Will Home Ownership be a Pipedream for Gen Z?

There may be no better feeling than closing on your first home.  Over the last 10 years, first time homebuyers have seen the market change dramatically, whether it’s mortgage rule changes that impact qualifying, or rising house prices that took some first timers out of the market altogether. Combine that with stagnant incomes, and it’s not surprising that young people feel that the dream may never happen for them.

But is it still a dream for the younger generation? Last year – 2019 – was the last for millennial graduates. We are now in the Gen Z world.  Gen Z refers those born after 1996, so they’re now 23 and younger. Millennials were born between 1981 and 1996, so they’re now between 23 and 38.
This group grew up with an iPhone in their hand and an iPad on their laps, and clearly have learned to process information differently than generations before them. But what hasn’t changed is their desire for home ownership.

In fact, Gen Z is poised to overtake millennials in their desire for homeownership. A survey  conducted by real-estate company Zillow found that in 15 years Gen-Z homeownership will be bigger than the share of millennials who currently own their homes.

Another survey from Finder.com shows that 81% of the Canada’s Gen Z’ers think they’ll purchase a home in the next 20 years. Ten percent of the 18-24 age group say they already own their own home, while 35% (one in three) believe they’ll purchase a home within the next five years.

Interestingly, millennials are more likely to believe that homeownership is NOT in their future. The difference? It hasn’t been quantified yet, but anecdotally, Gen Z ‘ers don’t like the high cost of renting, and would rather make personal financial sacrifices to save for the large down payment needed.

For these future homeowners, education and information is key. And the best person to help guide the process is a mortgage broker.  The following information is not only for Gen Z, but for everyone looking for their first home.

There are six steps to the mortgage application process.

Step 1 – The Application/Pre-Approval

• It’s important to get all the following information. This allows your mortgage agent to determine the amount you qualify for and the best mortgage strategy/product for you. Current address. If you are less than three years at your current residence, you must provide your previous address as well. In addition, you will need to provide
•  Birthdate
• Contact number
• Do you own or rent your current home?
• If rented, is the rent paid monthly?  If not, specify term of rent
• If owned, is there a mortgage? If so, with whom, the value of your home, and mortgage payments
• Approximate value of assets -- identifiable assets like RRSPs, savings, investments, vehicles, other properties, etc.
• Approximate value of liabilities -- identifiable liabilities like car payments, line of credit, student loans, credit cards, etc.
• Any alimony or support payments
• Employer (if less than three years, previous employer as well)
• Title
• Tenure
• Salary and other compensation
• Self- Employment information that includes historical taxable income, historical gross business income

Step 2 – Qualifying

Your information is sent to a lender for a rate hold, pre-approval or approval.  All info is sent electronically and directly to a lender. A response can come within 24-72 hours.

Step 3 – Verification

Verification will be done on items such as your income, with a job letter and recent pay slip, and proof of down payment. Some lenders require tax returns and Notice of Assessments. Your mortgage agent will list out all the information needed and lead you through a straightforward verification process.

Step 4 – Purchase

Once you’ve found your new home, your Realtor will draw up a Purchase and Sale Agreement, which he or she will also send to your mortgage agent on your behalf. When writing your offer, it’s strongly recommended that a “subject to financing” clause be written in, even if you have a pre-approval. 

Step 5 – Approval

During this stage the lender will review all documents and will call your employer to verify employment. You will also receive a Letter of Commitment with the rate, term, payment amount or frequency, amortization, and more. Your mortgage agent will review the commitment letter in detail with you before you sign.

Step 6 – Funding/Closing

The only thing left to do is to register the transaction legally. This will require a lawyer or a notary, depending on where you live. The lender will forward all the documentation directly to your lawyer, and the lawyer will contact you to arrange a meeting.

During this meeting your lawyer will confirm the details of your transaction and will request a bank draft or certified cheque to cover the amounts outstanding before the closing date, which includes the down payment, the lawyers fee, property transfer tax and any other disbursements not yet paid for, less any deposits already paid.

The lawyer then receives the funds from your lender, disburses them and registers the title in your name – then you get the keys.

Digital Experience 

Gen Z’ers were born to process a massive amount of information 24/7, but info overload can negatively affect anyone. There’s a lot of mixed messages, and sometimes outright misinformation on the ‘Net. Despite the I-Generation “always on” environment, the human touch is still welcome.
Buying your first house is a journey, but don’t take it alone. Contact a mortgage professional to combine your digital experience with the human touch.

An Alphabet Soup of Economic Predictions

Which is Canada Most Likely to Experience?

You’ve likely heard of analysts using letters of the alphabet to describe the potential paths for Canada’s economic recovery.

Will that graph of the country’s GDP look like a V or more like a U? Perhaps even a W, but hopefully not an L.

Below we take a brief look at what each of the recovery shapes mean, which is most likely, and how that might affect the country’s housing markets.

Let’s take a look at the letters that have been employed to describe the “shape” of where Canada’s economy has been and where it’s headed:  

V-Shaped: The most optimistic of the scenarios, this forecasts the steep decline in Canada’s GDP bouncing back quickly and returning to pre-COVID levels in short order.

U-Shaped: Similar to the “V” recovery, but this scenario anticipates a longer period of low or no growth. However, it also describes an eventual quick return to pre-COVID growth levels. 

“Nike Swoosh” Shaped: This is a variation of the “U-shaped” recovery, but describes a more gradual and prolonged period of economic recovery.  

W-Shaped: Like the V-shaped scenario, except the W forecasts a second steep decline in economic performance—possibly due to a second wave of the virus—followed by a second quick recovery to more normal levels.

L-Shaped: This is the most dreaded of them all, describing a persistent recession that doesn’t see the economy returning to pre-COVID levels potentially for many years.
 
Which Recovery Path is Most Likely?

There’s much disagreement over which model is likely to play out.

Some expect the economy to face continued headwinds for at least the next year, with some ups and some downs, perhaps along the lines of a W-recovery.

“Our economic forecast envisions the economy continuing to operate well below full capacity into 2021,” economists with RBC Economics wrote in a research note. “The road to recovery will be slow, and it could be quite bumpy.”

Others remain optimistic that the V-recovery is still taking shape.  

“The good news is that the incoming data continue to suggest a recovery that is about as v-shaped as we could reasonably have hoped for,” noted Neil Shearing, Group Chief Economist at Capital Economics. “The bad news is that sustaining the pace of recovery will get increasingly difficult from here.”

In a separate research note, economists at Capital Economics added, “In terms of fundamentals, it now seems clear that household income has not fallen by anywhere near as much as we expected in the second quarter, despite the slump in employment.”

Then there are others who don’t think any letter—in the English language or otherwise—can accurately describe the path that lays ahead.

“I don’t think a letter is going to neatly capture what we’re going to be looking at,” Douglas Porter, chief economist at BMO, told the Financial Post. 

What’s the Impact on Canada’s Housing Market?

The fallout for the real estate and mortgage markets has been a big unknown since the start of the crisis, largely because both supply and demand fell in unison.

“The fact both sides of the demand-supply equation fell in virtually equal proportions…revealed an important characteristic of COVID-19,” RBC economist Robert Hogue wrote. “To date, it hasn’t created market imbalances.”

While home sales plummeted in April by 57% as the effects of the lockdowns took hold, the decline in home prices has so far been limited in many markets.

And with sales already rebounding in May by nearly 57% and new listings seeing a 69% increase, there are signs some markets may be back to posting year-over-year price increases in short order.

As of May, MLS benchmark prices were up year-over-year in the Greater Toronto Area (+9.4%), Greater Vancouver (+2.9%), Montreal (+11%), Ottawa (+15.7%) and Halifax (+9.3%), according to the Canadian Real Estate Association.

Still, as economic fundamentals remain below potential for the foreseeable future and as government assistance programs, such as CERB and the mortgage payment deferrals, come offline this fall, many expect modest price declines.

“We believe downward price pressure will build in most markets in the coming months,” wrote Robert Hogue of RBC Economics. “Nationwide, we expect benchmark prices to fall 7% by the middle of 2021, though believe a widespread collapse in property values is unlikely.”

Mortgage Insurers Making Headlines

CMHC Makes Policy Changes – Genworth & Canada Guaranty Stay Put

It came as a surprise to many mortgage industry insiders when the Canada Mortgage and Housing Corporation (CMHC) announced its plan to further tighten their lending guidelines on July 1, 2020. Thankfully for many potential homeowners, Canada’s two private insurers, Genworth and Canada Guaranty, have decided not to follow suit.

Citing a need to mitigate its exposure (and taxpayer’s) to what the Crown Corporation’s CEO Evan Siddall’s predicts will be a drop in house values by as little as 9% and as much as 18% due to COVID-19, and a potential surge in household debt from 176% to 200% through 2021, they implemented changes that would cut purchasing power by up to 11%.

Under CMHC’s new guidelines, which is set to go into effect on July 1, 2020, the following will apply:

• Maximum Gross Debt Service (GDS) ratios, or the max percentage of home ownership debt payments ie principal, interest, taxes, condo fees and heat when compared to gross income, will be lowered to 35% (from 39%)
•  Maximum Total Debt Service (TDS) ratios, or the max percentage of total personal debt payments relative to gross income, will be lowered to 42% (from 44%)
• The minimum credit score needed to qualify will rise to 680 (from 600) for at least one household borrower
• Many non-traditional sources of down payment that “increase indebtedness” will not be permitted. 

However, borrowers will still be able to access their RRSPs through the Home Buyers Plan or a home equity line of credit on another property they own.

According to Mortgage Professionals Canada, 61% of first-time home buyers buy with less than 20% down. And 20% of down payment funds come from borrowed sources. This move by CMHC could cut purchasing power by up to 11%.  For example, a family earning $100,000 with 5% down, with no other debt, would qualify for a $320,000 mortgage (approx.) Under the new CMHC guidelines that mortgage amount gets reduced to approx. $280,000.  

Siddall said in a statement, “COVID-19 has exposed long-standing vulnerabilities on our financial markets, and we must act now to protect the economic futures of Canadians. These actions will protect home buyers, reduce government and taxpayer risk, and support stability of housing markets while curtailing excessive demand and unsustainable house price growth.”

Critics of the move wondered out loud at the timing of these changes, when provinces have begun easing lockdown restrictions to kickstart the economy, they felt it was counterproductive to efforts focused on regaining confidence in the housing sector.  

Paul Taylor, CEO of Mortgage Professionals Canada was quoted as saying, “…I think the timing for the introduction of these restrictions is poor, especially since the Federal government itself is pouring billions of dollars into the economy to keep it afloat.”

Canada’s Private Insurers Hold Firm

In Canada, federally regulated lending institutions such as banks, non-bank lenders, credit unions and trust companies, are required to insure high ratio mortgages – those with less than 20% down –against default. There are three insurers in Canada -- CMHC is a federal Crown Corporation and Genworth and Canada Guaranty are private sector suppliers of mortgage insurance. 

After reviewing their policies and CMHC’s decision, the two private insurers have decided to NOT follow CMHC’s lead. Both insurers made statements defending their current underwriting polices and are confident in their ability to manage risk. This is positive for borrowers.

As the economy starts its slow climb to recovery, we have seen positive signs across the country as sales start to increase. 

When it comes to real estate, consumer confidence is key. As we continue to ease restrictions, continue to practice safe protocols, and consumers start to feel comfortable again, we may see both homebuyers and those critical home sellers become more active.

It’s hard to say what the true impact to the market might have been if all three insurers had decided to tighten their rules. It’s clear that having a competitive market for mortgage insurance greatly benefits homebuyers. 

Mortgage Interest Rates in the COVID-19 Economy

Mortgages and interest rates are still talked-about topics in the current economic climate.

Here’s a recap. In January 2020, just prior to the pandemic surfacing in Canada, a five-year fixed rate was trending at approximately 2.89% to 3.09%. Fixed mortgage rates are loosely based on bond yields, which were trading at 1.5%.

The Bank of Canada’s (BoC) overnight rate, or key lending rate was 1.75% and the prime lending rate was 3.95%. Variable mortgage rates and lines of credit are based on the prime rate. At the time, mortgage lenders were offering discounted prime rates for new deals – some as high as 1%.

By March 2020, 5-year bond yields fell as low as 35 basis points and fixed-rate mortgage rates also fell to as low as 2.39%, but then went up to about 2.84 to 2.99%%, but are now starting to trend downwards again.

Also, in March, The BoC, cut its overnight rate three times - - it now sits as .25%. Most lenders also lowered their prime lending rates to 2.45%; however, the deep discounts have disappeared. Variable-rates are sitting at approximately Prime minus 20 basis points, or 2.25%.

It's commonly thought that five-year fixed mortgage rates are connected to five-year bond yields and that cuts to the BoC’s overnight rate will result in lower fixed rates. The two are not actually connected. Similarly, variable-rate mortgages were thought to be connected to the BoC’s overnight rate, and historically this has been the case, but it’s not written in stone.

In the current economic environment, the “traditional” rules are out the window, simply because what the economy is going through is unprecedented and everyone is moving cautiously.

Despite low bond yields and cuts to the prime rate, lenders are considering other factors – the rise in unemployment for one. One of the main indicators pointing to a continued healthy economy is jobs. Without jobs, household budgets get tighter, consumer purchases slow down, manufacturers scramble to reduce inventory, which could lead to lay-offs, and bankruptcies rise. Job loss is also a leading cause of mortgage default.

Statistics Canada reported that the country lost one million jobs in March, but that’s only a glimpse since the data is based on surveys in the week that started March 15. For perspective, economists suggest Canada's unemployment rate right now is likely around 20%, from an “average” of 5%. As you can see, the economic situation has been volatile and conditions can change daily.

Because the outlook is uncertain, and future mortgage defaults may be higher, lenders built risk premiums into their rates and we saw mortgage rates increase, despite the signs that borrowing costs were reduced.

The Government is keeping the economy afloat by injecting billions of dollars of financial support into the economy and, by default, instilling a small degree of confidence in Canadians. However, it’s likely that Canada will be in a recession – as some economist say it is now, and will take many months to recover.

The housing market is a vital component to the success of the Canadian economy. In many respects, the industry can help to stabilize a faltering economy.  Having said that, not everyone is out of work and consumers are still buying and selling houses.

There is an end game here and eventually the economy will start humming along. Jobs will return slowly, and low interest rates will likely be around for a while as we start the hard road to recovery.

Government, Monetary Policy and Fiscal Policy Reactions to COVID-19

By Mark Kerzner, President TMG The Mortgage Group

There was a second emergency reduction in the Overnight rate of 50 basis points on Friday, March 13 – to ensure market liquidity, and in response to the unprecedented economic impacts of the COVID-19 virus.  Many are anticipating yet another 50-basis points reduction that would bring the overnight rate to 0.25% in the near future.

Rates ultimately received by the end consumer are determined based on discounts or premiums from BANK Prime rates

One of the big questions following the latest emergency Overnight rate reduction by the Bank of Canada last Friday was whether or not Banks would follow suit with their PRIME rates and if so by what amount.

Yesterday afternoon it was confirmed that Prime lending rates are dropping but the price that new consumers will pay for variable based lending products may in fact be staying flat or potentially going up.  Discounts from bank PRIME of up to 1% appear to be vanishing. For existing variable rate and line of credit clients, your rates should be decreasing.

Just to reiterate, existing discounts for variable in-force mortgages are not changing.  Current discounts would related to new, renewing and refinancing mortgage clients who are choosing variable rate products.

After the Global Financial Crisis over a decade ago, variable rate discounts went from P-85 to P+100 almost overnight. One difference is that the ARM was a much more popular product a decade ago as the spread between it and fixed rate was much more pronounced. Today, the vast majority of consumers have been taking fixed mortgages, and are likely going to continue to do so.

Some have been asking questions about how is it now, that with the reduction in PRIME rates, are we seeing increases in mortgage lending rates.  As bond yields fluctuate (in part due to the oscillating markets) and liquidity premiums starting to dramatically increase, the cost of funds and the desired margins earned by lenders increases.

The Government and Regulators are using other fiscal policy stimulants to work to protect the economy as well.

To stabilize funding, the Government of Canada, through CMHC, announced yesterday they were buying $50 billion of insured mortgage pools.

OSFI mandates the rate of the Domestic Stability Buffer – a rate of capital that is set aside to safeguard against shocks in the system. Over the past few years that amount has continually increased.

It was less than a year ago in April 2019, that the Big 6 banks were required to hold risk weighted capital of 2.25% against the backdrop of increasing indebtedness of Canadian households and increasing ‘vulnerabilities’ faced by those lending institutions.

Lowering the capital requirements to 1% increases the ability for banks to lend approximately $300B in freed up capital. This is largely anticipated to support small business loans, helping those firms meet immediate business and payroll obligations.

In the mortgage world one announcement that received attention on March 13th was OSFI suspending consultation on the minimum qualifying rate for uninsured mortgages. This means the previously announced changes to the Stress Test were now not coming into force. I can assume that OSFI and the Minister of Finance never likely imagined rates dropping this low and having people qualify at 4% (or lower) when they likely consider 4% to be a more normalized rate to begin with (and not a buffer rate).

For those with mortgages, it’s now very important to speak with a licensed mortgage broker to assess options you may have available to refinance, early renew, extend term, choosing longer term fixed rate products, etc.

For those of you in financial distress who are existing mortgage consumers you have a variety of options available to you. A mortgage professional can help you navigate that landscape with your current lender and potentially with your mortgage insurer as well.  Options may include, payment deferral, loan re-amortization, capitalization of outstanding interest arrears and other eligible expenses and special payment arrangements.

This situation is unprecedented and is requiring swift and significant action.

The Bank of Canada and the Federal and Provincial Governments are setting up defence mechanisms during this unprecedented global pandemic. Ensuring the financial system operates, protecting deposits, ensuring liquidity, and providing a means of support for business continuity are at the forefront.

A mortgage professional has always been best suited to guide you through your personal situation and to provide you with options worthy of consideration. That has never been truer than Today.

Recent changes may be good news for homebuyers

We’ve had back-to-back changes recently in the mortgage world – one direct, one indirect. The benchmark rate used to qualify will change downwards starting April 6, 2020, and the Bank of Canada (BoC) just cut its key lending rate from 1.75% to 1.25%.

Two years ago, the stress test was introduced as a safeguard against rising interest rates, to make sure homebuyers would still be able to make their mortgage payments if their rate increased. To qualify for a mortgage, buyers need to qualify at the greater of 2% higher than the contract rate or the Bank of Canada’s average 5-year rate, which today is 5.19%.

Earlier this month, Minister of Finance, Bill Morneau, announced changes to the benchmark rate used to determine the qualifying rate for insured mortgages – mortgages with less than 20% down payment. This change will come into effect on April 6, 2020.

There has been mixed response from the financial community about this change. For some, the new qualifying rate will make it more affordable; for others, it won’t make much of a difference, especially in hot-market areas, where prices are rising quickly.

Then, on Wednesday, March 4, 2020, the BoC cut its key lending rate by 50 basis points, from 1.75% to 1.25%, which had an almost immediate effect on lines of credit and variable-rate mortgages -- banks dropped their prime rate from 3.95% to 3.45%.

This means that borrowing costs for mortgages, auto loans and other lines of credit are set to head lower. Consider a $400,000 mortgage on a 2.95% variable rate. The mortgage rate would shift to 2.45%, and mean about $100 per month in savings.

Why is this happening?

The interest rate drop comes on the heels of the US Federal Reserve’s decision to lower its rate by .50 points due to the global economic challenge posed by the uncertainty of the coronavirus that will likely affect domestic spending. The BoC’s rate cut of the same percentage took many by surprise – it was expected that rate would drop a quarter of a percentage.

There were also other yellow alerts prior to the coronavirus – a drop in global equity markets and in oil prices, created uncertainty in the financial markets. It wasn’t a stretch to think that the same drop in confidence would hit consumers as well. The BoC does not want to jeopardize domestic growth.

With regard to the stress test, there has been pushback from some economists and housing experts who say that the new stress test will just further fuel the housing market.

Here’s what we know about the stress test

• Currently, the stress test for insured mortgages is 5.19% (the minimum rate at which homebuyers must qualify, no matter the actual contract rate.)
• The new stress test, if it was in place today, would be approximately 4.89%.
• The Big Banks will no longer determine the stress test rate. This is good news. Banks have been hesitant to cut their-five-year posted rates (which the stress test is based on). This has made it more challenging for borrowers to qualify for a mortgage.
• Borrower’s will have slightly more purchasing power

Here’s what we don’t know

• How it will affect the average buyer. This will depend on a variety of factors, including the location of the property being purchased. In smaller markets, the new benchmark could help affordability for some buyers – in larger markets such as Vancouver or Toronto, it may have little effect.
• If it will affect home prices. More consumers qualifying for a mortgage may increase demand and put upward pressure on prices – there is still a shortage of properties available for sale.
• The new benchmark calculation, as stated, is more flexible. If interest rates continue to fall, then, in many cases, buying power would also increase.

As always, time will tell how all this will play out and there is talk that the BoC will cut the rate at least once more this year.

What does this mean for fixed versus variable-rate mortgages?

Fixed rates are priced on the bond market, which have fallen quite dramatically since January, so it’s likely that fixed rates will continue to move lower.  Now, with the BoC rate cut, and the banks following suit by dropping their prime rate, variable-rate mortgages will also drop.

Many factors go into deciding whether to choose a fixed or variable mortgage, and it’s a topic to discuss with your mortgage professional.

For now, these changes could be good news for homebuyers.

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.

Yes, you can be a homeowner

The news is full of negatives about housing market slowdowns, mortgage stress tests that shut millennials out of homeownership, low inventory, a slowing economy – it goes on. Although it may seem gloomy to many, there are a few silver linings. The Canadian dream of homeownership is still alive, although it may look a bit different than the traditional idea of owning a home.

First of all, the make-up of home buyers has seen a distinct change from the more traditional trend of buying with a partner/spouse. According to the recent RBC Home Ownership Poll, 28% of those polled say they need help and are purchasing or planning to purchase with their family. That is almost as many as those who say they can purchase alone (32%).

When compared to past years, buying a home with a partner or spouse has been steadily declining (42% versus 49% in 2017), while non-traditional trends, like purchasing a home alone (32% versus 29% in 2017), are climbing.

It’s also clear that what’s happening in today’s market is having an impact on buyers with 56% of Canadians thinking it's better to wait until next year to purchase a home. Almost half  of those are prepared to push the purchase out two years or more (highest among 18-34-year olds, 55%). Of those waiting to buy, 54% have the expectation that house prices will come down (as high as 68% of British Columbians and 58% of Ontarians expect the price of housing to drop).

Here are some highlights in the poll:

• Canadians feel it makes more sense to buy than rent (66%).
• Canadians are well positioned to weather a potential downturn in housing prices (71%) or an increase in interest rates (63%).
• Affordability (21%) and being in a safe neighbourhood (20%) top the list of what Canadians must have, while buying in 'the right' neighbourhood is less of a concern (6%, steady decline since 2015).
• Canadians are most willing to sacrifice the conveniences of being close to a major highway (16%), dining and entertainment (13%), good schools (11%) and public transit (10%).

A new housing reality

In the poll, eight-in-10 Canadians say a home or condominium purchase is still a good investment (81%). When we look at the condo market, there is a lot happening. This year, a record number of condos are set for completion in the GTA, which will likely slow price growth.

The Canadian Real Estate Association (CREA), in its most recent forecast said it expects the monthly trend for sales to improve slowly over 2019. Low interest rates and a strong job market is positive, with pricing projected to stabilize over the next two years, except in markets where there is a shortage of supply.

Non-traditional housing and co-owning arrangements are popping up across the country. The focus is on community is the key to cohousing projects that generally consist of individual homes, built around a common house with shared amenities. These amenities generally contain a kitchen and dining room and can have anything from kids’ playrooms and workshops to guest rooms and gardens.


Get ready

While it’s true that government policies have made it harder for some to qualify, the new ‘shared equity program’ and the RRSP withdrawal increase may help some of those people. 

As we head into the Spring market, listings will start to increase as buyers and sellers come out of hibernation. It’s important for homebuyers to educate themselves about mortgages, including how to qualify in this new stress-test environment. Working with a TMG mortgage professional will help you navigate the ins and outs of the mortgage process, from qualifying to approval and through to closing.

If you don’t qualify right now, your mortgage professional will show you ways to increase your likelihood of qualifying in the future.

Yes, you can fulfill your dream of homeownership.

Why a mortgage professional?

By working with a licensed mortgage professional, you have a trusted adviser and problem solver. Brokers take the time to first understand a client’s needs, both short term and long term, then recommend the right mortgage and present options. In addition to straight home purchases, brokers work with clients who refinance to consolidate debt, who are looking to purchase second homes, who are looking for the best options at renewal time, and brokers help clients make property-related investment decisions.

Anatomy of mortgage changes

There is little doubt that housing sales have slowed down in the past year, due in large part to stricter mortgage regulations. Part of those regulations is a mortgage stress test that requires borrowers to qualify for an interest rate that’s at least 200 basis points higher than the contracted rate. 

 Those in favour of the stress test saw it as a way to improve housing affordability by thinking it would result in falling home prices, as well as protecting homeowners from potentially higher interest rates at renewal.

While there were some house price reductions, there was also a major slowdown in house sales, which, one could argue, has helped fuel a slowing economy. 

History

The most recent round of mortgage rule changes came into effect in 2016, then in January 2018, more changes were introduced, including using the stress test to qualify for uninsured loans.  This had the greatest impact.   The next month, in February, sales declined in greater Toronto by 35% from those recorded in February 2017.  This past month (February, 2019) housing sales in greater Toronto were even 2.4% lower than a year ago. 

Housing sales in greater Vancouver were even weaker, with February 2019 sales 33% lower than the same month in 2018. In fact, February 2019 sales are 43% lower than the 10-year average for sales in February.

Evan Siddall, who heads Canada Mortgage and Housing Corporation (CMHC), believes the stress test is bitter medicine that is working fine. Siddall credits the stress test for lowering housing prices. His comments were based on the stress test being introduced to lower housing prices; however, Carolyn Rogers, the Assistant Superintendent at OSFI, said something different in her speech to the Economic Club of Canada.

She explained, the stress test “was designed to target mortgage underwriting standards.” In her words, the test was intended to provide a safety buffer so that borrowers do not “stretch their borrowing capacity to its maximum.”

Is it plausible that OSFI and the CMHC had two different goals? Maybe.  OSFI’s goal did indeed lower high-risk lending somewhat as reported by the Bank of Canada. House prices did drop slightly.

It appears the government may have overshot its mark with the stress test, and the slowdown in the housing sales may have been an unintended consequence. 

Pushback

Many housing and mortgage industry voices started to lobby the government -- some believed the stress test was working fine, other’s say the impact has been devastating to home buyers, especially first-time homebuyers.

CIBC economists, Bejamin Tal and Royce Mendes predicted in November, 2018 that the housing market would be a drag on Canada's economic growth in the coming year. Residential investment accounts for 7.5% of Canada's economy.

"It was a good run while it lasted, but the sun has officially set on the days of heady housing market growth fuelling Canada's national economy," Tal and Mendes wrote. “And that could be bad news because housing investment is more important to Canada's economy "than at any other time on record," they added.

Proposed solutions

Two ideas emerged from various stakeholders and associations -- lower the stress test threshold that requires borrowers to qualify at least 200 basis points above the contracted rate; and/or reintroduce the 30-year amortization for CMHC insured mortgages.

Government response

The Liberal government introduced the following two measures in their recent budget announcement to address the issue of housing affordability and first-time home buyers.

Home Buyer’s Plan Withdrawal Increase. Effective immediately, first time home buyers can now withdraw up to $35,000 from their RRSP, tax free, up from $25,000, for a down payment. If you have a co-borrower, that total could be up to $70,000. 

A first-time homebuyer, as defined by the Canada Revenue Agency, allows repeat homebuyers to also be classified as “first-time” if they or their spouse haven’t occupied a home, they owned in the prior four years. 

Funds must be repaid over a 15-year period or the money gets added to your income for tax purposes. Starting in 2020, those who separate from a spouse or common-law partner will get to use the Plan, even if they’re not a first-time buyer.

First Time Home Buyer Incentive

Billed as a “shared equity mortgage”, the government will lend first-time home buyers’ money to buy a home. According to the budget document, this new incentive “enables homebuyers to reduce the amount of money required from an insured mortgage without increasing the amount they must save for a down payment.”

The government has earmarked $1.25 billion over three years, administered by Canada Mortgage and Housing Corp. (CMHC), to provide up to  5 % of the cost of an existing home and 10% of a new home through what amounts to an interest-free loan to be repaid when the property is sold. 

Key points: 

•  Borrowers must have a down payment of at least 5% -- but less than 20% -- and a household income under $120,000.
•  The insured mortgage plus incentive, combined, cannot be greater than four times the participants’ combined annual household incomes.
• Condo purchases are allowed.
• The program is expected to start in September 2019 with further details to come this year. 
•  If you use it, the government will share in price gains or losses when you sell. (The government hasn’t released many details on this yet) 
• While the Department of Finance has not commented on this, the program is called a “shared equity mortgage”, so it may be safe to assume it will be a registered second.
•  You must be a first-time homebuyer. (We don’t know whether the government’s definition of “first-time buyer” will be the same as with its RRSP Home Buyers’ Plan (see definition above)
• Your mortgage must be default insured. Buyers may use any of the three insurers.
• There are no monthly payments required on this incentive money
• You have to pay the money back when you sell your home. There was no mention of what happens during a refinance but if similar programs abroad are any guide, a cash-out refi would trigger the repayment provision. 

Aftermath

Paul Taylor, CEO of Mortgage Professionals Canada, which represents the mortgage-brokerage channel, said in an interview with the Globe and Mail, he is disappointed that the government did not heed his organization’s calls to reduce the stress-test burden, which is keeping many home buyers from qualifying for mortgages.

But he said the new interest-free loan program will help the earners most affected by the stress test, so it may be a good alternative. The program requires more analysis to assess how successful it will be, he said.

His organization estimated that the stress test would compel about 200,000 potential home buyers to change their plans in the first two years of operation. If 100,000 are helped by the loan program over three years, “a good chunk” of people most impacted may be getting help, he said.

Many other key details, including precise repayment terms and maximum available loans, have yet to be addressed.  The government says CMHC will release full details later this year. That’s a long time, politically speaking and things could change again, given it’s an election year.

We will continue to monitor these announcements and update our readers as new information comes top light.

Interest rate increase has winners

Believe it or not, the recent .25% rise in the prime interest rate is an indicator of a healthy economy. Despite trade tensions, Canada’s economy looks to be weathering the tariff storm well, for now.

There is no doubt the Canadian economy is resilient. The country has weathered a few storms since 2008, but still chugs on – somewhat flat at times, but never stagnant. The focus of the Bank of Canada (BoC) is on stimulating the economy and keeping inflation in check. The inflation rate has been inching up and is now at 2.2%, still well within the Bank’s comfort zone. Maintaining low, stable and predictable inflation is key to fostering an environment where Canadians can prosper. 

There are many factors that contribute to rising interest rates. Since the economy has been in recovery mode for a while, it now makes sense the BoC would start raising the rate, given a few economic indicators.

One of the main indicators that point to a continued healthy economy is the job numbers. Without jobs, household budgets get tighter, consumer purchases slow down, manufacturers scramble to reduce inventory, which could lead to lay-offs, and bankruptcies rise. And job loss is also the leading cause of mortgage default.

In June, the economy added 31,800 positions. At the same time the unemployment rate rose to 6%, from 5.8% in May. The higher jobless rate is considered a good sign by analysts who see it as more people optimistic about finding a job.  Average hourly wage growth has maintained the same level as last month at 3.6%. 

What we don’t know is the effect of NAFTA negotiations and how an extended trade war will affect the economy. What we do know is how the recent increase will impact Canadians in the short term. 

First, the cost of borrowing will increase for customers with variable-rate loans and mortgages, but those with money in savings accounts and guaranteed investment certificates will benefit. When interest rates are low, there’s less motivation to save. 

The rate hike may also make Canadians think twice before adding to their debt loads. Canadians are carrying a record amount of debt -- $1.8 trillion and growing -- because of low interest rates. Hopefully, as rates rise, consumers will reconsider adding to their debt loads.

Seniors and retirees also benefit from rising rates. Seniors now have the opportunity to generate higher interest income, which may help them manage rising costs.

With people living longer, those with pension plans are in a better financial position against running out of money. 

The housing market is cooling a bit because of the new rules introduced this year, which may help affordability for future homeowners as the pressure to bring prices down grows. We are not seeing this happen yet in strong urban markets like Toronto and Vancouver.

There’s a fine line between interest rates that are too high or too low and how they may help one segment of our population and hurt another. 

While we have no control over interest rates, we do have control over our responses by thinking more carefully about our finances – our savings and our borrowing – so we’re not caught in challenging situations, no matter what the rates do.

The mortgage industry stresses quality over quantity

By Mark Kerzner, President TMG The Mortgage Group

The Canadian mortgage landscape has seen regulatory change after change combined with continued Government legislative changes since the Fall of 2016.  Government changes to mortgage rules have been led by the Department of Finance, superimposed with tightening from the Bank of Canada. We have also seen some provinces introduce their own restrictions that have resulted in increased taxes to foreigners and speculators.

As Canadians it is important that we question the reasons for these rule and guideline changes.  There are slightly different answers depending on where the rule changes are coming from. For the most part, they stem from the fact that there was a belief that the Canadian housing market was overheating, that an interest rate shock would paralyze a great many Canadians in being able to afford their payments when interest rates increase, and that the liability of the Government in backstopping mortgages was just too high.

It would seem the motivation to ‘tighten’ might have come from different vantage points but implemented with unison.  The Office of the Superintendent of Financial Institutions (OSFI), which oversees federally-regulated financial institutions wants to ensure their solvency, whereas the Department of Finance may have been more concerned about outstanding debt, and the Bank of Canada on their inability to raise rates quickly enough to stem borrowing activity.

And after nearly a year and a half of dealing with all these changes we are told by an international credit rating agency (S&P) that the quality of Canadian mortgages is deteriorating, resulting in the lowering of a key metric for Canadian banks.

I just don’t buy it. And to suggest that the broker channel is somehow complicit with the elevated levels of fraud is insulting. 

Robert McLister in Canadian Mortgage Trends, cited from the agency’s report: "…The growing share of residential mortgages originated via brokers, compound the risks of high household debt and house prices…As brokers do not bear credit risk for the residential mortgages they initiate, and are generally compensated primarily on the quantity (not quality) of residential mortgages applications they process, we believe brokers have less incentive than a lender’s own staff to prevent fraud.” 

Here are the facts: Deals originated by mortgage brokers are often underwritten four times. The broker underwrites the deal and reviews the documents for suitability deciding where to place the file. The underwriter underwrites the file according to the specifications of the lender guidelines. When the file is insured or insurable, the mortgage insurer (CMHC, Genworth or Canada Guaranty) underwrite the file, and with many non-bank lenders, the file may be reviewed on a pre-funding audit (may even go through Quality Assurance at one of the banks).

Fraud is an issue, and as an industry we cannot tolerate it. It is an issue in bank branches, with mobile sales forces as well as and among brokers.

The Financial Consumer Agency of Canada (FCAC) in their 9-month long study just outlined the wrongdoings of bank mobile sales forces. Included in their findings were; 

• Performance management programs -- including financial and non-financial incentives, sales targets and scorecards -- may increase the risk of mis-selling and breaching market conduct obligations

We must all be vigilant against fraudsters. Brokers are regulated provincially and must complete educational requirements. In many jurisdictions they have to complete periodic re-licensing requirements.

 In addition, there are supervisory requirements placed upon the brokerages where agents are licensed. The vast majority of brokers view their livelihood as a profession and would not want to jeopardize it in any respect.

All that said, over the past ten years, and accelerated more recently, mortgage rule guideline and qualification changes have dramatically increased the quality of the mortgages underwritten in Canada. Average credit scores have increased significantly, and arrears rates remain at historically low levels.

Brokers have been an accountability check on other channels for some time ensuring that consumers have choice and access to market leading rates. In the same respect, they are also educated and knowledgeable about lending guidelines and suitability. In the same respect they are an accountability check to maintain high standards in mortgage underwriting and fulfillment.

I shudder to think what the Canadian mortgage landscape would look like without a vibrant mortgage broker channel.