Some good clear-headed thinking from DLC’s Chief Economist Dr. Sherry Cooper.

As though things weren’t volatile enough, a new wave of virus terror is wreaking havoc on global financial markets. The novel conronavirus, COVID-19, continues to spread causing panic in worldwide stock and bond markets for the seventh day. Share prices have plummetted in Asia, Europe, the U.S. and Canada. The sell-off is fueled mostly by concern that measures to contain the virus will hamper corporate profits and economic growth, and fears that the outbreak could get worse.

Interest rates are falling sharply, hitting record lows reflecting a movement of cash out of stocks and commodities like oil, into the safer havens of government bonds and gold. In Canada, the 5-year bond yield has fallen to 1.16% this morning, down more than 50 basis points (bps) year-to-date and down 65 bps year-over-year (see chart below). Mortgage rates are closely linked to the 5-year government bond yield, so further downward pressure on mortgage rates is likely. Oil prices have fallen sharply, hitting the Prairie provinces hard. Crude oil WTI prices have fallen to just over US$45.00 a barrel compared to $62.50 earlier this year.

The Canadian dollar has also taken a beating, down to 0.7468 cents US, compared to a high of 0.7712 early this year.

The Canadian economy was already battered as today’s release of fourth-quarter GDP data shows. Statistics Canada reported that the economy came to a near halt in Q4 as exports dropped by the most since 2017 and business investment declined. Household spending was a bright spot–a reflection of a strong labour market and rising wages.

Monthly data for December, also released this morning, came in stronger than expected, showing the economy had some momentum going into 2020 before the coronavirus reared its ugly head.

The weak 0.3% growth in Q4 was expected as a series of temporary factors including a week-long rail strike, manufacturing plant disruptions and pipeline shutdowns slowed growth. Even though December posted an uptick, the first quarter will no doubt be hampered by the rail blockade and now virus-related supply and travel disruptions as well as reduced tourism.

Bottom Line: Panic selling in the stock market is never a good idea. The TSX opened down more 550 points this morning following yesterday’s outage. Trading on Thursday was suspended around 2 PM for technical reasons.

None of this is good for psychology or the economy.

The Bank of Canada meets next Wednesday, and clearly, their press release will address these issues. It’s unlikely the Bank will cut rates in response on March 4, but if the economic disruption continues, rate cuts could be coming by mid-year.

The new stress test will be in place on April 6. If rates were at today’s level, the qualifying rate for mortgage borrowers would be more than 40-to-50 basis points lower than today’s level of 5.19%. This will add fuel to an already hot housing market.

Some great basics for first-time homebuyers from our friends at Zoocasa

1. Buyer views the home

With your real estate agent, you’ll be looking at all sorts of homes on the market. Your agent will be able to guide you, finding things you might have missed—fixtures, space, closets, etc. Also, be sure not to reveal too much on open houses; yelling out “I’ll pay anything for this place!” won’t help you when you get to the negotiation stage.

2. Buyer submits offer

Once you’ve chosen the home you want, you’ll make an offer in writing to the listing agent. This includes all the typical components of a buyer’s offer. This is also when you submit your proposed purchase price for the sellers to review.

Your offer has an irrevocability period, where the seller has to consider the offer in a certain period of time—typically by midnight that night or within 24 hours. In that time, the seller has to respond to the offer, either declining it or providing the buyer with a counter-offer, (and this counter-offer would have its own irrevocability period).

3. Both parties negotiate the offer

The buying and selling agents will then negotiate the offer. Once the seller has received your offer, they can choose to return a counter-offer at a higher price. This can go back and forth until the two parties arrive at a mutually agreed-upon price, closing date, and terms. The negotiations can switch to verbal between agents, if there’s going to be a lot of back-and-forth, but only changes in writing will be legally binding.

4. Seller accepts the offer

Once the buyer has offered the seller terms they’re willing to accept, the acceptance in finalized via both parties’ signature, and the deal is complete.

5. Buyer gives deposit

Your deposit is given to the seller’s agent to secure the offer.

The buyer has two choices when submitting a deposit: they can either give the deposit with their initial offer, called “herewith,” or “upon acceptance,” when the seller has accepted the offer. The second option is more common, especially in a buyer’s market, but herewith deposits are common in a seller’s market, where bidding wars are more frequent.

The amount of the deposit varies based on regional trends. Deposits in the Greater Toronto Area, for example, are typically up to 5%, whereas some small communities across the country only require a few thousand dollars. Your agent will know what’s expected to secure your offer.

6. Buyer completes due diligence conditions

Most offers will come with several conditions that need to be met before the sale can be finalized, or go “firm.” These include a getting home inspection, and confirming mortgage financing for the property. Conditions must be met within a set period—typically between two and five days.

A common condition in a condominium purchase is a satisfactory status certificate. These status certificates can take a couple weeks to arrive once ordered, followed by a 2–5-day period for the lawyer to approve it. Ask your agent about any other exceptions you may encounter.

7. Brokers and lawyers prepare for the completion date

Once conditions are met, the buyer and sellers begin to plan their move while the mortgage broker and real estate lawyer work on everything else. The lawyer will confirm the title is clean and ensure they’ve received all mortgage documents and insurance documents at least two weeks before closing. A few days before closing, the buyer and seller sign all paperwork with their lawyers.

8. Buyer receives keys on closing date

Your closing date is set in the agreement of purchase and sale. Typically, this is 30 to 90 days from the acceptance of the offer, but it can vary depending on the agreed-upon needs of the seller or buyer.

Closing transactions can take all day for the lawyers to finalize money and title transfers. It’s advised that the buyers arrange to move in after the closing date, as you may not get your keys until after 4pm on closing day.

Some great news that we’ve been hoping for from our friends at Zoocasa

Good news is on the way for those getting into the housing market this spring – it’s going to become a bit easier to qualify for a mortgage, as changes are in store for the much-contested federal mortgage stress test.

The Department of Finance announced on February 18 that it will be tweaking the qualification criteria used in the stress test, to go into effect on April 6 – just in time for the busiest housing market season of the year. Under the new changes, the benchmark rate – also referred to as the “floor” – used to set the stress test threshold for borrowers will be changed from the five-year rate set by the Bank of Canada (which in turn is set by an average of the posted five-year rates offered by the Big Six banks) to the weekly five-year median insured mortgage rate used in mortgage insurance applications, plus 2%.

Currently, the change is only for insured mortgage borrowers – those who pay less than 20% down on their home purchase and require mortgage default insurance from the Canada Mortgage and Housing Corporation. However, the same change is likely to come for uninsured mortgages too, according to national banking regulator the Office of the Superintendent of Financial Institutions, which will be consulting on the matter until mid-March. The stress test has been in place for insured borrowers since October 2016, while the version for uninsured mortgages rolled out in January 2018.

What Does This Mean for Home Affordability?

This change is notable as it will materially reduce the threshold these borrowers need to qualify at in order to obtain home financing, as the rates offered by lenders for insured mortgages are typically much lower than the posted rates at the big banks; for example, the current BoC rate sits at 5.19%, while many lenders offer insured mortgage rates today below 3%. In fact, if the new median rate was made available now, it would sit at 4.89%.

According to calculations from RateHub, a borrower getting a mortgage rate of 2.89% and tested at the new rate would qualify for a home valued at $526,632, $15,000 more than the $511,424 they’d receive under the current rate.

Why is the Stress Test Changing?

Mortgage industry experts have criticized the gap between the stress test and actual mortgage rates as being out of touch with real-time markets, with the difference growing ever larger in today’s low-interest rate environment. As a result, Finance Minister Bill Morneau was instructed by the government to review the stress test late last year to ensure it was better aligned with real market conditions.

However, tweaking its criteria required a sensitive approach, as it was put in place to protect borrowers’ ability to pay their mortgage should rates rise, and prevent them from taking on too large of a loan in the first place.

In its announcement, the Department of Finance said that while the measures have largely achieved these goals, “This adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions.”

Stated Morneau, “For many middle class Canadians, their home is the most important investment they will make in their lifetime. Our government has a responsibility to ensure that investment is protected and to support a stable housing market. The government will continue to monitor the housing market and make changes as appropriate.”

Real Estate Industry Voices Support for Change

The reaction from realtors at the national level has been positive, as the stress test has been blamed for reducing affordability for many buyers and cooling the market. According to the Canadian Real Estate Association, per capita sales activity in 2018 reached its lowest point since 2001 following the uninsured stress test, while 2019 final sales tied for second-worst.

While calmer buying activity may have been welcome in Canada’s most expensive housing centres, such as in the Vancouver and Toronto real estate markets, there was criticism that the measures disproportionately affected smaller cities where conditions were balanced, or already in buyers’ market territory, like the Prairies. As well, there was growing concern that borrowers shut out by the test moved instead to B and alternative lenders to get their home financing, which actually added more risk to the borrowing landscape due to their higher interest rates and overall less favourable terms.

Stated CREA President Jason Stephen, “Realtors have advocated for changes to the stress test on behalf of potential homeowners who have been sidelined, borrowers who have moved away from the regulated market to less-regulated options, and real estate markets across the country in need of relief.”

Will This Add More Fuel to Already Heating Markets?

Not everyone is hailing the change to the stress test to be a positive development, expressing concern it will only contribute to rapidly heating prices and buyer competition in the nation’s largest cities, which have gotten an early start this year; the Toronto Regional Real Estate Board is reporting that average GTA prices approached the $900,000-mark in January, having increased 12.3% year over year. From a national perspective, CREA said the sales-to-to-new-listings ratio for Canada as a whole was 65.1% in December – well over the threshold to be considered a sellers’ market.

According to Capital Economics’ Senior Canada Economist Stephen Brown to the Financial Post, “The timing could hardly be worse.”

“Reducing the severity of the stress test is likely to put further upward pressure on housing prices, at a time when the sales-to-new-listings ratio already points to a surge in house price inflation ahead,” he stated. “The dilemma the Bank currently faces, between the need to support activity on the one hand and the need to limit the build-up of financial risks on the other, will only get worse.”

It remains to be seen how this latest change will filter through the housing market, especially with competitive urban centres already experiencing hot conditions in the typically slower late-winter season. All eyes will be on whether the mortgage industry experiences a significant uptick in applications once the easier rate is in force.

During the process of buying or selling a home, your clients often learn about recommended or required repairs and upgrades. This can happen as a result of the home inspection, or you may make suggestions based on your knowledge of the local market and comparable homes. Of course, the first thing your clients want to know is, “How much will that cost?”

The Pillar To Post Construction and Remodeling Estimates Cost Guide puts this information at your fingertips. It provides estimated cost ranges for the repair and/or replacement of major systems and components in a home including heating and cooling, roofing, plumbing, electrical and much more. It also includes general guidelines for the life expectancies of those systems. This information can help your clients make informed decisions when they’re considering home repairs or improvements and is valued by buyers and sellers alike.

For complimentary copies of our newly updated Cost Guide, please contact your local Pillar To Post Home Inspector or download it here.