over-leveraging themselves in a mortgage that they could potentially not be able to afford down the road,” she added.

Hinojosa thinks that the stress test proved its worth during the recent run-up in interest rates, the impact of which was felt immediately by adjustable-rate mortgage holders.

“What I noticed with a lot of these clients when the rates were ratcheting up was that it wasn’t a question of whether they couldn’t afford it,” she said. “It was just uncomfortable because they had to readjust the budget.”

Without the stress test in place when these borrowers were qualifying for their mortgages, they could have potentially over-leveraged themselves and potentially put themselves at risk of default if rates rose high enough, Hinojosa added.

Other lenders

While all federally regulated financial institutions are required to follow stress test guidelines, there are still other options for consumers.

Some provincial credit unions, for example, can issue mortgages with a qualifying rate equal to the contract rate or just 1% higher, giving stretched borrowers more leeway.

But, are they using credit unions?

Albinati and Gert Martens, a broker with Dominion Lending HT Mortgage Group based out of Grande Prairie, AB, say that their clients are not typically turning to credit unions.

Albinati noted that in order for his clients to receive insurance for their mortgage—which makes up about two-thirds of his purchase files—they will need to follow federal guidelines and qualify under the stress test.

Hinojosa, however, said she has seen the stress test push borrowers to other lending channels, including the private mortgage sector. “I think the other part of this is the unintended consequences of having such a high stress test,” she said. “It’s not only pushing clients necessarily to credit unions, [but] also increasing the amount of business that’s been going into alternative lenders.”

Although these alternative channels have seen a spike in activity, Hinojosa notes that it isn’t because these institutions do not stress test, but because they also have the ability to approve clients with extended debt-to-income ratios that the banks can’t necessarily do.

Albinati said he is also starting to send business to lenders other than the big banks. “We are doing a lot of renewals [and] pulling business away from the chartered banks, as they are not being competitive,” he said. “[With] record mortgage lending in 2020-2021, they are scaling back as mortgages are pretty competitive in terms of profit margins.”

28 Aug

Long-term view shows Toronto and Vancouver home prices remain elevated despite recent declines

General

Posted by: Dean Kimoto

Despite detached home prices in Toronto and Vancouver posting year-over-year declines in the first half of the year, a longer-term view shows prices are still elevated, and in many cases higher compared to two or three years ago.

In its Hot Pocket Communities Report released Tuesday, RE/MAX found that detached homes in nearly 93% of the 82 districts it analyzed in both cities—which included downtown neighbourhoods and exurbs—were cheaper in the first half of 2023 compared to the previous year.

The exact amount varied between as little as 1.5% in West Vancouver to a whopping 25.6% in the Toronto exurb of Brock.

“Anxious homebuyers were quick to identify the bottom of the market and jumped in with both feet in the second quarter of the year,” Christopher Alexander, president of RE/MAX Canada, said in a statement.

RE/MAX said the easing of home prices was the biggest driver of buying activity in the first half of 2023, especially for existing homebuyers looking to upgrade their current residence.

Home prices remain elevated from a historical context

However, historical RE/MAX data show that despite the recent price drops, valuations remain on par with—or still above—pre- and early-pandemic prices.

In Toronto, prices in the district encompassing the Don Valley Village and Henry Farm neighbourhoods—among the cheapest in the downtown core—dropped by 10.8% to nearly $2 million in 2023. In the previous year, prices in the district had jumped by 17.4%, from $1.87 million to $2.1 million.

Vancouver East saw an 8.1% price drop in 2023, but that followed last year’s whopping 17.3% price gain.

And when it comes to towns outside of Toronto and Vancouver, the situation is even more stark.

In the Whistler/Pemberton area, outside of Vancouver, detached home prices declined 24.8% between 2022 and 2023, according to RE/MAX data. However, they also rose by 39.3% the previous year, more than cancelling out any benefits from this year.

Detached home prices in Orangeville, outside of Toronto, dropped by 14.3% in 2023, but they had shot up 26.47% the previous year.

In other words, prices for detached homes in these neighbourhoods largely haven’t declined over time.

“When we start to compare them over three years, we see virtually no price reduction because of what pricing was in 2020-2021 to where it is today,” Elton Ash, executive vice-president of RE/MAX Canada, told CMT in an interview. “Ultimately, if you purchased a home prior to 2020 and you sell today, you’re likely going to sell for higher than what you paid for it.”

The impact of higher rates and low supply

RE/MAX cites a lack of housing supply as the largest factor driving affordability issues today.

It says that nine out of the 16 districts it surveyed reported inventory shortages. This included the Gulf Islands and Whistler/Pemberton, where new listings are down by nearly 43% and 23%, respectively.

Ash says homebuilders are slowing their construction projects largely because of higher interest rates, inflation and uncertainty around carrying costs, not to mention buyer uncertainty.

Potential buyers are staying in their homes unless they absolutely need to move, which then reduces demand for new houses to be built. “That then becomes a self-fulfilling cycle,” Ash says. “You can’t get increased inventory if people just aren’t going to move.”

But the housing inventory shortage isn’t new. In 2022, the Canada Mortgage and Housing Corporation (CMHC) concluded that developers would need to build 3.5 million more housing units by 2030 than they normally would to make housing more affordable for the average Canadian buyer.

Ultimately, Ash doesn’t see housing affordability relief in the near term for prospective buyers looking to buy in the greater Toronto or Vancouver markets.

Where the housing market goes from here

With interest rates at historic highs, and the potential for them to rise further, Ash says he expects the market to be muted throughout the winter. But he doesn’t expect that will last.

Assuming interest rates remain under control and the Bank of Canada doesn’t increase interest rates beyond September, Ash expects the spring of 2024 to be a repeat of last spring.

Pent-up demand and higher buyer confidence, along with a stable interest rate environment, could see a return to 2023’s market conditions, he says. That ultimately means higher overall house prices, especially if developers don’t pick up the pace—and anything they do start this year won’t be ready for some time.

“I don’t see inventory increasing a great deal,” Ash says. “I do see buyer demand increasing. So, therefore, pricing will start to edge up next spring.”

 

This article was written for Canadian Mortgage Trends by:

Brennan Doherty
Brennan Doherty is a Toronto-based writer. His work has appeared in a multitude of publications, including the Toronto Star, TVO, Maisonneuve, VICE World News, MoneySense, Future of Good and Strategy Online.
24 Aug

Why work with a broker when I can just go to my bank?

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Posted by: Dean Kimoto

Maybe I work with your bank already.  Except… I might have a better option.  It’s worth asking!  I just did a quick scan and from what I just saw The Dominion Lending Centres network has access to at least 76 lenders (and some local credit unions we work with I noticed weren’t on this list, so there’s even more!).

The following article was just published on Canadian Mortgage Trends:

First National comments on underwriting partnership with BMO, says move is an “endorsement of the channel”

BMO’s decision to work with First National as its underwriting partner for its return to the broker channel served as an endorsement of both FN’s services and the channel as a whole.

Those were the comments First National President and CEO Jason Ellis delivered as part of the lender’s second-quarter earnings call.

As part of BMO’s announced re-entry to the broker channel starting in early 2024, the bank confirmed it would be partnering with First National to provide its underwriting and funding services.

In comments made to CMT at the time, Justin Scully, Head, BMO BrokerEdge, said they chose First National based on its “discipline” and 30-year track record of broker underwriting and servicing.

Ellis was asked about the partnership during First National’s latest earnings call.

“To the extent that BMO made the decision to outsource the activity of adjudication and fulfillment of the mortgage applications, I can’t speak to definitively,” he said. “But I imagine having been absent from the channel for a period of time and perhaps viewing the success of TD by outsourcing that activity, may have turned their mind to the idea.”

He added that First National is “thrilled” to have earned the mandate, which he called a “great endorsement for the channel, and we think it’s a great endorsement for the service we provide here at First National.”

And while Ellis said the underwriting and servicing deal will be a “2024 event,” he noted that “very, very heavy lifting has now been done.” He also confirmed that the underwriting partnership with BMO will be “very similar” to the work it provides to its two other counter-parties, TD and Manulife.

The future of big banks in the broker channel

Asked if he thinks it’s just a matter of time before the other big banks make their own moves into the broker channel, Ellis said there’s no indication of that right now.

“I guess there’s always a risk of having one share diluted as more and more participants enter the market, but I right now don’t have any clear indication that the other [big banks] are on the verge of making any significant changes with respect to their view of how they access the market,” he said.

For now, he said First National’s opportunity to work alongside the big banks as a service provider is “a great diversification opportunity for revenue streams in a way to leverage our core competencies of underwriting and both servicing, which we continue to provide as a third-party service as well.”

No outsized risk among FN’s variable-rate portfolio

In his prepared comments on First National’s lending portfolio, Ellis confirmed that there are currently no heightened challenges being posed by the lender’s variable-rate clients.

“The arrears rate on the adjustable rate portfolio continues to track that of the broader portfolio, with no signs of stress from higher payments presenting itself yet,” he said.

Part of the reason is because First National offers a true variable-rate mortgage, also known as an adjustable-rate, where payments automatically adjust based on changes to the prime rate, which keeps clients on their contracted amortization schedule.

He added that clients are now overwhelmingly choosing fixed-rate products, a trend being seen industry wide among new originations. First National reported that just 8% of its borrowers chose an adjustable-rate mortgage in the second quarter, down from 62% a year earlier.

“Also through the quarter, there was an unusually large number of borrowers selecting 3-year terms,” Ellis added. “I think some borrowers, perhaps advised by their brokers or on their own terms, viewed a shorter term, albeit at a higher rate, as the better strategy as they looked ahead to an earlier renewal and an opportunity to access what they viewed perhaps lower rates in the near future.”

Q2 earnings overview

  • Net income: $89.2 million (+61%)
  • Single-family originations (incl. renewals): $7.4 billion (-12%)
  • Mortgages under administration: $137.8 billion (+8%)
  • 90+ day arrears rate: 0.6%

Source: Q2 2023 earnings release

Notables from its call:

First National President and CEO Jason Ellis commented on the following topics during the company’s earnings call:

  • On stable earnings despite lower originations: “Despite lower originations overall, our business model proved its resiliency. Recurring revenue from servicing and net interest earned on our portfolio of securitized mortgages delivered expected stability to our financial results. Key to maintaining these predictable and recurring revenues is the continued growth of mortgages under administration even during periods of reduced originations.”
  • On the importance of the broker channel to the big banks: “The banks recognize the scale and continued growth of the broker channel as a source of distribution for residential mortgages. I think it continues to be an increasingly relevant place to originate. And I think demographically, younger and newer borrowers are using the Internet and nontraditional channels to access financial services generally, including mortgages…
  • On the financial impact of borrowers’ preference shifting back to fixed rates: “…there is a hedging aspect to committing on a fixed rate, which doesn’t exist on a commitment for an adjustable rate. Otherwise, our math to determine the appropriate rates on both products is similar and should result in similar outcomes for us.”
  • On lower mortgage prepayments: “Our return to more traditional prepayment speeds has been an important factor in facilitating [mortgages under administration] growth. Higher mortgage rates have reduced the incentive to refinance midterm and more mortgages are reaching maturity, resulting in more renewal opportunities.”
  • On First National’s Alt-A portfolio: “New Excalibur originations were down consistent with the overall residential experience. Arrears in the Alt-A book are flat compared to last quarter, and there has been no meaningful change in any of the average portfolio metrics, like loan-to-value, credit scores or debt service ratios.”
  • On origination forecasts: “In light of the last two rate hikes by the Bank of Canada and the marginal impact to affordability, we are reviewing our expectations for residential originations in the second half. We no longer anticipate that originations in the second half will exceed those from the same half last year. We still believe, however, that on a relative basis, the second half will compare to last year more favourably than the first half did.”

First National Q2 conference call

This article was written 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.
22 Aug

Latest News

Posted by: Dean Kimoto

Just read a great article on Real Estate Invesment Properties vs other options, CLICK HERE to read in full.

The quick review: in terms of cashflow, purchasing an investment property right should be compared against other investments.  For the long term, in terms of asset appreciation, well that may be another story!

As always, best to speak with your team of professionals to see what makes sense for your situation and comfort level.  If you don’t know where to start, call me and lets come up with a plan.

8 Aug

Real estate markets defy rate hikes: annual growth in activity persists, but there are signs of a cooling ahead

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Posted by: Dean Kimoto

Real estate markets in the country’s largest metro areas remained relatively strong in July despite the Bank of Canada’s most recent rate hikes.

Data from some of the key real estate boards show continued year-over-year growth in activity and continued upward momentum in prices.

In Toronto, sales posted a 7.8% year-over-year gain, while in Vancouver they were up nearly 29%.

However, Andrew Lis, the Real Estate Board of Greater Vancouver’s director of economics and data analytics, said part of the strength is due to weaker sales a year ago as interest rates were starting to rise.

“Last July marked the point when the Bank of Canada announced their ‘super-sized’ increase to the policy rate of one full per cent, catching buyers and sellers off guard, and putting a chill on market activity at that time,” he noted.

Still, Lis notes that the current strength is against the backdrop of borrowing rates that are much higher compared to a year ago. “Despite borrowing costs being even higher than last July, sales activity surpassed the levels we saw last year, which I think says a lot about the strength of demand in our market and buyers’ ability to adapt to and qualify for higher borrowing costs,” he continued.

Signs of cooling ahead

On a monthly basis, sales in most markets were down, including in Vancouver (-3%), Toronto (-8.8%), while price gains moderated.

Pressure eased on prices thanks in part to an increase in supply as sellers have started listing homes in greater numbers, particularly in Ontario and British Columbia.

“If sustained, we would expect price gains to continue moderating in the coming months,” noted RBC economists Robert Hogue and Rachel Battaglia.

“Signs of cooling activity in some of Canada’s largest markets are consistent with our view that the spring rebound was premature, and will taper off further amid high interest rates, ongoing affordability issues and a looming recession,” they added. “We think the path ahead is more likely to be slow and bumpy, with the recovery gaining momentum when interest rates come down—a 2024 story.”

Regional housing market roundup

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

QUICK LINKS:

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Greater Toronto Area

July 2023 YoY % Change
Sales 75,250 +7.8%
Benchmark price (all housing types) $1,118,374 +4.2%
New listings 13,712 +11.5%
Active listings 15,371 +0.3%

“Home sales continued to be above last year’s levels in July, which suggests that many households have adjusted to higher borrowing costs. With that being said, it does appear that the sales momentum that we experienced earlier in the spring has stalled somewhat since the Bank of Canada restarted its rate tightening cycle in June,” said TRREB President Paul Baron.

“Compounding the impact of higher rates has been the persistent lack of listings for people to purchase compared to previous years,” he added.

Source: Toronto Regional Real Estate Board (TRREB)

Greater Vancouver Area

July 2023 YoY % Change
Sales 2,455 +28.9%
Benchmark price (all housing types) $1,210,700 +0.5%
New listings 4,649 +17%
Active listings 10,301 -4%

“While sales remain about 15% below the 10-year average, they are also up about 30 per cent year-over-year, which is not insignificant,” said Andrew Lis, REBGV Director of Economics and Data Analytics.

“Looking under the hood of these figures, it’s easy to see why sales are posting such a large year-over-year percentage increase,” he added. “Last July marked the point when the Bank of Canada announced their ‘super-sized’ increase to the policy rate of one full per cent, catching buyers and sellers off guard, and putting a chill on market activity at that time.”

Source: Real Estate Board of Greater Vancouver (REBGV)

Montreal Census Metropolitan Area

July 2023 YoY % Change
Sales 3,098 +1%
Median Price (single-family detached) $555,000 +1%
Median Price (condo) $395,000 0%
New listings 4,354 -9%
Active listings 14,820 +20%

“After a disappointing month of June, transaction activity is picking up in the Montreal CMA. For the first time since the summer of 2021, it is the Island of Montreal that is pushing activity in the metropolis, driven by sales of small income properties and single-family homes,” said Charles Brant, Director of the QPAREB’s Market Analysis Department.

“Clearly, some buyers are less affected by the rise in interest rates. The majority of buyers currently in the market can count on income or equity from their real estate holdings, with values compared to last year,” he added. “The many newcomers with immigration status allowing them to buy a property in Quebec are also joining the ranks of this category of buyers with good purchasing power.”

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

Calgary

July 2023 YoY % Change
Sales 2,647 +17.7%
Benchmark price (all housing types) $567,700 +5.7%
New listings 3,247 +2.2%
Active listings 3,488 -34.8%

“Continued migration to the province, along with our relative affordability, has supported the stronger demand for housing despite higher lending rates,” said CREB Chief Economist Ann-Marie Lurie.

“At the same time, we continue to struggle with supply in the resale, new home and rental markets resulting in further upward pressure on home prices,” she added.

Source: Calgary Real Estate Board (CREB)

Ottawa

July 2023 YoY % Change
Sales 1,658 +11%
Average Price (residential property) $746,445 -4%
Average Price (condominium) $448,380 +2%
New listings 2,758 -14%

“Both transactions and average prices are up from last July indicating consumers remain confident in the market notwithstanding the two recent quarter-percent interest rate hikes by the Bank of Canada,” said OREB President Ken Dekker.

“We’re only a month into the third quarter, but based on July’s positive indicators, we are likely to see solid year-over-year results in the second half,” he added.

Source: Ottawa Real Estate Board (OREB)

 

This article was written 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.
31 Jul

Renting vs. buying in today’s market: how monthly payments compare

General

Posted by: Dean Kimoto

In addition to the stats on renting vs buying there’s some great economic data following!

This article was written by Steve Huebl for Canadian Mortgage Trends: Renting vs. buying in today’s market: how monthly payments compare

A new study has found the cost of renting vs. buying comparable housing in select Canadian markets is nearly on par.

In fact, the difference between renting and buying was less than $500 per month in 11 different markets, according to the report from Zoocasa.

“Though no market is more affordable to buy in than rent, there are several markets where the rental and mortgage payments are similar, though these are all outside of Ontario and British Columbia,” the report notes.

For example, in Winnipeg the average monthly rent is $1,475, while the average mortgage payment was calculated at $1,493, for a difference of just $18. Similarly in Quebec City and Regina, the Zoocasa report found average rents were just slightly more affordable, by $54 and $148, respectively, per month.

It’s important to note that the study didn’t factor in other costs such as utilities, maintenance or property taxes.

In other markets, the monthly cost between renting and owning was more drastic. The largest payment difference was found in Surrey, B.C., where the average mortgage payment was calculated at $2,639 more than the cost of renting. Similar large gaps were seen in the Ontario cities of Burlington and Brampton.

The results were in contrast to a 2021 Royal LePage survey that found, on average, the cost of homeownership was actually less than the cost of renting a comparable housing unit. At that time, of course, homeowners were benefiting from record-low interest rates.

Zoocasa said the average rental rates were sourced from Rentals.ca, while mortgage payments were based on average house price data from the Canadian Real Estate Association and calculated assuming a 20% down payment, and a 5.04% rate amortized over 30 years.

Courtesy: Zoocasa

Other mortgage and real estate stories…

Bank of Canada expected to keep benchmark rate at 5%

The Bank of Canada’s benchmark interest rate is expected to spend the remainder of the year at its current 22-year high of 5.00%, according to a median of responses from market participants.

The findings were released in the Bank of Canada’s second-quarter Market Participants Survey, which surveyed 30 financial market participants between June 8 and 19, 2023.

Asked for their forecast for the Bank of Canada’s policy interest rate, respondents were near-unanimous in believing the policy rate will remain at 5% through the end of the year.

That’s contrary to current bond market pricing, which currently sees a near 80% chance of one more quarter-point rate hike at the Bank’s September meeting.

Most survey respondents expect rates to fall to 4.75% by March 2024, and believe the benchmark rate will end 2024 at 3.50%. By the third quarter of 2025, a median of responses from participants see the Bank of Canada cutting rates further to 2.50%.

The respondents pointed to higher interest rates as the top risk facing economic growth in Canada, followed by tighter financial conditions and a decrease in purchasing power.

A majority of respondents also now believe Canada will skirt a recession and see annual gross domestic product growth remaining positive throughout both 2023 (+0.7%) and 2024 (+1.2%). In the first-quarter survey, the median forecast was for slightly negative growth in 2023.

On inflation, the participants expect total CPI inflation to slow to 3% by the end of 2023 (up from 2.7% in the previous survey), easing further to 2.2% by the end of 2024 (unchanged from the Q1 survey).

Canadian job vacancy rate drops to two-year low

Canada’s job vacancy rate continued to trend down in May, reaching a two-year low.

Statistics Canada reported on Thursday that the number of unfilled positions fell to 759,000 in May, a decline of 26,000 from April. The declines were concentrated in Quebec (-10,800), Manitoba (-3,700) and Saskatchewan (-2,400).

This resulted in the job vacancy rate falling to 4.3%, down by 0.1% from the previous month. Compared to last year, the job vacancy rate is down by 1.5 percentage points.

The StatCan report shows the number of payroll employees rose by 129,900 in the month, led by gains in public administration (106,200) and healthcare and social assistance (+7,000).

Average weekly earnings were up 3.6% on an annual basis to $1,200.75. That’s up from the 2.9% pace reported in April.

U.S. Fed hikes interest rates

On Wednesday, the U.S. Federal Reserve raised its benchmark borrowing costs to the highest level seen in more than 22 years. The Federal Open Market Committee (FOMC) raised the fed funds rate to a target range of 5.25% to 5.5%. The midpoint of this range represents the highest benchmark rate level since early 2001.

Financial markets had largely expected this rate hike.

Fed Chairman Jerome Powell noted during a news conference that inflation has shown some moderation since the middle of the previous year, but still has a way to go to reach the Fed’s 2% target. Powell left open the possibility of maintaining rates at the next meeting in September, stating that future decisions would depend on carefully assessing incoming data and its impact on economic activity and inflation.

“It’s certainly possible we would raise (rates) again at the September meeting, and it’s also possible we would hold steady,” he said.

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.
26 Jun

Another week, another rise in fixed mortgage rates. How high could they go?

Latest News

Posted by: Dean Kimoto

This article is from the Canadian Mortgage Trends website: https://www.canadianmortgagetrends.com/2023/06/another-week-another-rise-in-fixed-mortgage-rates-how-much-higher-could-they-go/

Another week and another round of fixed rate hikes have swept Canada’s mortgage market.

Mortgage lenders, including most of the big banks, have continued to hike their fixed mortgage rates following the recent surge in Government of Canada bond yields, which are used to price fixed-rate mortgages.

Several big banks, including BMO, CIBC and RBC, have hiked their posted rates by 15 to 40 basis points over the past week (one basis point is equivalent to 1/100th of a percentage point, or 0.01%).

 

 

Some of the biggest moves were seen in shorter 1- and 2-yr terms, according to data from MortgageLogic.news. Among national mortgage providers, average deep-discount rates for a 1-year term are now up to 6.25% (from 5.99% a week ago). And among the big banks, posted 2-year rates are up by about the same amount, averaging nearly 6.40% now.

Ron Butler of Butler Mortgage points out that bond yields are now up by over 100 basis points, or a full percentage point, from their March lows.

In previous weeks, rates with a 4-handle—that is, those in the 4% range—have largely disappeared. But the latest rounds of rate hikes are taking many fixed rates well into 6% and 7% territory.

Asked if 5-handle rates could be next to dry up, Butler said borrowers can expect 1- and 2-year rates in the 6% range, while 3- and 5-year rates should stay in the 5% range “for the time being.”

He adds that clients are continuing to express interest in both two and three-year terms.

Will rates continue to increase next week?

Given the surge in bond yields, Butler suspects lenders and brokerages will continue to raise fixed rates next week, potentially by as much as 30 bps.

And now that the 5-year yield has broken 3.60%, a key threshold, it still has its sights on the next important level of 4.00%, says Ryan Sims, a TMG The Mortgage Group broker and former investment banker.

“If we see a large drop today on the close, I think a lot of lenders will hold, but if we close up or even flat today, and next week is the same, then I think we could see some further fixed rate increases,” he told CMT.

“If we see the Canada 5-year bond hit the magical 4.00%, there is not a lot of resistance between 4.00% and 5.00%,” he added. “It’s not my prediction at all, but if we hit 4%, hold the 4%, and get any little bit of inflationary news, then it will be rocket fuel to the yield.”

Michael Gregory, Deputy Chief Economist at BMO Economics, notes that 2-year yields are up 43 bps from May’s average so far and are “poised to become the highest monthly mark in almost 15 years.”

He said the increase reflects “the prospects for a higher terminal policy rate and a ‘higher-for-longer’ theme to subsequent easing (presuming the economy steers clear of a deep recession).”

“Meanwhile, on both sides of the border, we look for the yield curve (2s-10s) to reach peak inversion for the cycle (on a monthly average basis) within the next month or two,” he added.

What’s driving the rate hikes?

The increase in Canadian bond yields came following recent rate hikes by other world central banks, as well as a rise in U.S. Treasury yields that came in response to hawkish comments from Federal Reserve Chair Jerome Powell.

Testifying before U.S. lawmakers, Powell suggested more policy tightening will be needed. At a separate event, Fed Governor Michelle Bowman said “additional policy rate increases” would be needed to bring inflation under control.

Last week, Powell also said that rate cuts would only be considered by the Fed once inflation comes down significantly. “It will be appropriate to cut rates at such time as inflation is coming down really significantly, and again, we’re talking about a couple years out,” he said.

U.S. markets are now pricing in a higher chance of two additional FOMC rate hikes this year., and any moves south of the border inevitably have an impact on Canadian interest rates.

This week also saw rate hikes by the Swiss National Bank, the Bank of England and Norges Bank. The latter two surprised markets with larger-than-expected increases of 50 bps.

Taken all together, the latest rate commentary and central bank moves have heightened market concerns about global inflation as well as the economic impact of higher-than-expected policy rates.

The latest Bank of Canada rate forecasts

Those with a variable rate are also expected to feel more pain from rising rates, potentially as soon as the Bank of Canada‘s next policy meeting on July 12.

Markets are pricing in a nearly 70% chance of an additional quarter-point rate hike next month, with those odds rising to 100% by September. All eyes will be on May inflation and employment figures, which could sway the BoC decision either way.

The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.

Target Rate:
Year-end ’23		 Target Rate:
Year-end ’24		 Target Rate:
Year-end ’25		 5-Year BoC Bond Yield:
Year-end ’23		 5-Year BoC Bond Yield:
Year-end ’24
BMO 5.00% (+50bps) 4.00% (+50bps) NA 3.55% (+5bps)
 3.05% (-20bps)
CIBC 5.00% (+50bps) 3.50% (+50bps) NA NA NA
NBC 5.00% (+100bps) 3.75% (+75bps) NA 3.40% (+60bps) 2.95% (+25bps)
RBC 5.00% (+50bps) 3.50% (+50bps) NA 3.30% (+55bps) 2.75% (+20bps)
Scotia 5.00% (+25bps) 3.75% (+50bps) NA 3.65% (+40bps) 3.60% (+35bps)
TD 5.00% (+50bps) 3.50% (+100bps) NA 3.65% (+60bps) 2.85% (+25bps)

 

10 May

RBC sees mortgage delinquencies rising nearly 30% in the coming year

Latest News

Posted by: Dean Kimoto

After spending most of the past year at or near record lows, Canada’s mortgage delinquency rate is expected to return to pre-pandemic levels, potentially rising by nearly a third.

That’s the latest forecast from RBC Economics, which points to a “looming” recession and an expected increase in the unemployment rate to 6.6% by next year as catalysts for more Canadians falling behind on their mortgages.

“The noticeable improvement in Canadians’ finances (in the aggregate) early in [the] pandemic wasn’t sustainable,” wrote RBC’s Robert Hogue and Mishael Liu. “Those gains are now reversing and will likely erode further amid a softening economy and higher interest rates.”

Despite most Canadians’ financial situations having improved over the course of the pandemic, the RBC report points to the end of government support programs, a rising cost of living and skyrocketing interest rates as factors that are causing a growing number of borrowers to fall behind on their debt payments.

Delinquency rates rising on non-mortgage debt, mortgages to follow

The report points to rising delinquency rates for non-mortgage debts, such as credit cards, auto loans and lines of credit, which are often a precursor to mortgage delinquencies.

Mortgage delinquencies, while rising slightly from their record low, are considered a backward-looking indicator, which tells us more about what was happening a year ago than it does today, Ben Rabidoux of Edge Realty Analytics has pointed out.

That’s because when a borrower loses their job, they typically have savings that can get them by for six months to a year, or get a mortgage refinance. On top of that, mortgages aren’t considered delinquent until they are at least 90 days overdue.

“What’s a much better indicator is looking at things like credit card delinquencies, [which are] definitely ticking up,” he said on a call for clients earlier this year. “So, you can kind of roll forward six months and this is going to be the trend in mortgage delinquencies.”

Credit ratings agency Equifax Canada has also reported on rising non-mortgage debt delinquencies, which were up 11% in the fourth quarter of 2022. Among mortgage holders, the rise in non-mortgage delinquencies was up by 6% year-over-year.

Among mortgages, delinquency rates remain just off all-time lows at 0.15% as of February, according to the Canadian Bankers Association, with rates highest in Saskatchewan (0.62%) and lowest in Quebec at 0.11%.

Canadians more interest rate-sensitive than ever

While an expected rise in the unemployment rate is expected to reverse about half of the decline in mortgage delinquencies over the coming year, the RBC report notes that a combination of higher debt loads and higher interest rates, which have made Canadians “more interest rate-sensitive than ever,” will play a role too.

As a result, delinquency rates are expected to continue trending higher into the medium to longer term “as earlier interest rate hikes and heavier debt-service loads catch up with financially-stretched mortgage holders.”

While variable-rate mortgage holders have already felt the pain of higher interest rates in many cases, RBC says this will “also become the reality for fixed-rate mortgage holders once their term expires.”

RBC suggests those at greatest risk are borrowers who bought a home between late 2020 and early 2022, when interest rates were at their lowest. The impact of higher rates for fixed-rate mortgage holders are expected to come at renewal time generally between 2025 and 2027.

Even though the report’s authors expect the market to remain “challenging for years to come,” they say a full-out economic collapse is “unlikely.”

“We expect any financial troubles to remain relatively contained in the short to medium terms,” they noted.

__________

This article was written by Steve Huebl and re-posted from the Canadian Mortgage Trends website:

RBC sees mortgage delinquencies rising nearly 30% in the coming year

 

 

13 Apr

Bank of Canada Holds Policy Rate At 4.5%

Latest News

Posted by: Dean Kimoto

The Bank of Canada holds rates steady again but maintains its commitment to 2% inflation

The Bank of Canada left the overnight policy rate at 4.5%, as expected, stating their view that inflation will hit 3% by mid-year and reach the 2% target by next year. They admit, however, that demand continues to exceed supply, wage gains are too high, and labour markets are still very tight. The Bank is also continuing its policy of quantitative tightening.

“Economic growth in the first quarter looks to be stronger than was projected in January, with a bounce in exports and solid consumption growth. While the Bank’s Business Outlook Survey suggests acute labour shortages are starting to ease, wage growth is still elevated relative to productivity growth. Strong population gains are adding to labour supply and supporting employment growth while also boosting aggregate consumption. Housing market activity remains subdued.”

The Bank expects consumption spending to moderate this year “as more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly.”

“Overall, GDP growth is projected to be weak through the remainder of this year before strengthening gradually next year. This implies the economy will move into excess supply in the second half of this year. The Bank now projects Canada’s economy to grow by 1.4% this year and 1.3% in 2024 before picking up to 2.5% in 2025”.

Most economists believe the Bank of Canada will hold the overnight rate at 4.5% for the remainder of this year and begin cutting interest rates in 2024. A few even think that rate cuts will begin late this year.

In contrast, the Fed hiked the overnight fed funds rate by 25 bps on March 22 despite the banking crisis and the expectation that credit conditions would tighten. This morning, the US released its March CPI report showing inflation has fallen to 5% year-over-year. Next Tuesday, April 18, Canada will do the same. The base year effect has depressed y/y inflation. Canada’s CPI will likely have a four-handle.

Fed officials next meet in early May, and it is widely expected that the Fed will continue to raise the policy rate while the Bank will continue the pause.

Due to the differences in our mortgage markets and the higher debt-to-income level in Canada, our economy is much more interest-sensitive. Despite these disparate expectations, the Canadian dollar has held up relatively well.

Bottom Line

The Bank of Canada upgraded its growth projections for this year in a new forecast, suggesting the odds of a soft landing have increased. This may preclude interest rate cuts this year.

“Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target,” the bank said.

The April Monetary Policy Report suggests strong Q1 growth resulted from substantial immigration. With the population proliferating, labour shortages should continue to decline, and inflation will fall to 3% later this year. The global growth backdrop is better than expected, though the Bank continues to look for a slowdown in the coming months, citing the lagged effects of rate hikes and the recent banking sector strains.

Governor Macklem said in the press conference that the economy needs cooler growth to corral inflation, although the Bank’s forecast does not include an outright recession.

The Bank will refrain from cutting rates this year. The Governor explicitly said at the press conference that market pricing of rate cuts later this year is not the most likely scenario.

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

Bank of Canada Pauses Rate Hikes As US Fed Promises Further Tightening

Latest News

Posted by: Dean Kimoto

The Bank of Canada holds rates steady even as the Fed promises to push higher

As expected, the central bank held the overnight rate at 4.5%, ending, for now, the eight consecutive rate increases over the past year. The Bank is also continuing its policy of quantitative tightening. This is the first pause among major central banks.

Economic growth ground to a halt in the fourth quarter of 2022, lower than the Bank projected. “With consumption, government spending and net exports all increasing, the weaker-than-expected GDP was largely because of a sizeable slowdown in inventory investment.” The surge in interest rates has markedly slowed housing activity. “Restrictive monetary policy continues to weigh on household spending, and business investment has weakened alongside slowing domestic and foreign demand.”

In contrast, the labour market remains very tight. “Employment growth has been surprisingly strong, the unemployment rate remains near historic lows, and job vacancies are elevated.” Wages continue to grow at 4%-to-5%, while productivity has declined.

“Inflation eased to 5.9% in January, reflecting lower price increases for energy, durable goods and some services. Price increases for food and shelter remain high, causing continued hardship for Canadians.” With weak economic growth for the next few quarters, the Bank of Canada expects pressure in product and labour markets to ease. The central bank believes this should moderate wage growth and increase competitive pressures, making it more difficult for businesses to pass on higher costs to consumers.

In sum, the statement suggests the Bank of Canada sees the economy evolving as expected in its January forecasts. “Overall, the latest data remains in line with the Bank’s expectation that CPI inflation will come down to around 3% in the middle of this year,” policymakers said.

However, year-over-year measures of core inflation ticked down to about 5%, and 3-month measures are around 3½%. Both will need to come down further, as will short-term inflation expectations, to return inflation to the 2% target.

Today’s press release says, “Governing Council will continue to assess economic developments and the impact of past interest rate increases and is prepared to increase the policy rate further if needed to return inflation to the 2% target. The Bank remains resolute in its commitment to restoring price stability for Canadians.”

Most economists believe the Bank of Canada will hold the overnight rate at 4.5% for the remainder of this year and begin cutting interest rates in 2024. A few even think that rate cuts will begin late this year.

In Congressional testimony yesterday and today, Federal Reserve Chair Jerome Powell said that the Fed might need to hike interest rates to higher levels and leave them there longer than the market expects. Today’s news of the Bank of Canada pause triggered a further dip in the Canadian dollar (see charts below).

Fed officials next meet on March 21-22, when they will update quarterly economic forecasts. In December, they saw rates peaking around 5.1% this year. Investors upped their bets that the Fed could raise interest rates by 50 basis points when it gathers later this month instead of continuing the quarter-point pace from the previous meeting. They also saw the Fed taking rates higher, projecting that the Fed’s policy benchmark will peak at around 5.6% this year.

Bottom Line

The widening divergence between the Bank of Canada and the Fed will trigger further declines in the Canadian dollar. This, in and of itself, raises the Canadian prices of commodities and imports from the US. This ups the ante for the Bank of Canada.

The Bank is scheduled to make its next announcement on the policy rate on April 12, just days before OSFI announces its next move to tighten mortgage-related regulations on federally supervised financial institutions.

To be sure, the Canadian economy is more interest-rate sensitive than the US.  Nevertheless, as Powell said, “Inflation is coming down, but it’s very high. Some part of the high inflation that we are experiencing is very likely related to a very tight labour market.”

If that is true for the US, it is likely true for Canada. I do not expect any rate cuts in Canada this year, and the jury is still out on whether the peak policy rate this cycle will be 4.5%.

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