There’s real estate life outside of Toronto and Vancouver

If you read the headlines about the housing industry, you’re bound to think that affordability is out of reach, and if you’re a first-time home buyer, you may think you will never be able to own a home. You’d be forgiven to think that. It’s likely you’re reading about the two major centres – Vancouver and Toronto. What’s happening in these two cities seems to dominate the news, but it’s not the whole story.  

There is affordability and life outside these two biggies and your dreams of home ownership are very much alive. 

In a recent news article, Phil Soper, CEO of Royal LePage said the move to towns near secondary municipalities has been gaining in popularity. He went on to say that eight of the 10 fastest appreciating Canadian areas are in Ontario, led by areas surrounding Windsor, London, Kitchener-Waterloo-Cambridge, Kingston, Niagara/St. Catharines, Hamilton, Belleville/Trenton and Guelph, he said.

In Ontario, Brad Knight, a mortgage broker with OMAC powered by TMG, is seeing the (Spring) market coming to life, finally. 

“For the longest time, we had no inventory but now we’re seeing more listings and slightly higher prices.”

Knight works in the St. Thomas/London area and is seeing lots of families coming from Toronto. “Because there is more flex-time in the workplace and many who can now work from home, the market here is attractive with the average price of a single-detached home selling for approximately $365,000.”

The average days on market is 15-22; but with the additional listings, some are selling much faster, if the property is priced right, Knight said.

He also credits the better weather for some of the boom, but still finds the mortgage stress test coming into play for first time homebuyers. He’s not sure how the new government incentive, slated to roll out in September, will affect buyers.

“Right now, the weather has improved, mortgage business is up and it’s turned out to be a good June.”

 In Corner Brook, Newfoundland, the mortgage business is not bad. According to TMG broker Brian Patey, the year started slowly but now the market has caught up to where it was last year. 

“We don’t get the big swings here like they did in St John’s, where the market was hot, due to the oil industry in Alberta, but now that’s dried up and the market there has calmed down. But here, we’re pretty steady”, he said.

The market in Corner Brook is small and homes can be bought for under $200,000, which according to Patey are selling pretty fast now – the $300,000 and higher sit a bit on the market.

It’s still tough for first time home buyers because of a lack of jobs. “There’s not a lot of industry coming into this area,” Patey said. 

Despite the challenges, he is optimistic and so are the Realtors in the area. The biggest change for Patey has been the time of year when the market gets busy. “It’s not a typical Spring market anymore. Now I can be very busy in January and February.”

The real estate market in Saskatoon is starting to rebound according to Corinne Lokinger, a real estate agent with Coldwell Banker. “We have seen a 16% increase in sales this year over least and a 21% increase in condo sales.”

Although still considered a down market, condo sales are doing well and consumer confidence has risen, which is stabilizing the market she said. “First time home buyers are buying the lower-priced houses and condos.”

For a while in Saskatoon, listings were down and days on market were longer – upwards to 77 days. But as the prices stabilize and the listings pick up, Lokinger is seeing that the houses that are priced right, are selling.

Lokinger also said the market there certainly felt the slowdown after the stress test was introduced, but it’s turning around now.

“I’m feeling pretty good about what’s happening now. I’ve been talking to mortgage brokers and to other Realtors -- call it intuition, but it seems like something big is coming to Saskatoon,” she added.

Back in Northern Ontario, another smaller market TMG mortgage broker Taya Weiszhaar saw a slow start to the year but business has now picked up. She services areas around Kirkland Lake, North Bay, and Sudbury.

“We had a lack of inventory and high prices,” she said. “Now, we have good, quality listings that are priced right. Some are on market for only three days.”

Interestingly, the largest part of her business comes from first time home buyers who are keen to own a home and are interested in knowing their options. 

“I’m not seeing a problem with these buyers getting their down payment but our prices are low compared to major centres – you can buy a house for under $280,000 and I saw a couple listed at $89,000 and $108,000. I also advise them to buy the house first, the vehicle second.”

Weiszhaar also finds that first time home buyers are in some ways easier to finance because they haven’t accumulated the debt that her repeat buyers have. 

As for the new government incentive Taya is not impressed and says it really won’t change qualifying in her market. “The first-time buyers in my market are motivated and will work hard to save the down payment,” she said. “If the government really wanted to help, they would lower the benchmark rate so that more people can qualify.”

She feels good about the future and says, “People buy houses when they’re ready, no matter the rate. They are looking for the right house at the right price and that’s it.”

 

The Ongoing Stress Test Debate

By Mark Kerzner,
President, TMG The Mortgage Group

The controversy over the mortgage stress test continues. Banks, economists, mortgage lenders, Realtors, mortgage brokers, and its association Mortgage Professionals Canada (MPC) are urging government to make some changes, not to get rid of the stress test altogether, but to consider some variables, such as income growth and mortgage repayment which may not have been factored in.

So it was curious to hear Evan Siddall, CEO of Canada Mortgage and Housing Corporation (CMHC), imploring the Standing Committee on Finance to “..look past the plain self-interest of [mortgage brokers]… Apparently, the MPC [Mortgage Professionals Canada] is content to see home builders, real estate agents and mortgage brokers receive short term benefits while Canadians bear the long-term costs.” 

I am not sure where this personal attack is coming from or how this advances his agenda. As an industry we have provided a valuable sounding board and meaningful suggestions for tweaking rule changes to ensure a healthy and stable housing market today, and for the future.

When many industry experts support the position that a stress test could consider other factors such as principal repayment and income growth, for example – and such support also coming from very credible bank economists -- some of whose employers choose not to deal with brokers directly-, then it's uncertain why Siddall would personally attack an Association  representing the broker channel.
In addition, the Chief Economist of MPC, Will Dunning, just published a report further detailing reasons why the stress test should to be tweaked, along with market commentary by various economists and their positions on the subject.

The stress test was introduced without consultation from industry insiders and stakeholders and now the Government has a locked-in position they seem unwilling to change. The stress test is having a negative impact on the housing market and could very well affect the economy in the long term.
However, the story is not one side advocating for the all-out removal of stress tests against the other side locking into an unchangeable position.

Let’s look at the entire story. When the February 2010 stress test was introduced on mortgage terms less than 5 years, and on variable-rate products, it was done seemingly to protect a consumer’s ability to handle payments in an increasing rate environment at the time of renewal.

This time around it appeared as though the stress test was introduced for different reasons. The overall amount of sovereign debt was considered too high as it approached $700 billion.  There was concern about runaway prices in Toronto and Vancouver.

However, the stress tests introduced in October of 2016 by CMHC and then extended to conventional mortgages by the Office of the Superintendent of Financial Institutions (OSFI) in January 2018, was ostensibly to reduce future debt burdens. 

The result has kept an estimated 40,000 would-be homebuyers on the outside looking in, according to an April TD Report.  According to the Globe and Mail “The government [was] responding to concerns that sharp rises in house prices in cities like Toronto and Vancouver could increase the risk of defaults in the future should mortgage rates rise.”

From my perspective, if we are going to be heavily relying on a Benchmark rate in qualifying applicants, then the way the Benchmark rate is determined should also be changed.

It is currently set from the mode of the big banks’ posted rates. It should be determined either by a market-driven rate (perhaps as a delta to bond yields), have an established floor (say 4.25% for example) or relate specifically to the contract rate itself.

We have seen interest rates drop over the first two quarters of 2019, yet bank posted rates and the stress test have not. As interest rates were rising last year the banks chose to increase their posted rates, and the Benchmark rate was correspondingly increased. 

When the 2016 stress tests were introduced, the Benchmark rate on which it was calculated was 4.64%.  At the same time the discounted 5-year fixed rates were in the 3.69% to 3.99% range. Today, 5-year fixed rates can be found in the 2.89 to 3.19% range and the Benchmark rate is 5.34%.
For clients renewing their mortgages AND who have made their contractual payments as agreed, to qualify them at a rate higher than their contract rate if they want to transfer their mortgage is simply anti-competitive.

The mortgage industry supports high underwriting standards to ensure a buffer exists in our collective ability to withstand higher interest rates.

Instead of creating animosity and adversity, let’s work together to create an environment that encourages qualified and responsible First Time Homebuyers in accessing the market.

If you are a mortgage customer looking to access the market make sure to use the services of a mortgage broker who can help you navigate the rules, options and opportunities to align with your long term goals and objectives.

Canadian Housing Affordability Improves – Really! Here’s Why

Housing affordability has been big talk in the country for a few years now. We’ve had rising interest rates and rising house prices, to a point where government felt it had to intervene to mitigate any negative impacts on household debt. To guard against that, and to perhaps force house prices to come down, the mortgage stress test was introduced, whereby borrowers needed to qualify at a higher rate than the actual contact rate.

Conventional wisdom is that falling prices should improve housing affordability but the stress test resulted in a percentage of the population, mostly first-time home buyers, getting priced out of the market.

Over the past six months we have heard anecdotal evidence that the situation is improving, and now we have some hard numbers that explains why. National Bank’s latest study of 10 major Canadian housing markets found that income growth was the reason, and that it had outpaced home prices -- and it looks as if that trend will continue. Rising incomes along with lower home prices, and relatively low interest rates, are a good start on the road to affordability.

National Bank measures affordability by looking at how much household income is spent on mortgage payments. Experts suggest that households should spend no more than a third of their income on housing costs. In the first quarter of 2019, the amount needed to pay mortgage payments on a average Canadian home was lower than the last quarter in 2018.

This is the case even in Vancouver, in both condo and non-condo markets. For example, in the condo market, a typical Vancouver household in the first quarter of 2019 the income needed to service a mortgage was down half a percentage point, quarter-over-quarter. And, it’s the first improvement in 15 quarters in the condo market.  The improvement was even better for a house at 2.5% lower.

In Toronto that measure dropped a full percentage point but consumers still need a substantial chunk of their income to cover housing costs on an average Toronto home. However, more buyers are looking outside these larger areas where homes are more affordable. These include Calgary, Edmonton, Saskatoon, Regina Winnipeg, Saint John, Halifax and St John’s.

The National Bank’s two economists, Matthieu Arseneau and Kyle Dams, were quoted as saying, “…mortgage rates were not a drag on affordability for the first time in seven quarters.” They remain confident that more relief is on the way.

Even the Bank of Canada expressed growing confidence that the country’s economy is rebounding. Interest rates remained unchanged for a fifth straight time and said recent data has “reinforced” their view a slowdown at the end of 2018 and early 2019 was temporary.

However, we’re still not out of the woods yet --there remains the issue of the stress test. There has been a concerted effort among lenders and the real estate and mortgage broker channels to lobby government to consider making changes. The mortgage brokers channel’s association, Mortgage Professionals Canada, (MPC) has been campaigning aggressively to modify the mortgage stress test.

Many economists have added their voices to the campaign against the current stress test, pointing to the negative impact it’s had and/or will have on the housing market and on the economy – reduced housing activity can have long term impacts.

 One of the core issues in their arguments is that the government didn’t take into account rising incomes.  MPC chief economist Will Dunning makes a good case in his recent report titled, “The False Binary” that to take into account the future growth of borrowers’ incomes, the stress tests should be set at 0.75 percentage points above the actual contracted interest rates – they are currently at a minimum 2 percentage points above contracted rate.

The economy may be gaining strength; incomes are rising and affordability is easing in many areas. What home buyers and the housing market needs now is a little help from government. No one is advocating to remove the stress test, but perhaps they might consider lowering it.