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.

The Brexit Vote

Written by Mark Kerzner, President, TMG The Mortgage Group

For the last few weeks we have been seeing flashes of news stories on the upcoming BREXIT vote, and this morning we have seen the results. Britain has voted by a narrow margin to withdraw its participation in the European Union (EU).

I have to admit I am a little bit of a political junkie. I often have CNN.com in my background at work and spend my time in the car listening to satellite news radio. And while we (O.K, I) were led to believe that the STAY vote would ultimately prevail, it was the LEAVE momentum that succeeded in the end.

Democracy in action is really a beautiful sight to see. Regardless of what position you had started on, everyone is now bound by the realities and the wishes of the majority. We see this storyline play out time and again. We see it happening in the US presidential election and we bear witness to it at home on a regular basis. Even if you were a staunch Harper supporter in the Fall election, Trudeau is our Prime Minister.

While there are certain elements of nationalism in recent social movements in western democracies there are also elements of xenophobia and demagoguery and those are the things that concern me.

Regardless of how close the polls had this vote, the markets were not anticipating this outcome. I actually was listening to a radio show yesterday afternoon that was quoting the U.K ‘bookies’ estimating this outcome at 20%. Since the markets were expecting a different result, the volatility that we have seen so far today was not to be unexpected.

The British Pound has fallen to a level not seen in 31 years, markets around the world are selling off and commodity prices (with the exception of gold) are falling.

I guess it is a little ironic in some ways that this movement to opt-out of an economic union has reminded us just how much we are all intertwined globally.

The UK amounts to a very small trading partner for Canada. That said, perhaps (just perhaps) this new global economic volatility will lead to a ‘natural’ slowing down of some of our heated housing markets. Perhaps the US Fed will remain on the sidelines a little longer before it starts increasing rates. Perhaps this will in some way help our housing concerns here at home.

At the end of the day though when all is said and done, we will continue to drive forward, our markets will eventually rebound and we will see the market swings subside … that is until the next geo-political item plays out.

Millennials need help with home ownership

Recent reports from two of Canada’s major banks -- CIBC and ScotiaBank -- offer a glimpse into the world of millennials and home ownership as well as the impact of the Internet on mortgage hunting. Bottom-line: Nearly two-thirds of millennials plan to own a home in the next five years, but don’t have the money for a down payment yet. Ninety-six per cent of Canadians rely on the Internet for information but 70% of those still rely on advisors for mortgage advice.

Among Canadians aged 18-24, two thirds (64%) of them plan to make the move to home ownership, with 63% looking to buy in the next five years, but nearly half (44% ) say they have not started to save. The down payment is the biggest obstacle; however, rising prices is seen as having an impact on their ability to buy.

A majority (56%) of Canadians are sympathetic and say something should be done to help the younger generation enter the housing market. Seventy-seven per cent believe that buying a home is more difficult for young Canadians today than it was for previous generations.

Here are the key findings from the CIBC poll about millennials and home ownership:

1.  64 % of Canadians aged 18–34 say that their future plans include buying a home. Among them: 63% plan to do so within the next five years, and 44% have not started to save yet for their down payment.
2.  54 % of millennials planning to buy a home say that saving enough for the required down payment is the biggest obstacle to home ownership. Other roadblocks include: Job security and earning enough to afford mortgage payments (53%) and rising real estate prices (46%). 
3. 56 % of Canadians say something should be done to help young Canadians get into the housing market.
4. 77 % of Canadians say buying a home today is more difficult for young Canadians than it was for previous generations

Although it may not be easy to get a mortgage, it is doable. Working with a mortgage broker, who can help map out a strategy, is a key step to make the dream of home ownership a reality. In fact, the result of a ScotiaBank poll found that 98% of Canadian now rely on the Internet for information, yet 70% still look to advisors for their mortgage advice. This is likely due to sheer volume of information available online.  The bank also predicts that by 2020, less than 1 in 10 financial transactions will occur in branches, which means that online transactions will increase.

So what does this mean for mortgage brokers and consumers? It’s actually good news for consumers. As competition increases, mortgage products may become more tailored with more options available. Competition is a good thing because it gives you choice. Brokers can help facilitate that choice.

 In the mortgage industry, with historically low interest rates, it’s easy to shop the market to find a low advertised rate, whether from your local bank or from your mortgage broker. However, mortgages are not as simple as some make them out to be, especially when rate is all that is considered.

It’s important that home buyers educate themselves about mortgages including the following areas:  pre-payment terms, penalties, fixed vs. variable, open vs. closed, etc.  Each situation is as unique as each borrower and each needs a unique strategy.

Again, the sheer volume of information online can be overwhelming.  While getting informed through Internet research is a good thing, once armed with that information, it’s still important to work with a licensed mortgage professional who will ask the right questions to tailor a custom-fit mortgage that works for short and long term goals.

Canada set to grow in different ways

The Canadian economy is poised to grow again, but in a very different way according to the Bank of Canada’s (BoC) recently-released Monetary Policy Report.  The BoC expects global economic growth to strengthen…. gradually… and modestly.

Once again, the U.S. market is impacting growth in Canada. While there is demand for our exports, US residential investment and investment in their oil and gas sector, which are key sources of demand for Canadian exports, has changed.  Economic activity there expanded at a modest pace at the end of 2015 and the beginning of 2016, and while it was hoped that there would be strong momentum, it hasn’t happened.  Growth is expected to remain modest for the year.  Not surprising given it’s an election year.

The Loonie
The battered loonie has been showing signs of life. It recently hit 79.50 cents US at one point during the last week in April -- its highest mark since July 2015.

Global economies
Unfortunately, economic recovery in the euro area and Japan continue to yo-yo. Low oil prices and exchange rate depreciations have dampened growth.  In the euro area, growth is also being restrained by ongoing deleveraging, weak investor confidence and tight lending conditions. In Japan, lackluster wage growth is restraining consumption.

China
The economy there is in transition with movement away from industry and more towards the service sector, which now accounts for just over 50% of China’s GDP.  China’s GDP growth is expected to slow from 6.9% in 2015 to 6.3% in 2018. Fiscal stimulus is expected to be focused on additional infrastructure spending and tax relief for businesses

Canadian Economy 
The inflation rate is projected to stay below 2% through 2016. Core inflation is expected to be around 2% through 2017. The economy is also in transition, moving toward non-resource sectors.  This adjustment is expected to contribute to the moderate growth cycle we are now in for the next two years.
 However, it’s not all bad news.  Economic activity through 2016 and 2017 has been revised up, thanks to measures introduced in the federal budget in March.  The gap between growth and activity is likely to close sometime in the second half of 2017. This adjustment period is expected to last until 2019.

The Housing Market
New construction and activity in the resale market is strong in British Columbia and Ontario, relative stability in Quebec and the Maritime provinces,  although there are declines in housing activity in  oil-producing provinces. The strength in British Columbia and Ontario appears, in part, to reflect local demand stimulated by employment growth. The shift in interprovincial migration in response to the oil price shock is reinforcing the regional divergence in housing market activity as workers leave the oil-producing provinces for Ontario and British Columbia.

The strength of housing demand in Ontario and British Columbia is contributing strongly to growth in residential mortgage credit.

The BoC continues to keep its overnight rate at .05%. Stephen Poloz, President of the BoC, defends his monetary policy and said, “The fact is that policy actions -- monetary and fiscal -- taken in the wake of the global financial crisis, prevented what would have been a second Great Depression. But many of the negative forces that were acting then are still acting now. That’s why ultra-low interest rates are not causing rapid growth and inflation.”

There will be lots to watch in the upcoming year as the world transitions. What that will look like is anyone’s guess.

A sobering look at the economy

Everyone is waiting for the Liberal government’s new budget on March 22. Prime Minister Justin Trudeau has promised to run deficits in the coming years because billions will be spent on projects like infrastructure, which he predicts will create jobs and help revive the economy. There are also other economy-boosting plans such as cutting taxes for middle-income earners, which has already happened, and revamping child benefits so they help more families.

A brief overview of the current state of the economy is evidence that the country is in a slow growth period, with the exception of housing.  First, the value of the loonie is dragging and clearly the Bank of Canada (BoC) does not have the power to do anything about it.

The latest rate announcement from the BoC left the overnight rate unchanged at 0.5%.  One reason may be that a rate cut would continue to heat up consumer credit and housing activity and could potentially increase household debt. The average Canadian household carries $1.65 in debt for every dollar of disposable income – a record high. According to Statistics Canada consumer credit and mortgage and non-mortgage loans increased 1.2 per cent to $1.923 trillion at the end of last year. The total included $573.6 billion in consumer credit debt and $1.262 trillion in mortgage debt.

Another reason for the central bank’s decision is that it believes it has done all it can to boost the economy. It’s now in the hands of the federal government.

Despite a recent mini-rally, the international price of oil had dropped an additional US$20 per barrel since the Bank of Canada’s last economic outlook in October. The freefall seems to be over, but we need more time to rebalance excess supply with weak global demand.

Finance Minister Bill Morneau has already predicted a deficit of 18-20 billion dollars for 2016/2017. Should we be worried about big defects? Apparently not, according to The Canadian Centre for Policy Alternatives, The organization has urged Prime Minister Trudeau to allow the deficit to rise to $37.9 billion, but to also take steps to get money into the hands of Canadian consumers to stimulate growth. There is a "multiplier effect" of getting more money into the hands of low and middle-income Canadians, who are more likely to spend it.

Yet, once again, the government will be relying on consumers to continue to keep the economy afloat, which it has been doing for the last two years.

The Montreal Economic Institute (MEI) has another view. It doesn’t agree with the premise that increasing budget deficits could boost the economy.

“In the aftermath of the 2008 financial crisis, it is the OECD countries that reduced both their public spending and their revenues that succeeded in achieving the fastest average annual growth,” said Mathieu Bédard, economist at the MEI. "Conversely, countries that chose to increase both their spending and their tax burdens experienced very slow growth.”

However,  the economy certainly needs a boost as we wait for non-energy sectors to kick in. By all accounts the manufacturing sectors in Ontario, Quebec and British Columbia are doing well. There are signs that Canada’s economy is adjusting to new areas of strength in manufacturing, service and technology industries. Those companies are getting a boost from a weaker dollar, and Canada is now a magnet for tourists.

It may still take a few more years for the economy to fully recover and stimulus budgets may help in the interim by speeding up the process.

We can only wait to see what the Federal budget looks like and only time will tell if it will work.

You can be mortgage-free

Housing market activity continues to be an important driver of the Canadian economy. Housing activity creates jobs in the construction and real estate industries, and trickles down to impact the many industries that support construction and real estate through related goods and services.

Home equity wealth is enormous in Canada and currently sits in the range of $3 trillion. Homeownership can  be  considered a “forced saving’s plan”, according to Mortgage Professionals Canada’s  Annual State of the Housing Market report released in December.

Mortgage payments are a blend of interest payment and repayment of principal. As interest rates have fallen, the share of the payment that goes to principal has increased sharply. At today’s rates, and assuming a 25-year amortization period, 50% of the first payment is principal repayment. A decade ago the share would have been 31%. This implies the following:

• Faster repayment of principal means increased equity.  
• This may be the reason many consumers consider mortgages “good debt”. 
• Most mortgage borrowers understand that the principal part of their payment, while a cost, goes to their bottom line and improves their financial situation. 
• The “net cost” of homeownership (excluding principal repayment) is now very low in historic terms.

The report also found that in 2015, 36% of homeowners took actions to reduce their mortgage debt. While many homeowners think in terms of lump-sum payments, which are a great option, there are other ways to save money and pay down that debt. It only takes small changes for you to become mortgage free, save thousands of dollars in interest and increase your equity.

Consider  the following actions:

1. Refinancing for a lower interest rate
2.  Renegotiating for a lower interest rate
3. Switching to accelerated bi-weekly payments 
4. Increasing amount of regular payments
5. Lump-sum payments

According to the report about 950,000 mortgage holders voluntarily increased their regular payments during the past year. The average amount of increase was about $340 per month, for a total of almost $4 billion per year. In addition, voluntary increases that were made in prior years continue to contribute to accelerated repayment of mortgages. Increasing your payment by just $20 a month can have a positive impact simply because the extra money is applied directly against the mortgage principal. This decreases the amount of interest you will pay over the life of the loan.

Also in 2015, seven per cent of mortgage holders (about 400,000) increased the frequency of their payments.  Just over one million made lump sum payments during the past year. The average amount was about $15,300, for combined repayment estimated at $15.5 billion.

Other highlights from the report include:

1. About 660,000 households lived in homes that they purchased during the past year (newly-constructed or resale). The average price is $408,800, for a total value of $270 billion. 
2. Among these recent homebuyers, there had been an estimated total of $35 billion in mortgages on existing homes that they sold (which would have been discharged or transferred at the time). The combination of $188 billion in financing on purchased homes minus $35 billion on prior dwellings means that home purchases in 2015 have resulted in a net credit growth of $153 billion.
3. About 100,000 Canadian homeowners fully repaid their mortgages during 2015 (up to the date of the fall survey). A further 40,000 expect to fully repay their mortgage before the end of the year. In combination, about 140,000 mortgages will have been fully repaid during the year.

The freedom that being completely debt-free brings is a dream for many Canadians. If you’re unsure of what your next step should be, talk to a mortgage broker.  Together you can review your mortgage, look at your financial picture and devise a mortgage-reduction plan that works for you.

What is happening to Canada’s housing market?

Well, that depends on where you live. But first, let’s look at the economic big picture. Oil prices are the lowest we have seen in decades – oil is currently trading around $29 a barrel. Why has this happened? Certain oil producing countries have flooded the market, which has driven the costs down.

It’s no surprise that this downhill slide has had a negative impact on the Canadian economy as whole, and in particular Alberta and Saskatchewan.  The energy sector accounts for more than a quarter of the national GDP. When the energy sector is doing well, so does the real state sector in those provinces and so does the economy as a whole.

Now to the Loonie which is trading in the low 70 cents U.S. The last time we saw this rate was in 2003. More disconcerting is that our dollar has lost more value against the U.S. dollar than other major currencies, including the Pound or Yen, leading some economists to whisper the “R” word. However, we have been in a “technical” recession for a couple of quarters now.

Foreign investment in the Canadian real estate market has driven prices up in provinces like British Columbia.  This is welcome news to those who own property, but as we’ve seen in the Greater Vancouver area, increased prices have made the market, for first-time home buyers, at least, more unaffordable.  Foreign investment is a major factor and the low dollar makes investing here an attractive proposition.
A snapshot taken from across the country shows continuing high prices in Vancouver and Toronto, and shows a sluggish economy in Alberta and Saskatchewan.  Housing starts are down across the board yet prices are still expected to increase, especially in high demand areas.

Despite the somewhat gloomy reports, it isn’t all that bad. First of all, mortgage rates, both variable and fixed, are low, making it easier for first-time home buyers to purchase a home, especially in markets outside of Vancouver, Toronto and Montreal where prices are more stable. And that’s the other plus – homes outside those areas are affordable. The new down payment rule may not affect areas outside large markets. The new rule requires that a 10% down payment is required for the amount that goes over $500,000. For example, a home purchased at $600,000 requires 5% down on the first $500,000 and 10% down on the balance of $100,000 for a total of $35,000. Prior to the new rule the down payment would have been $30,000.

Another factor is supply and demand -- as the population continues to grow, people have to live somewhere.  There are still more buyers out there then there are sellers, which means there is still a demand for homes. And so far, it doesn’t look as if the market is slowing down, with the exception of Alberta – Saskatchewan is already seeing increased activity.

The Spring market will soon be upon us and will come at the heels of the new Liberal government’s much-anticipated budget.  Prime Minster Trudeau vows to make it a budget focused on stimulating the economy as the country weathers this slow period of growth.
In the meantime, there will be no bubbles bursting in a housing market that is remarkably resilient.