Housing slow down heralding a more balanced economy

For the past four years economists have been warning us of a slowdown in housing activity, of lowered house prices and of interest rate increases. None of which have come to pass, until now, with the exception of interest rate increases and clearly, no one really knows what will happen with rates.

“Real estate, it has nine lives,” said Benjamin Tal, deputy chief economist at CIBC in an interview with the Globe and Mail. “Every time it’s supposed to slow down because of interest rates, something bad happens elsewhere that keeps interest rates low…”

Here are the most recent predictions from the Canada Mortgage and Housing Agency (CMHC).

New-home construction will slow over the next two years as low oil prices continue to take their toll on the economy despite rock-bottom interest rates.  Prices of resale homes will rise 3.4% this year before slowing to 1.5%.

Oil-dependent provinces such as Alberta and Saskatchewan will be hit hardest.  Home prices will likely decrease below the national average in Alberta.

In the rest of Canada the slowdown will be due to the shifting preferences among buyers. Where once buyers set their sights on higher-priced, newly built detached homes, they will start looking at buying older entry-level resale homes and more affordable new builds, such as townhouses and condos.  A healthy supply of condos and townies has kept those prices more affordable.

In Canada’s two high-priced markets – Vancouver and Toronto, demand for detached homes may fall because they are just not as affordable. However, just outside of these two hubs, prices are affordable.

CMHC also predicts that mortgage rates will rise slightly over the next two years, with five-year posted rates set to range from 4% to 5.5% this year, rising to 4.2% to 6.2% next year – caveat: We’ll see.

Many economists also say that our housing market is overvalued. Some say upwards of 60% compared to rent, some say about 30%, but the consensus seems to be between 10% and 20%.  But we may be looking at the wrong comparison.  What’s really important is a mortgage holder’s ability to pay.  And that means people need to stay working. 

So far, job numbers are good. The unemployment rate is holding steady at 6.8 %. Compared to a year earlier, Canada has added 161,000 jobs (a gain of 0.9 per cent) and the total number of hours worked has grown by 1.2%. Full-time jobs have risen by 1.8% over the past year. 

However Canadians are carrying large debt loads. At last count in March the debt ratio was 163.6% -- a record high. However, in June the debt ratio declined. It appears that in a low interest rate environment, consumers pay down debt.   Benjamin Tal said in an interview, “We have seen in the past that Canadians use low interest rates to actually pay down debt faster, as opposed to add to their debt…”

It looks as if consumers don’t have a problem paying their debts…unless interest rates shoot up past “historical norms”.  Yet, how many years have to pass before something becomes history?  We’ve been living with low interest rates since 2008 – that’s seven years. It could be that low interest rates are now the “norm”.

We are living in times that are defying textbook scenarios on the economy. Clearly world economies have changed. It’s not likely that interest rates will skyrocket in the next few years, given what’s happening in the world; it is more likely they may start to increase… slightly. 

What we’re seeing today is the correction that economists predicted would happen two years ago. With it will come a more balanced, stable economy where people are happily working, who are able to pay their debts, where interest rates are “low normal” and  where house prices are affordable. 

In the end, economists will look back and say that everything unfolded as it should.

This is a recession in the 21st century

The past few weeks we’ve seen the dollar sink, the Bank of Canada’s rate drop to .50%, and not-so-great economic reports over the last two quarters have been released.  And with all this comes discussion that Canada is going through a…(whisper) recession.

According to the definition of a recession -- a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters – that’s what we’re experiencing. However, this seems to be a very different downturn than previous recessions.  And because the definition puts us squarely in one, it doesn’t mean that the country is slipping into serious economic trouble.

David Madini of Capital Economic said, “The recession may not last much beyond the middle of this year (2015).

Here’s some of the key data.  According to Stats Canada figures, the Canadian monthly trade data are now back to pre-2008 levels. However trade data and deficits are simply movements in capital and may not be the best indicators of the economic health of a nation. The U.S has been in a trade deficit for four decades without much harm – in fact, they seem to have prospered well through it all.

While economists fret about trade data and GDP numbers, consumers just keep buying, despite the struggling loonie.  They’re buying cars.  The housing market is still humming along in most parts of the county. Canada’s imports are higher this year, which is benefitting consumers.  Employment is strong in most parts of the country. And consumer confidence is high.

This may be the best recession ever. Or perhaps this is what a recession looks and feels like in the 21st century. Some economists are now suggesting that, although by definition, Canada is in a recession, the two-quarters rule may not be the best test.

During the recession in the early 1980s Canada experienced higher inflation, higher interest rates and high unemployment.  The Bank of Canada rate hit 21% in August 1981, and the inflation rate averaged more than 12%.

Canadian companies no longer focused on innovation and productivity improvements – they were in survival mode.  Also, high inflation was partly responsible for larger government spending. In the early 1980s, Canada’s unemployment rate peaked at 12%. It took almost four years for the number of full-time jobs to be restored.  Real GDP declined by 5% between June 1981 and December 1982. By 1979, the Canadian dollar was worth 85 cents U.S., which made U.S. imports more expensive. On the other hand, Canada’s major exports declined in price. Combined with high inflation, and interest rates, these high commodity prices reduced the standard of living.

Pretty grim picture. Now fast forward to today’s recession. The inflation rate remains in check at 1%. Canada’s unemployment rate is approx 6.8%, which is considered normal. The Bank of Canada rate is .50%. There is an entire generation of Canadian who have never experienced high interest rates -- today’s low rates are the norm for them. 

After the June employment figures were released, Scotiabank released a report suggesting the country was not in a recession “in any meaningful or broadly defined way.”

Some have billed it the Great Canadian Non-Recession.

Technically, we may in a recession and those in areas impacted by the downturn in the oil industry may be feeling it the most, however, consumers are purchasing big ticket items and home sales were up 3.1% from April to May.

So what’s going on?  Is this a true recession? Or, is this what we can expect future recessions to look like going forward? Perhaps the definition of a recession needs to be updated. The world has certainly changed in the past three decades. Some of the credit has to go to government policies. Policymakers have lived though previous recessions and have put safeguards in place to ensure old scenarios are not repeated.

But more so it might be that just two quarters data numbers is not enough anymore. Douglas Porter, chief economist for BMO Financial Group, says it’s too early to declare a recession – that there are some other indicators such as the three “Ds” – depth, duration and dispersion -- which have not been met yet.

Whatever Canada is going through at this time, it has not had a negative impact on most households… and really, that’s all that matters.

How will the recent rate cuts impact mortgage regulations

By Mark Kerzner, President, TMG The Mortgage Group

With the latest Bank of Canada (BoC) rate cut to 0.50% comes a reminder that many would like us to believe our housing market is tenuous.  Once again there is a lot of discussion about just how overheated our market is and the dire circumstances many current homebuyers are likely to find themselves at renewal time.

First, let’s think about why the Bank of Canada decided to cut interest rates once again last week. In January the BoC surprised many of us and cut the overnight rate in response to a rapid decline in oil prices.  This time around it did so because the Canadian economy has not rebounded the way the Bank had hoped.

In an effort to stimulate spending, the Bank used one of its levers to lower the cost of borrowing. In doing so the value of the loonie further decreased thereby making imports more expensive and exports cheaper. The hope is that foreigners will both invest in and buy Canadian goods.  The caveat to that appears to be Canadian real estate where many economists and policy makers would prefer that no additional investment takes place. The problem is, it’s hard to have it both ways.

The Canadian housing market is resilient – no doubt about that. But when we speak of the Canadian real estate market we really have to speak in terms of what is happening in Toronto and Vancouver and then the rest of Canada … the latter is nowhere near as hot as the former.

For the past seven-(ish) years the Bank of Canada, the Government of Canada, our mortgage Insurers and our lenders have introduced numerous lending restrictions designed to strengthen the underlying housing market, soften a blow at the time of renewal  --in the event of increased mortgage rates -- and reduce the rate of home price appreciation.  In the wake of these last two rate cuts, discussions are heating up again.

Now we are hearing rumours of increased down payment requirements as well as possibly reducing the maximum amortization. Both of these changes could have a significant impact on the market – and I do not believe the policy makers are looking for ‘significant’ market changes immediately preceeding an election. They could, however, prove to be precursors to a discussion to take place later this Fall.

In late 2008 the Bank of Canada reduced the overnight rate and the banks passed along only 3/4 of the reduction. So far in 2015 the banks have passed along only 30 of the 50 basis points.

While the banks do incur costs with each change to the overnight rate they are also ‘banking’ additional spread on both new and on their existing books of business. With arrears remaining at very low historical rates, and the high quality of borrowers, the banks are already protecting themselves from a potential overheating of the housing market. As such, to potentially trigger a downturn in the Canadian housing market by pushing regulations too far, such as increasing the down payment requirement to 10%, would not be prudent.

In the event the down payment requirements were to increase to 10% approximately 20% of first-time homebuyers could be affected. Some will find the means to borrow additional down payments and others may seek out secondary financing. At the margin, for the homebuyers that remain in the market, their cost of borrowing will increase.

Another “buy”-product of lower interest rates are lower bond yields. People look for better returns on their investments and some will move funds into equities.  Perhaps this will prove to be a good long-term investment strategy, though in the long run, real estate investing may turn out to be a sounder investment approach.

The reality is, in the wake of a massive global recession (2008-2009), followed by major geo-political uncertainty and a perilous Eurozone, our economy, and especially our housing market, have done phenomenally well. The steps taken over the past 6-plus years have proven prudent.

Once again we find ourselves in a sort of conundrum – borrowing costs are getting cheaper, the economy is stagnating yet our housing market, at least in two major cities, continues to push forward.  My concern is that we overshoot and impact one of the main engines -- first-time homebuyers -- that drives the marketplace.

I think it’s important to ensure that families who invest in real estate have the strength and ability to do so. I do not believe that policy makers should be trying to massage the actual market itself. As such, here are a few recommendations they may wish to consider.

• Register all first-time homebuyer mortgages at 30 or 35-year amortizations but set qualifications as well as payments at 25 years.  In the event of a future default, payments could then be set at 35 year amortizations to allow for some flexibility and preservation of cash flow.

• Keep the down payment minimum at 5%, though in certain geographic locations require liquid assets equal to 7.5% (plus closing costs).

• Index the cut off where mortgage insurance can be obtained. For instance a number of years ago a policy was created that restricts mortgage insurance on properties that were greater than $1M. That number should be indexed to allow for natural price appreciation (or depreciation) and geographic factors in the market.

 The housing and mortgage markets in Canada have proven to be resilient. Now more than at any point in our young history, it is vital for Canadians to seek the expert advice of mortgage brokers to navigate their options.

What to make of the economy, interest rates, house prices and debt

Here are the facts at this moment in time: The growth of the Canadian economy continues to struggle in the wake of lower oil prices and a dropping loonie. 

Interest rates are at historic lows. The Bank of Canada’s prime interest rate is now at .75%. The prime lending rate for consumers is 2.85%. Five-year fixed mortgage rates are between 2.64% and 2.79%. Five-year variable rates range from 2.15% to 2.3%.

House prices have spiked in a few hot spots across the country — most notably Toronto and Vancouver where prices have risen 10% and 11% respectively  — which is skewing the national average.

Household debt is sitting at 163.3% as a percentage of disposable income according to Statistic Canada's recent report -- only marginally lower than the record 163.9% ratio the agency reported in the fourth quarter of 2014.

Should Canadians be concerned about their jobs? Will interest rates start to rise soon? Will there be a housing meltdown? Is household debt out-of-control?

Let’s see. The Bank of Canada’s (BoC) Governor Stephen Poloz, in his latest statement, was clear about one thing — he was confident that the regulatory changes to mortgage lending was working and those taking on mortgages were able to pay them. So, as far as interest rates, it’s pretty safe to say, barring any major economic upheaval, that low interest rates are here to stay until the economy starts to grow.

The Chair of the US Federal Reserve Janet Yellen announced recently that interest rate hikes are coming. Yellen said if the American recovery continues, rates with rise this year. As the US economy starts to pick up steam, then Canada’s economy will likely follow. 

At this time consumers are taking advantage of low rates to pay down mortgage debt. A recent survey by Manulife Bank of Canada found that 40% of homeowners are starting to pay off their mortgages ahead of schedule. Manulife found that 18% made extra lump-sum payments in the past year, while 17%  increased their regular payments which reduces amortization. Another five per cent did both.

The annual survey of home buying habits by the Canadian Association of Accredited Mortgage Professionals (CAAMP) finds the same thing. CAAMP found that  first-time buyers are, on average, putting 21% down and expect to tighten up amortization periods from 25 years to 20 by increasing their payments.

If Poloz was truly concerned about debt then raising interest rates would quickly nip that worry. But raising interest rates would not help what Poloz sees as a bigger concern —  weak exports and business spending. Basically, Canada’s economy is stagnant. What the BoC does monitor closely is the rate of inflation, which it aims to keep between 1% and 3%. If it starts to edge closer to the 3% rate, then we can expect some changes. The current inflation rate is hovering around the 2% mark. 

House price increases may still be a concern; however, there is evidence that prices are stabilizing. According to the Canadian Real Estate Association (CREA) only half of Canadian provinces can expect house prices to increase.

Canada Mortgage and Hosing Corporation (CMC) recently reported that while there are some concerns about overheated regional markets, the overall national risk remains low.

While newspaper headlines tend to be somewhat controversial, the reality is that many Canadians are getting better educated financially,  are putting themselves in stronger financial positions and are more resilient to whatever is happening in the country.

TMG The Mortgage Group Celebrates 25 years in the Mortgage Industry

It was the year the Edmonton Oilers came back and Mario Lemieux couldn't. The economy turned its worst performance since the Second World War.

It was the time of Brian Mulroney and George Bush (Sr). Caller ID systems were introduced and the Internet revolution began.

It was a time of hot pants, mini-skirts, pre-ripped jeans, grunge art, Ninja turtles, head bands and sneakers. "Die Hard" was a box office hit and TV show "Cheers" won all of the Emmys.

It was the early 90s and TMG The Mortgage Group was formed. From day one, Grant and Debbie Thomas had a goal of operating a strong brokerage, educating the consumer that mortgage brokers were  best suited to help them get the best products, and to not become a big, faceless company. They wanted to create a company with old-fashioned family values, yet remain relevant and strongly competitive.

They have succeeded. On May 28, 2015, TMG celebrated its 25 years in the mortgage industry with a gala event.  After 25 years TMG, a national full service mortgage brokerage has developed an excellent reputation in the industry and is highly-respected among agents, brokers and industry partners, including lenders. TMG is known as a company with integrity.

Early on, it was decided to grow the company organically. Today, TMG has nearly 800 brokers and agents nationwide. The company continues to grow and attracts like-minded, professional individuals by treating them with respect, providing good value, and continually responding to their needs.

“Our core values help promote an open, progressive, entrepreneurial environment. We think in terms of partnerships with our brokers and staff,” said Mark Kerzner, president of TMG.

Through the years of continued and impressive growth, TMG has been able to maintain and even strengthen its corporate family culture.

The company’s contribution has not gone unrecognized in the industry. In 2011, TMG was honoured with the Canadian Mortgage Award’s top award for Network Broker of the Year.

In 2012 the company was named one of the Best Companies to Work for in B.C. TMG was awarded CAAMP’s Partners  in Excellence Award as well as Grant and Debbie receiving MBABC’s Pioneer Award for Lifetime Achievement.

In 2013 the company won Employer of Choice at the Canadian Mortgage Awards and later that year Grant and Debbie were inducted into CAAMP’s Canadian Mortgage Hall of Fame.

In 2014, four TMG brokers were recognized for their contribution to the industry by winning CAAMP Excellence Awards.

However, as wonderful as the accolades are, and as proud as they are of their achievements, Grant, Debbie and Mark are not ones to sit back and rest. There is much more to do. After 25 years, it’s important that TMG  continue to find innovative ways to help its brokers succeed.

6 Reasons to Follow Your Mortgage Broker on Social Media

Social media marketing has been the hot spot for many businesses and professionals who use it as an effective way to connect with their customer base. While it can sometimes be beneficial to follow a more traditional business in the hopes of finding out about offers, deals, and hours, you may not see following your Mortgage Professional in the same light.

Here are six reasons to follow your mortgage professional on social media, which can be just as beneficial for you as it is for them.

 Get Your Questions Answered. Lots of people turn to the Internet and social media to crowd source answers, such as “what are the current interest rates” or “how much house can I qualify for”.  While you can certainly get a lot of responses from your friends and contacts, having a Mortgage Professional in your feed can get you some very specific and goal-oriented answers.

You’ll Get More Details. You will get independent mortgage advice from a mortgage industry expert about purchasing, refinancing or renewing.   You will get:

•  Personalized service
•  Independent, unbiased advice about what's in your best interest.
•  A great rate that comes with terms and conditions that match your long-term needs.
•  Ongoing advice, when you need it

You’ll Do Less Searching. The mortgage process can be complex and daunting.  Why navigate through the often murky waters of bank terms, hoops and red tape when you can have a mortgage professional work not only with you, but for you?

Whether it’s your first home, a refinance to consolidate debt, an investment property, a mortgage renewal or a second mortgage, a mortgage professional can help you find the best financing solution for your needs. A mortgage professional will research and filter through dozens of loans and products and then review the best options with you. A mortgage professional will help you make key decisions and then support you through the application and closing process.

You’ll Learn Things. You can learn something.  By following a mortgage professional , you’ll be getting all kinds of information about the market, interest rates, new mortgage products, etc. that you might not have learned otherwise. This can help you accomplish your goals faster and with better results.

They’ll Come to You. While email lists aren’t necessarily part of social media, chances are that if you follow your Mortgage Professional  on any type of site, they’re going to ask you to sign up for their email list. If you do so, you’ll now be getting information delivered right to your inbox. So all you have to do is sit back and read, rather than spending your time searching for the same thing.

Start Following. If you’re worried that your Mortgage Professional will use social media as a big push to get you to use their services, you shouldn’t be. Most of them are using social media as a way to get word and information out and to connect with their existing client base as well as potential new clients by getting their name out in front of as many people as possible. So you have nothing to lose and everything to gain by clicking “like”, “follow”, or “sign up”.

Start following your  Mortgage Professional  on social media today and find out just how much you stand to gain.
 

NDP in Alberta?? Say, what now?

By Gord Appel, Vice-President TMG Alberta Region

Wow, this time last year someone might have thought to have you locked up if you said there would be a NDP majority in Alberta.  Yet, here we are mid-May, after the May 5th election dust has settled, and we find ourselves welcoming in new Premier, Rachel Notley, of you guessed it - the NDP.

While the election results may have been shocking enough to gain attention on a national and even international scale; a closer look at the political landscape in Alberta would show another story.  Rumblings that the 44-year privilege, the PCs believed would stay forever was about to crumble, were being echoed throughout the province.

After six years of governing a financially booming province, the then current PC government not only handed down an un-balanced budget but also gave Albertans a budget that proposed legislation with significant increases to Mortgage/Land Title fees, further cuts to essential services and front-line staff in both the medical and education sectors.  We were told to brace for tough austerity.

We then witnessed (now former) PC interim leader Jim Prentice call a premature election to secure his leadership spot - this election was to cost the Alberta taxpayers an estimated  $30 Million Dollars.  Uhm, what?  We Albertans took to the polls and with an unprecedented move removed the longest (provincial/federal) run in government in Canadian history.

The election results said that while change is frightening we were no longer willing to go with the "devil we knew".  We took the NDP from a mere four  seats in the legislature to a majority government with a resounding 53 seats.  While some are pleased, some dejected, and perhaps more still indifferent, we are all going to have to live with the outcome.  This "new" cabinet and lack of experience has many Albertans fearful.  While the cabinet is a group of "newbies", Rachel Notley herself is not.  She brings a strong sense of leadership and her team brings with them a message of hope, renewal and positive change.

Our political landscape may be changing, but what makes us uniquely Albertan has not.  Our "Alberta Advantage" is not borne from the luck of geography alone, our greatest resource has and always will be the great people of this province.  Yes, we are blessed to have one of the richest oil patches in our backyard and lucky for us that doesn't change either.  Oil is going to continue to be an important resource for the foreseeable future -- we have lots of it – and the infrastructure and foresight to get at it and distribute it.  We are an entrepreneurial-spirited bunch. We work hard work and we play hard and that is not going to change either; regardless of the flag colour the governing party flies.

And while we may be nervous of what a change in government may bring, we are willing to take the chance on some fresh faces, new ideas and the inspiration it can bring.

Notley's first act was to extend an olive branch to the energy sector.  She promises to work closely with energy-industry leaders to re-write Alberta's system of royalties and environmental rules over the next four years.  She has promised to cancel Prentice's increases to Mortgages and Land Titles (certainly good for all us in the Mortgage Industry).  She has promised significant investments in health care and education.  She pledges to freeze post-secondary tuition fees, expand public home care and include school lunch programs for kids in low-income households.

 Now it's just a question of how she's going to pull it all off?