Finally the government has heeded to some common sense recommendations from the mortgage industry.  Effective April 6, 2020, there will be a slight modification  to the ‘benchmark rate’ used to qualify for insured mortgages.  This should reduce the qualifying rate by about 0.30% if contract rates remain at roughly today’s levels, and translates to about 3% more buying power.

Note, this affects only insured mortgages, meaning ‘high ratio’ less than 20% down payment purchase.  Only owner occupied (single family dwelling up to fourplex) or duplex to fourplex rental purchases can be insured.  As of 2018, insured mortgages accounted for less than a third of new mortgages.

Refinances and single family rentals cannot be insured, and fall into ‘uninsured’ category.   However, a similar qualifying approach for uninsured mortgages is being considered. A communication on this matter is expected by April 1, with changes effective on April 6.

Instead of the more ‘static’ rate approach currently, the new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.  Perhaps this is adding more unnecessary government bureaucracy and complexity to the stress test.  Although it is a relief to see drop in qualifying rate, now how will buyers time their home buying decision, if rate is changing? Working closely with a mortgage broker is now even more important for this reason, as you can be advised  if your specific situation changes.

According Mortgage Professionals Canada, a more reasonable ‘stress test’  is closer to 0.75% above contract rate (as opposed to 2%). This is based on calculations that take into account income growth and mortgage principal payment over the term of the mortgage.   Current response from head of CHMC (Canada’s largest mortgage insurer, which regulates mortgage insurance)  Evan Siddall, “Calls to reduce the margin (from 200 to 75 bps) do not have traction at present.”  Things may change, as Siddall has announced his departure from CMHC.

We will get more practical clarity once April 6 hits and this test is applied to applications.

Bank of Canada holds the rate steady. Your variable rate mortgage remains unchanged. More grim language used. “..there remains a high degree of uncertainty and geopolitical tensions have re-emerged, with tragic consequences” “Governing Council will be watching closely to see if the recent slowdown in growth is more persistent than forecast.”  Next announcement is Mar 4.

Bank of Canada holds the rate steady. Your variable rate mortgage remains unchanged. Hinting at ‘stable’ rate. “The Bank continues to expect inflation to track close to the 2% target over the next 2 years.” A 2 year projection, in my opinion, is too forward reaching, anything can change in the meantime. Next announcement is Jan 22.

Bank of Canada holds the rate steady. Your variable rate mortgage remains unchanged. Bleak outlook. “The Bank continues to monitor the evolution of financial vulnerabilities in light of lower mortgage rates and past changes to housing market policies. Governing Council is mindful that the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist.” Next announcement is Dec 4.

The election is over. What does this mean for mortgages? Some good insights (summarized from source Mortgage Professional Canada):

Mortgage rules and related policy will not be a top priority for Trudeau government.

Most likely Liberals will implement their national tax on vacant residential properties owned by non-Canadians who don’t live in Canada, likely in spring budget.

The promised increases to the FTHBI (first time homebuyer incentive) in Toronto, Vancouver, Victoria would be welcomed but may not be immediately forthcoming. Push and pull between various levels of policy makers, with fear of increasing housing demand and therefore prices.

Not expected Liberals to consider insurable 30-year amortizations as policy independently, but in a minority government, opposition allegiances can set the agenda of the day.

It is also possible that the FTHBI could be replaced by 30-year amortization, but for now, forsee FTHBI surviving through this Parliament, at least.

Proposal of removal the mortgage stress test on renewals or switches (note, not on purchases or refinances) on the table, seems like all 3 party caucus members generally supportive of this, but nothing certain yet.

Recent announcement of the regionalized adjustments to FTHBI for Toronto and Vancouver may point to government being open to more regionalized policies, not just a “one-size-fits-all” national policy.

While many Canadians will want to see action, minority governments last longest when they keep it simple, and not act too boldly. No party wants another election so soon. Regardless, the mortgage industry will not wait and continues discussions with all parties.

Staying put before the election. Bank of Canada holds the rate steady. Your variable rate mortgage remains unchanged. Economic outlook is weak. Comment made about justifying current mortgage rules. Next announcement is Oct 30, days after the federal election.

“Given this composition of growth, the Bank expects economic activity to slow in the second half of the year.”

“Housing activity has regained strength more quickly than expected as resales and housing starts catch up to underlying demand, supported by lower mortgage rates. This could add to already-high household debt levels, although mortgage underwriting rules should help to contain the buildup of vulnerabilities. “

Bank of Canada holds the rate steady. Your variable rate mortgage remains unchanged. Sombre language used. The general speculation is that there is possibility of rate dropping. We will have to see if the boat will be rocked before the federal election. Next announcement September 4.

Summary of mortgage related items in the budget:

The federal budget announced a new first-time home buyer incentive. It is essentially a ‘shared mortgage’ or interest-free loan to be repaid when the property is sold. Loan of 5% (existing home) or 10% (new build) of purchase price on insured purchases with minimum 5% and maximum 20% down payment. Maximum household income of $120K, and purchase price no more than four times the buyers’ household income. This translates to maximum price of $505K. Borrowers still must qualify under the existing stress test. Details on exactly how this repayment will look like was not presented, ‘more details released later this year’.

The RSP first-time home buyers plan (HBP) limit is increased from $25K to $35K.  Can be used towards a down payment on a purchase. Repayment timeline is unchanged.

My interpretation:

• This does not address much the issue of supply of housing.
• It creates an already existing competition for entry level housing, as the maximum price translates to $505K (and can be lower, depending on your household income).
• It shuts out most expensive regions like Toronto and Vancouver, due to their higher home prices.
• Since this is still a ‘loan’, it just pushes borrower’s debt to the future, as they have to repay once property is sold.
• This adds risk to the taxpayer, as the government-backed ‘interest-free home loan’ is tied to real estate values. What if values go down? Isn’t this the space the government wanted out of several years ago, and now they are back in the real estate business?
• There are no specific details on how the loan exit will work. Let’s worry about that possibly ‘after the election’.
• Their published example of a $400K home purchase with the incentive yielded a monthly mortgage payment reduction of approximately $200. If they just reverted back to allowing 30 year amortization from 25 years, it would be a similar reduction. Why create complexity, new bureaucracy and programs instead of letting go.
• Similar local down payment assistance programs have been commented on as not as widely used as expected.
• The increase in HBP can benefit some, but many younger first-time home buyers don’t have that much saved up anyway.
• Although the government claims to listen and rely on industry experts, much of what was said from the mortgage industry fell on deaf ears.
• A focus on strengthening our economy and jobs could be a better approach to address issues with debt loads and affordability.

We will have to wait and see the effects and market reaction.

The Bank of Canada holds the rate steady. Your variable rate mortgage remains unchanged.

The mood of the announcement now paints a different picture than the last year’s hinting of increase. Now it says ‘CPI inflation to be slightly below the 2% target through most of 2019’, (typically above 2% mean they raise rate) and ‘Given the mixed picture that the data present, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook.’

And hey, it’s an election year, so do they really want to rock the boat? Next rate announcement scheduled April 24.

Here is a great overview of what’s in store for 2019 from Dominion Lending Centres’ Chief Economist Dr. Sherry Cooper. She breaks it down for us so it is easier to understand. Important read as we enter a new year, it may help you with your financing and real estate investing decisions. Check out point 4 and what she says about Bank of Canada rates.

At the start of every New Year, pundits posit the forecast as everyone wonders what the year will bring. While no one has a crystal ball, here are some fundamentals at play this year:

1). Canada’s economy will continue to under perform the U.S. as growth slows to 1-3/4% in 2019 compared to just over 2% in 2018. For the U.S., where budget deficits have been rising sharply with the 2018 tax cuts, growth this year will hit about 2.4% compared to nearly 3% last year–an over-heated economy to say the least.

2.) Canada’s population growth will lead the G7 by a wide margin. In 2018, Canada’s population was on track to increase 1.4%, the most robust pace in 18 years and double the 0.7% rate for the U.S., which was the G7 country with the next-highest population growth rate. Despite this, spending did not rise —auto sales fell on an annual basis for the first time since 2009, while home sales had their second biggest slide in the past 20 years. Per capita GDP growth in Canada this year will under perform most of the G7.

Strong (net) immigration accounted for almost half (45%) of Canada’s population increase last year. That contribution will only grow since Ottawa has committed to boosting its annual immigration target from 310,000 new permanent residents in 2018 to 331,000 this year (up 6.7%) and to 350,000 by 2021. About two-thirds of 2019’s expansion will come from the immigration programs that target highly skilled workers aimed at addressing labour shortages across Canada.

As well, the number of non-permanent residents reached an all-time high of 166,000 last year accounting for one-third of the growth in the population. This group includes temporary foreign workers, international students and asylum seekers. All three categories soared, reflecting strong demand for skilled labour, Canada’s growing reputation as a desirable place to obtain post-secondary education, and increases in cross-border refugee claimants.

3.) Canadian consumers are tapped out as debt levels remain high, interest rates edging upward and credit is less readily available. Boomers are wary that their homes are worth less than what they were counting on as Canada’s two largest housing markets experienced decade-low sales last year with softer prices especially at the pricier end of the single-family home market. First-time buyers might have more homes to choose from in some markets, but regulators have tightened qualification rules. Foreign buying has slowed owing to foreign purchaser taxes in Toronto and Vancouver and speculation taxes in Vancouver.

4.) The Fed and the Bank of Canada will raise rates in 2019 by more than the market currently expects. Market participants in recent weeks have reduced expectations for rate hikes by both central banks to barely one increase apiece. More likely, both the Fed and the BoC will raise the benchmark overnight rate twice each this year. Even with these actions, monetary policy in both countries will be slightly accommodating with interest rates still below neutral levels.

5.) Even with only modest rate increases in 2019, consumers will be impacted because they are so heavily exposed to debt. Economists at the Royal Bank estimate that the average household faces a $1,000 hit from rate hikes. This would imply that the average household principal and interest payment will increase by 7.6% in 2019.

6.) This effect will be offset by stronger wage growth as labour markets continue to tighten. Labour shortages will finally add to wage growth. The unemployment rate hit a record low in December, yet wage growth had slowed to only 1.5% year-over-year, well below inflation. Over the next decade, more than 270,000 people will retire from the Canadian labour market every year. Immigrants and temporary workers will replace some of these retirees, but not all.

Recent data suggest that the quit rate–the proportion of the labour force that leaves their jobs voluntarily–is rising. This portends higher wage rates going forward.

7.) Rising interest rates will squeeze government spending for the feds and provinces with significant debt loads. Ottawa will spend more on debt payments than any other program except elderly benefits.
8.) Corporate balance sheets will be negatively impacted by higher interest rates as Canadian companies borrowed more heavily than their international counterparts. Canadian companies remain less competitive as their productivity growth has lagged their global competitors. Efforts to improve Canadian competitiveness are in process but have yet to show meaningful results. This has been a secular problem for Canada.

9.) Canada could be caught in the crosshairs of a U.S.-China trade war, but free-trade deals with Europe (CETA) and China (CPTPP) will reap benefits, particularly as the U.S. continues to alienate many of its allies and trading partners. Canada must diversify trade away from the U.S., particularly in the oil sector, which requires massive infrastructure spending. No longer can we count on exports of oil and transportation products to the U.S. to be the mainstay of Canadian global trade.

10). Comparable to last year, housing in 2019 will not fuel Canada’s national economy, thanks to macroprudential policy measures and modestly higher interest rates. Housing accounted for a record-high percentage of overall economic growth and job creation until early last year. We are barely off those peak levels now, so any slowdown in housing activity will have a disproportionately large negative impact on the economy–the flip side of its disproportionate expansionary impact over much of the prior decade.

Bottom Line: Sales to new listings have stabilized in Toronto, but continue to decline in Vancouver. Population growth in Vancouver has under performed Toronto’s for two years, while supply, mainly in the high-rise segment, has risen sharply. In consequence, the number of completed and unabsorbed units in Vancouver continues to increase, while that measure is still trending downward in Toronto. The sector of most significant weakness in Toronto will continue to be in the pre-sale low-rise market where there remains considerable excess supply.