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.

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.