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.

Negative interest rates and you

I have a great deal for you – give me $100 and I will give you back $99. No? Well, that would be the result of a negative interest rate scenario The Bank of Canada’s  (BoC) Stephen Poloz has alluded to as an option  in case of another global  economic crisis. We’re not there yet and it is unlikely we will ever get there, but if we did, it’s not likely consumers would be impacted in a big way.

So what would happen if we had sub-zero interest rates? First of all, that loan deal presented at the beginning of this article would be the scenario for the banks. When you put money into a deposit account, you earn money on that deposit. For example, if you deposited $100 and 0.5% interest rate, you end up with $100.50. A negative interest rate works the other way. If you deposited $100 at a negative 0.5% interest rate, you would end up with $99.50.

If banks were to keep borrowing from the BoC, they would be paying for the privilege of doing so. The idea is to force the banks to be more liquid. Instead of saving, they get a financial return by using more of their funds for loans.

It’s not a “normal” response to an economic crisis but a few countries have gone there recently – Denmark, Sweden and Switzerland, for example. The BoC has other tools and the new government is working on a stimulus package that will likely help get the country growing again.

Loans may cost less but loans wouldn’t necessarily be easier to get -- consumers would still have to qualify. And unlike in Denmark, where some banks are paying mortgage holders a small monthly interest on their home loans, that is not likely to happen here.  Also, if rates did go sub-negative, it likely wouldn’t mean added banking fees for saving-account customers either.  If that were to happen, consumers would just hoard their cash.

“The lower rates go, the more likely you are to spend,” said Carlton University economics professor and monetary policy expert Nicholas Rowe in an interview with Global News. And low interest rates stimulates the economy because, “it’s a big encouragement to go out and spend your money,” he added.

As for mortgages, the variable rate might be affected but fixed rates are depended on the bond market.  In fact discounts from prime on variable mortgages have actually decreased significantly in recent weeks. Encouraging home ownership is good for the economy overall because when people buy homes, they also buy other goods for that home.

There are two reasons to cut interest rates: to stimulate the economy through increased borrowing and consumption and to devalue the currency to boost exports.

There may be some good news on that front.  Many Canadian economists expect good news in the upcoming months.  Although it has taken longer than expected for the economy to depend less on the oil sector and more on the manufacturing sector, growth is expected in 2016 and 2017.

A lot is riding on the federal government’s new stimulus package, aimed at kick-starting a sluggish Canadian economy. Although the details have not yet been released, BMO Capital Markets thinks it will lead to economic growth. They crunched the numbers and say, at best, “stimulus would lift GDP growth by a bit more than 0.5% next year.”

If so, BMO’s call for just over 2% economic growth in 2016 and 2017 edges a bit higher to 2.5%.
Although it’s not likely we’ll see negative interest rates, it’s good to know there is a plan in place, just in case.

New down payment rule change – will it affect you?

By Mark Kerzner, President TMG The Mortgage Group

What a difference a week makes.

The new Liberal government is making its voice heard loud and clear with respect to the Canadian housing market and its concerns about an overheated housing market in certain cities in Canada.

By increasing down payment requirements for properties greater than $500,000 the Minister of Finance, Bill Morneau took the position that, “The actions taken … prudently address emerging vulnerabilities in certain housing markets, while not overburdening other regions.”

While the industry knew changes were being considered, only a few would have bet on the speed with which they were delivered.

It is important to understand that increasing down payments has been talked about for many years and the results could have been much more severe.  I suppose, at its core, down payment minimums could simply have increased to 10% across the board. In presenting it this way the Minister has recognized geographic market differences. Please refer to the chart below for a simplified display of the extent of the change (showing that its maximum impact is increasing down payment to 7.5% for homes valued at $999,000, or $25,000)

Without a doubt the real estate sector, including the mortgage market, remain top- of-mind with our new finance minister. This change, along with some proposed changes from OSFI related to lender capital requirements, and CMHC changes related to guaranteed fees in the mortgage-backed securities market will surely lead to incremental costs for our mortgage funders.

These two additional changes seemed to have been timed to bring about a series of changes at the same time, which taken together, are designed to curtail a rising housing market. It is important that we are as aware of them as we are of the down payment increase.

When funding costs for our lender partners increase, they are likely to be passed along to consumers in the form of higher rates.  These increased direct costs to consumers, in the form of higher down payment requirements, combined with higher funding costs will certainly impact affordability on the margin. In doing so, the government is hoping it will create more balance in the market – perhaps by slowing it down in certain areas.

And while the intended ‘targets’ were likely Toronto and Vancouver, CIBC deputy chief economist, Benjamin Tal wrote a report that showed the unintended consequences may be felt more in cities such as Calgary, Victoria, Edmonton and Hamilton as those cities have a higher percentage of high ratio sales between $500,000 to $1M.  That said, overall impact is estimated to be less than 3.5% of the market.

For more than half a decade we have been working though times of increased regulation and oversight.  Some of those changes have brought about the increased use of secondary and private lenders for some, and increased down payment requirements for others. And while costs may have increased on the margin for some, ultra low interest rates along with a high degree of consumer confidence have buoyed housing markets in many markets across the country.

For years we have advocated government and policy makers to tread carefully around broad stroke changes to increase down payments. Given the government's intent to make this policy change I am pleased to see that it was done on the margin and took into consideration regional market realities.  The Department of Finance has drafted the following FAQ for more context.

While our initial reaction is always concern, I think it’s reasonable to estimate that these changes will not dampen the real estate markets to the point of collapse. In fact, we will continue to operate in a very robust and confident lending environment.

As we are assessing this latest change, it’s important to remember there are still a number of very important items on the radar as it relates to potential changes in mortgage regulations. These include foreign ownership in a broad sense and Canadian residents buying investment properties. Since both of these items already require at least 20% down payment, other levers may be evaluated as a means to influence the market.

Mortgage brokers save consumers money, whether or not they use a broker. That is because competition breeds responsiveness. Even though we are living through a period of heightened regulatory oversight, the broker channel continues to grow. The reason is that consumers need and value our experience and expertise to navigate the mortgage landscape, ultimately sourcing them the lender and product best suited for their financial need.

If you are a mortgage consumer reading this, I urge you to contact your mortgage broker today.