Tuesday, January 24, 2017

Buying homes in the millennial age

Late last Fall, Mortgage Professionals Canada (MPC) polled 2000 Canadians -- 540 were millennials (18-34-year-olds) -- across the country to get their feedback about the mortgage industry, mortgage brokers and the housing market in general.

Not surprisingly, millennials see the housing market quite differently than their parents and approach home ownership from the view of generating income.

Overall, four-in-ten agree that real estate is a good long-term investment and classify a mortgage as “good debt”.

Thirty-four per cent of First Time Home Buyers think that generating income from the property is important and 21% plan to rent out a part of their home. New homebuyers who renovated did so to add a rental space.

Now considered the “new normal” generating income from a property is more important these days to young people, whether as a direct investment or to help pay off their mortgage by renting out a portion of their own home.

Where does the down payment come from?

The rising costs of home ownership has been a barrier for many millennial home buyers who are challenged to come up with the down payment. However, their strategies are not unusual and are similar to the ways the boomer generation came up with their down payments. Here are the top three sources:

1. Personal savings (60%)
2. Gift from parents or other family members (19%)
3. RRSP withdrawal (12%)

However, in today’s market, it’s more like a race -- save for a down payment, then try to buy something before prices are unreachable. 

Importance of home ownership

A 2016 poll by CIBC found that home ownerships is important to young buyers, like most Canadians. According to the poll,  85% view home ownership as a priority.
More good news – millennials are well-prepared for home ownership but were a bit surprised that costs were slightly more than they expected. 

Who to call for a mortgage?

So, who do millennials call when they want a mortgage, mortgage broker or bank? Well, they’re almost equal-- 33% use their usual bank and 29% get a referral from family and friends as well as Realtors for a mortgage professional. Here are the top five reasons millennials like working with a mortgage broker:

1. To get the best rate
2. To get multiple quotes
3. To help with the paperwork
4. To get help with the process
5. Better customer service

Overall satisfaction with working with a mortgage broker is higher than those who worked with a bank – 78% compared to 69%.

While it’s true that mortgage broker share is trending upwards, there are still some challenges for the industry. The main challenge is broker awareness – millennials don’t seem to know how brokers can help them. 

However, once a home buyer works with a broker they tend to use that same broker again, if the broker continues to stay in contact. Seventy-seven per cent of 18-34-year-olds would like to contacted after the deal is finalized. That contact can be via newsletters, periodic updates about the mortgage industry, in-person meetings and/or phone calls.

Help for first time home buyers

Affordability is the key for millennials and in Ontario and BC they are getting a bit of help. The Ontario government is doubling the rebate on the land transfer tax for first-time homebuyers to $4,000.  

The Ontario Real Estate Association said the increased rebates of the land transfer tax will help more young families achieve their dreams of home ownership.

In BC, first-time homebuyers have access to an interest-free loan from the B.C. government. This new provincially-backed loan program matches the amount a first-time buyer has saved for a down payment -- up to $37,500, or five per cent of the home’s purchase price.

Bottom line: There is continued optimism about the housing market.

Friday, December 30, 2016

10 crystal ball predictions for 2017

We are living in uncertain times..again. So, what can Canadians look forward to in the upcoming year – the unpredictable, for sure; however, there are a few trends we can pretty much bank on – maybe.

  1.  Fixed rate mortgages are increasing. Since the U.S. election we have already seen some upward pressure on bond yields, which is one of the reasons fixed rates have increased.  The U.S. Federal Reserve has already started to raise its rates. This may put pressure on the Bank of Canada (BoC) to start raising the overnight rate in 2017 and into 2018. 
  2. Trade disputes with the US. The incoming president of the US has already said he will get tough on trade deals. Our softwood-lumber agreement will soon expire and you can be sure that will be a tough negotiation.
  3.  Oil prices may be higher – this is already happening, which may lead to improvements in  the economies of Alberta and Saskatchewan.
  4.  Provincial growth. Royal Bank of Canada expects Ontario and Manitoba to be co-leaders in economic growth in 2017 while Alberta could place third and British Columbia and Saskatchewan may tie for fourth spot.
  5.  The battered loonie may make some gains. Economist Todd Hirsch predicts the Canadian dollar will dip 70 cents early in the year, but will finish out the year at 78 cents. He also predicts the Federal Reserve will raise rates three times in 2017, while the Bank of Canada will sit on the sidelines until 2018. However, the loonie should stabilize and regain some ground toward the end of the year.
  6.  Economy will expand to 2%. Bank of Montreal economist Douglas Porter predicts that the federal government’s long-awaited infrastructure stimulus measures should boost the economy.
  7.  Changes to NAFTA & TPP. This could have a negative impact on Canada’s growth.  The bulk of Canada’s exports go to the US. However, the new president hasn’t said too much about Canada, yet. In a best-case scenario, our trade ties could get stronger.
  8.  The pace of home prices will slow, especially in B.C. The latest numbers from the Canadian Real Estate Association (CREA) and the freshest reading of the Teranet-National Bank home price index are already showing this trend. An ample supply of listings relative to demand is anticipated to keep price gains in check.
  9.  Help for first-time homebuyers. CREA predicts that housing sales, nationally, will decline, especially in BC and Ontario due affordability issues and tightened mortgage regulations. However, both provinces have introduced measures for first-time homebuyers to help with affordability.
  10.  Housing sales will rise by 3.5% in Alberta. This is a hopeful prediction for the hard-hit province.  Sales are also forecast to improve modestly in Manitoba and New Brunswick. Sales will ease  slightly in Saskatchewan, Nova Scotia, Prince Edward Island and Newfoundland and Labrador.

Happy New Year!

Monday, October 03, 2016

A new world view – the impact of the Millennial generation

The world has changed dramatically over the past eight years since the Global Recession hit in 2008. The biggest change and one that will have the biggest impact to future economies is the changing demographics of the world’s population.

Millennials (ages 18-34) have now surpassed the Baby Boomer generation (ages 51-69) and Gen X’ers (ages 35 to 50) will surpass Boomers by 2028. These two groups, Millennials and Gen X’ers,  are quite opposite to Boomers in their spending habits, in their lifestyle choices, and their personal goals and will have a definite impact on our economies worldwide
Their spending habits, for example, are vastly different: Millennials are thrifty, buying more but spending about a quarter less on average than Boomers or Gen Xers, according to a new TD Bank report.

Research has found that Millennials are “confident, self-expressive, liberal, upbeat and open to change.” There are also some interesting differences between them and older generations. Here is how they match up on what they consider the ultimate reward for paid employment:

  1.  Boomers want a prestigious title and the corner office.
  2.  Gen Xers want the freedom not to have to do something.
  3. Millennials prefer meaningful work.

About having children

  1.  Boomers are controlled, their children were planned.
  2. Gen Xer’s are doubtful about the possibility of becoming parents.
  3. Millennials are definite about parenthood and view marriage and parenthood as more important than careers and success.

Another important difference is that Millennials are savers, smart shoppers and very tech savvy.  They are better money managers than older generations and live within their means. Despite the burden of student debt they seem to have money.

The Sharing Economy

What older generations considered “must-haves” are no longer important. For example, 30% of Millennials do not intend to purchase a car in the near future. Instead, they like the idea of Uber. They like to travel but check out sites like Airnb. Hotels and rental car companies have already begun to feel the effects.

The Freelance Economy

The freelance or “gig” economy has been growing for the past 10 years.  Millennials like the flexibility of freelance work for its flexibility. One reason is they are vastly under-employed despite having the most education and freelancing has become a viable alternative.

What about housing?

They like the idea of home ownership. According to the TD Bank study, the top three priorities for Millennials before purchasing a home include saving for a down payment, paying off debt and having a steady job. And 63% of them are considering purchasing a home in the next two years. Because they are a generation of savers, nearly two-thirds are saving for a down payment, citing it as the biggest hurdle. Other key findings include the following:

  •  One-fifth of Millennials (19% ) plan to supplement their savings for a home with financial assistance from friends and family, and 65% plan to have a spouse or partner as a co-signer
  • They want to pay off their mortgages quickly.
  • Seventy-eight per cent want move-in ready homes. 
  • Seventy-seven per cent  percent cited mortgage rates as the most important factor when purchasing a home
  • Eighty per cent of Millennials feel commute time is key when purchasing a home. These location factors weigh heavily on their decision about buying in increasingly expensive urban housing markets.

Here’s what they don’t want to do:

  • Move into a smaller house than they initially desired (68%)
  • Sacrifice amenities e.g., convenient access to shops and services (81%)
  • Compromise on their top choice of neighborhood (80%)

The New Economy

While it’s hard to predict what will happen in the future, it’s clear that Millennials and the technology revolution have already impacted global economies. What they do, their attitudes and behaviours are leading indicators of what's to come -- what they do will shape the rest of the world. They represent a huge shift in how people learn about the world around them and how they engage in it. Perhaps it’s time for a rethink about what is “normal” in today’s economy and work towards adapting to the changes.

Friday, August 26, 2016

The state of the mortgage industry

By Mark Kerzner, President, TMG The Mortgage Group

Perhaps it's just that I am feeling a little nostalgic today or perhaps it's the Toronto heat and humidity starting to get to me, but I was curious to see just how far we, as a mortgage industry, have come over the past number of years.

There are many of you who were not working in this industry at the end of the last decade, a time when institutional 'A' lending included beacon scores of 620 or higher. In fact, there was a 'sandbox' that allowed lenders to extend as much as 3% of their loans to clients who had beacon scores as low as 580.

At the same time 'A' lenders were able to provide loans on stated income; 65% equity deals were commonplace; rentals and refinances could be had up to 95% loan-to-value; mortgagors could amortize to 40 years and purchasers could borrow with $0 down.

Perhaps we went too far.

On the policy side

When the Global Financial Crisis (GFC) hit, we witnessed a market collapse in the United States. Canadian regulators, policy makers and government did not want to expose us to the same fate. They enacted a series of regulation and policy changes, which did a good job to ensure prudent lending practices.

  • Amortization terms were reduced 
  • Loan-to-value limits were changed for refinances and rental properties. 
  • Restrictions on lines of credit limits were introduced
  • There were more stringent underwriting guidelines, including higher beacon scores.
  • And so on… 

And while recoveries were muted in other countries, our economy, fueled by a buoyant resource sector and low interest rates, allowed our housing market to remain robust. With low interest rates and a healthy housing market, prices continued to rise.

The increase in home values has been most noticeable in Toronto and Vancouver. Policy makers and regulators who were once viewing decisions based on ensuring strong credit standards are now also viewing decisions under the microscope of appreciating prices and increasing debt levels.

In the early winter of 2015/6, we saw the introduction of larger down payment requirements for higher-valued homes. We are now hearing about increased capital requirements for homes in certain geographic areas and most recently, there have been suggestions that we deal with supply side constraints with demand side policy restrictions. These latest recommendations are all in an effort to help slow down a housing market to prevent a potential crash.

On the mortgage supply side

Around the same time as the GFC started to impact liquidity, lending guidelines, etc., the composition of the Canadian lending environment also started to change.

First, a number of alternative lenders left the market; for example: Accredited and GE Money. Then, a number of 'A' lenders either shut down or stopped originating loans through mortgage brokers such as FirstLine, HSBC, ING, VanCity.

While we have lost a number of lenders, which has the potential to impact competition and ultimately the rates offered to clients, a number of new entrants have entered the market as well. RMG emerged stronger than before as well as Marathon Mortgages and Manulife Financial, to name a few.

And while guideline changes have made it much harder for many borrowers to qualify for 'A' lending products, there has been a resurgence in the alternative and private lending markets to fill that void.

Putting the two sides together

When I look back on our industry I feel a huge sense of pride. We have navigated through constant change with leadership and professionalism. In fact, broker share has grown from approximately 23% to 30% during these tumultuous times.

The strength of the mortgage broker channel is leading to consumers saving significantly on their mortgage costs as well. A 2011 study by the Bank of Canada said the average discount of borrowers who use a broker was 19 bps.

Even if that number of 19 basis points is overstating today’s savings and we reduce it by nearly half, say to 10 basis points, that means that of the approximate $75B in total mortgages originated by brokers, Canadians save nearly $75,000,000 (per year) in their mortgage payments.

Furthermore if the entire mortgage market is $225B in annual mortgage production and the remaining $150B not originated by brokers saved only 5 bps on their mortgage transactions due to the competition enabled by the broker channel, Canadians saved a further $75M in payments annually. Those funds could be used for spending or to pay down more expensive forms of debt.

The mortgage industry was once thought to be a low risk, moderate return business for the banks. It certainly was not front page news. Today, discussion about interest rates, home values, qualifications, and economic drivers from housing seems to be part of our regular conversation. As Canadians access more and more information, they continue to select mortgage brokers to present them with options to help them secure home financing solutions best suited for their unique needs.

Wednesday, August 03, 2016

The impact of BC’s foreign tax

There are a lot of unknowns regarding BC’s decision to tax foreign home buyers, a requirement that took effect this week.  The impact on the market was immediate. Real estate agencies, mortgage brokers, lawyers and notaries scrambled, during the week leading up to and including the holiday weekend, to close the sale of hundreds of homes leaving many home buyers frazzled before the August 2 deadline. In fact, it was so busy, the land registry system crash, forcing registration to be done manually.

Provincial Finance Minister Mike de Jong unveiled the 15% tax levy on Monday, July 25, leaving less than a week for the housing market to react. The tax is part of legislation aimed at foreign ownership, which has been blamed, at least in part for low vacancy rates and high real estate prices in southern B.C.

Dan Pultr, Vice-President of TMG The Mortgage Group Vancouver said that the government may have rushed its decision to implement the tax so quickly. “Following significant public outcry, the government clearly felt it needed to do something about the housing market, however they may not have thought through the unintended consequences and strain on the systems and of a retro-active tax.”

The biggest issue for Pultr and others in the mortgage and real estate industry is that the new tax is based on the closing date and not the contract date.

Pultr agreed that something had to be done but it may not be the solution for the long-term. “Vancouver has always been an expensive area and has attracted healthy investment activity and frankly, if you have substantial income or assets, as many foreign investors have, it’s hard to say if the tax will deter them from investing.”

Moody’s, the bond credit rating agency believes the tax will likely slow down the steep house price appreciation in Vancouver that has grown over the past decade.  For example, a foreign buyer will pay $168,000 in land transfer taxes on a $1 million home in Vancouver after Aug. 2, compared to the $18,000 cost for a Canadian citizen or permanent resident.

Other countries, including Hong Kong and Australia have imposed similar taxes designed to stem foreign investment in real estate.

The new tax also applies to foreign-controlled corporations that are not incorporated in Canada or in which at least one beneficiary is a foreign entity. Interestingly, the tax does not apply to commercial real estate, an area that has seen increased interest from foreign individuals and entities. The leading commercial indicator has been at an all-time high, and because a lot of commercial buildings are done as share sales, property transfer tax is avoided all together. So the tax would only be levied on a foreign-controlled company that purchases residential real estate.

However, the tax does negatively impact some home buyers.  Chris Adkins, a 12-year veteran mortgage broker for TMG The Mortgage Group in Vancouver believes the short term effect will be a psychological one.  In the long term, he doesn’t think much will change.

 “The wealthy don’t really care about the costs -- if they want to buy, they will. The real issue is supply and demand.”

Others will be unfairly penalized, he said.  “For example, those who have work permits in Canada and who pay taxes will be affected.”

He also mentions the New to Canada program available will have to change their status requirements for immigrants. “It’s a big grey area and there are a lot of unknowns. It’s almost akin to taxation without representation.”

Adkins suggested that BC might have looked at the Australia model more closely, which levies a foreign tax on homes in the higher price range.

He also does not believe this tax will have the long term effect that was intended.  “In Vancouver, demand is outweighing supply and government red tape is holding back a large number of units from the market, which increases the prices in an already high-priced market.”

Can this happen in Toronto?

Ontario Finance Minister Charles Sousa has said he is “looking very closely” at BC’s new tax, but is Toronto in the same situation as Vancouver?

According to Murtaza Haider, associate professor of real estate management at Ryerson University, the two cities are vastly different, despite both having high prices. Again, the supply and demand argument comes into play.

 “What you see in Toronto is a supply constraint. New homes are not coming in at the same pace and at the same time the demand is slightly higher… and that is also contributing to higher prices here,” he said in an interview with Macleans Magazine.

 A new Angus Reid online poll conducted last week in BC  found that most respondents support a tax on foreign buyers of Metro Vancouver homes but  doubt it will be effective  to cool  the region’s red-hot real estate market.  And despite the new tax seven out of 10 respondents believe affected buyers will manage to find loopholes allowing them to get around the new tax.

A lot of unknowns.

Thursday, July 14, 2016

How Brexit will impact you

By Dan Pultr, Vice-President, British Columbia
(With files from Gina Monaco)

All news channels, and most of the world, have become obsessed with Brexit, for good reason. In what is a now a historic moment, the majority of voters in the United Kingdom voted to exit the European Union (EU) – a partnership that came into existence after the Second World War. It morphed into an economic and political union of 28 countries working as a single market, which allows free movement of goods, capital, services and people between member states.

The negative effects of this decision was immediate – markets dropped, currency values fell and trade relations have become shaky. The reason  -- uncertainty. No one knows the long term implications -- not the economists, not the leaders of the remaining countries, not even those who voted to leave.  And it may take years to find out.

What we do know, however, is with uncertainty comes changes and it could and most likely will impact Canada, specifically our housing market. Here are a few ways that Brexit may affect you:

Interest rates will remain low
The immediate impact of the post-Brexit vote on Canada's economy will be pressure to keep interest rates at historically low levels, according to BMO chief economist Douglas Porter. That's good news for consumers. The U.S. Fed, which seemed ready to hike rates in September, will likely delay that decision, for now. In Canada, economic conditions continue to support low interest rates and a delay by the US will almost certainly leave things unchanged. The Bank of Canada's latest rate announcement held the overnight rate at .05%, which is good news for variable rate mortgage and loan clients.

The Loonie
The Loonie fell fast after the vote, relative to the US dollar. In the end, it lost more than a full cent, closing at 76.93 cents US. However, on a positive note, relative to the Pound and Euro, the Canadian dollar has strengthened, as Europe grapples with the economic fall out, so if you're headed to the U.K. or Europe, chances are you'll be pleasantly surprised with the exchange rate.

Your savings
If some of your savings are in equities or mutual funds, the Brexit vote may have had a surprise negative impact on your portfolio. However, most economists don't believe another financial crisis is at hand. Historically, markets tend to overreact at first then start to reclaim some of their losses. Although Brexit is cause for concern and has created uncertainty, the long term impacts are still not known and many are saying the reaction is overstated and to hold on until the dust settles.

Foreign investment in our real estate
Canada is at a crossroads right now. On the one side, many real estate investors will be looking for alternative stable regions to invest in than the UK at the moment, and Canada may be the most attractive. That said, foreign investment in Canadian real estate has already been cause for concern in some key markets. In the short term, there will definitely be an increased demand for Canadian Real Estate from St. John’s to Victoria, to Vancouver and Toronto. The key development will be how foreign investment in real estate is handled by policy makers.

While Brexit has created uncertainty in a dramatic way, there is an upside. If you're searching for a new home, you’ll continue to enjoy record low interest rates and your home may be worth more than ever before. If you’re looking to refinance to pay off debt or lower your borrowing costs, increased property values and low interest rates help home owners unlock some of that equity they’ve built up as property values continue to rise and the most advantageous terms.

Wednesday, July 06, 2016

Diving deep into the housing market

Recently, Finance Minister Bill Morneau said he would "deep dive" into Canada's housing market to find out what’s really affecting record-high prices, arguing that if the government is going to make any changes, then it should be evidence-based. So let’s look at some of the “evidence”.

Interestingly, Morneau divides the housing market into four parts. The stable market, which is a significant portion and includes Montreal and Ottawa; the strong part, which includes the Toronto region where housing factors are moving quickly; the "very strong part", which is Vancouver and nearby areas; and the areas that are not doing so well because of the downturn in the oil industry. Then there is, of course, the foreign investment factor.

Overview of current housing market

The state of the Canadian economy has changed, and so too has the housing market. A look at the Statistics Canada website shows some interesting numbers: As of May, the unemployment rate is down; retail sales are up slightly; manufacturing sales are up slightly; and average weekly earnings are up, slightly. These are all good indicators that the economy is growing – but not as robust as it grew prior to the 2008 recession, but growing nonetheless.

In Mortgage Professionals Canada (MPC) Spring Report, Looking for Balance in the Canadian Housing and Mortgage Markets, it found that the number of adults with jobs is lower now that before the recession. So what accounts for the hot housing markets in parts of Canada? The real difference is now we have low interest rates, which have fuelled the housing market, and indeed, has kept the Canadian economy humming along for quite some time. We also have some indication that foreign investment is adding fuel, as well as a lack of supply.

If we take all the factors above and match them to the four parts of the housing market that Morneau mentioned we find the following:

  • In Toronto and Vancouver there is higher population growth. The labour markets are better there and there is much lower unemployment but there are housing supply issues.
  •  In the stable areas of the country there is balance in the labour market and adequate housing supply and demand.
  •  In the areas impacted by the oil industry, lower rates are not effective because there are issues with unemployment. 

Because the housing market has been under-supplied for a long time (this is a major factor that has fueled prices in both Vancouver and Toronto – lack of supply for single family homes) the result has been a long period of rapid price growth, according to the MPC report. "The recent surge in sales has, once again, sparked a very high sales-to-new-listings ratio, and the rate of price growth has accelerated."

 Housing Bubble Revisited

It's inevitable that, along with reports of a hot housing market, a discussion of housing bubbles follows. But what, exactly, is a housing bubble? Well, it's characterized by property quickly becoming overvalued until it reaches a level that is unsustainable relative to income and other factors including employment. That rapid rise is quickly followed by property value decreasing to where homeowners owe more than the property is worth. What tends to follow is that homeowners, depending on their financial situation, will try to sell the property or will simply stop paying the mortgage, resulting in an influx of foreclosures in the market.

By that definition we could be in a bubble except for the other factors, namely, job numbers and earnings, both of which have risen in recent months. It's when unemployment rises, interest rates increase and house prices continue to rise that trouble follows. Certainly low mortgage interest rates have fuelled some of the increase in activity; however, the increased prices in the high-end markets are still skewing the average. Eventually, those high-end prices are expected to moderate and there are signs that it’s starting to happen.

Government Intervention

 As the Finance minister dives deep into the industry, Mortgage Professionals Canada (MPC) is cautioning the government against regulations that might "cool" the market. MPC said that another clampdown on mortgage lending rules in Canada could unnecessarily cause housing prices and demand to plummet – and even "bring consequent economic damage" to the country.

 "Now that the energy sector is no longer a major economic driver, a healthy housing sector is even more essential," Will Dunning, chief economist with Mortgage Professionals Canada, said in a statement.

 Morneau announced that Ottawa was forming a working group with provincial representatives from Ontario and B.C., as well as municipal officials from Vancouver and Toronto, to study Canada's booming housing market and would evaluate whether further steps are needed to protect borrowers and lenders to help maintain a stable housing market.

Since 2008, Canada has tightened mortgage regulations five times, shortening the length of loans and hiking minimum down payment rules.

Mortgage Professionals Canada sees no substantial evidence of a widespread increase in risk taking by borrowers or lenders for these reasons:

  • Data from the Canadian Bankers Association shows a very low rate of mortgage arrears, just 0.28% or one per 354 mortgages
  • Survey data continues to show that Canadians are highly motivated to pay off their mortgages as quickly as possible 
  • At current very low interest rates, regular mortgage payments result in accelerated pay down of mortgage principal. At a current typical interest rate of 2.5%, 2.9% of the principal is repaid in the first year. 

 Bottom Line 

A home is a long term investment and its value will fluctuate up and down over the course of your tenure in it. The housing market right now is at a precipice – when high prices and lack of supply deter home buyers and potential home sellers wait out the market, then we’ll start to see moderating prices, as economists have been predicting for the last few years. One thing we know for sure is that low interest rates are here to stay for at least another year, which will be a boon when the market becomes more robust and affordable.