Current housing market review by Dominion Lending’s Dr. Sherry Cooper.
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Canadian Housing Continues to Moderate in May
General Robyn McLean 18 Jun
Month: June 2021
Bank of Canada holds benchmark interest rates steady, updates its economic outlook
General Robyn McLean 11 Jun
Insight on the latest Bank of Canada announcement from our friends at First National.
- Jun 9, 2021
- First National Financial LP
This morning, in its fourth announcement of 2021, the Bank of Canada left its target overnight benchmark rate unchanged at 0.25%. As a result, the Bank Rate stays at 0.5%. It also provided somewhat encouraging thoughts on the state of, and outlook for, the Canadian and global economies and updated its outlook on inflation. Here is a summary:
Canadian economic conditions
- Economic developments have been broadly in line with the Bank’s outlook published in the April Monetary Policy Report
- First quarter GDP growth came in at a robust 5.6% and while this was lower than the Bank originally projected, “the underlying details indicate rising confidence and resilient demand”
- Household spending was stronger than expected, while businesses drew down inventories and increased imports “more than anticipated”
- Economic activity so far in the second quarter has been dampened, largely as anticipated, due to renewed lockdowns associated with the third wave of COVID-19 and recent jobs data show that workers “in contact-sensitive sectors” have once again been negatively affected
Inflation
- CPI inflation has risen to around the top of the Bank’s 1-3% inflation-control range, due largely to base-year (2020) effects and much stronger gasoline prices
- Core measures of inflation have also risen, due primarily to temporary factors and base year effects, but by much less than CPI inflation
- While CPI inflation will likely remain near 3% through the summer, it is expected to ease later in the year, as base-year effects diminish and excess capacity continues to exert downward pressure
Global conditions
- With COVID-19 cases falling in many countries and vaccine coverage rising, global economic activity is picking up
- The US is experiencing a strong consumer-driven recovery and a rebound is beginning to take shape in Europe, while a resurgence of the virus is hampering the recovery in some emerging market economies
- Financial conditions remain highly accommodative, reflected in broadly higher asset prices
Looking forward
Despite progress on vaccinations, there continues to be uncertainty about the evolution of new COVID-19 variants. However, with provincial containment restrictions on an easing path over the summer, the Bank still expects the Canadian economy to rebound strongly, led by consumer spending. Growth in foreign demand and higher commodity prices should also lead to a solid recovery in exports and business investment, according to the Bank.
With respect to the housing market, the Bank’s only comment was that “activity is expected to moderate but remain elevated.” In April, the Bank opined that housing construction and resales were at historic highs, “driven by the desire for more living space, low mortgage rates, and limited supply” and noted that it would continue to monitor the potential risks associated with the rapid rise in house prices.”
Policy measures
The BoC’s Governing Council noted that there remains considerable excess capacity in the Canadian economy, and that the recovery continues to require “extraordinary monetary policy support.”
Accordingly, the Bank said it remains committed to holding its policy interest rate at what it calls the effective lower bound until economic slack is absorbed and its 2% inflation target is “sustainably achieved.” This may happen sometime in the second half of 2022.
As well, the Bank reiterated that it would continue its Quantitative Easing program – at a target pace of $3 billion per week – to keep interest rates low across the yield curve. It also added that: “Decisions regarding adjustments to the pace of net bond purchases will be guided by Governing Council’s ongoing assessment of the strength and durability of the recovery. We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.”
The bottom line
Today’s announcement falls under the heading no news is good news. The benchmark rate is unchanged, the economic recovery appears to be unfolding largely as expected and bond buying activity will continue to provide monetary policy support in the near term.
All of this suggests now is a good time to borrow but also with a view toward developing mid to long-term financing strategies that will address future conditions including the potential for policy interest rate increases next year.
- Jun 9, 2021
- First National Financial LP
How The New Stress Test Will Impact Home Buyer Affordability Across Canada
General Robyn McLean 7 Jun
Some great insight on the increase of the stress-test in Canada from our friends at Zoocasa.
How The New Stress Test Will Impact Home Buyer Affordability Across Canada
As of today, it’ll be a bit tougher for new and renewing mortgage borrowers to qualify for their home loan. A higher threshold for the “stress test” has come into effect, requiring borrowers to prove they can carry their mortgage costs at an interest rate of 5.25% or their contract rate plus 2%, whichever is higher. This is a slight increase from the previous threshold of 4.79%. The stricter criteria applies to both insured mortgage borrowers (those who make a down payment smaller than 20% on their home purchase) and uninsured borrowers, who put down 20% or more.
What Does the Stress Test Do?
Simply put, in order to pass the stress test, borrowers must have healthy-enough incomes and debt servicing ratios to indicate they could pay their mortgage payments at the higher interest rate, regardless of the rate they actually get from their lender. For context, current fixed and variable mortgage rates are as low as 1.7% – 2% for a five-year term, so the stress test will tack on at a minimum 3% or higher. This translates to borrowers qualifying for a smaller mortgage amount.
How Will the Stress Test Impact Home Buyers?
However, as borrowers have been stress tested since 2018, the impact of this latest change will be fairly minimal. According to analysis conducted by Zoocasa, a buyer looking to purchase the average-priced home in their city would face a dip in affordability of about 3.8%, with between $14,000 – $47,000 shaved off the amount they’d qualify for. To make up for this difference, the study determined borrowers would need to supplement their incomes between $2,000 – $9,000 in order to qualify for the same size mortgage under the new stress test, depending on the city they’re purchasing in.
To determine these differences, Zoocasa calculated the income required to qualify for a mortgage large enough to purchase the average-priced home in 11 cities across Canada at both a mortgage rate of 4.79%, and then at 5.25%. It was assumed home buyers had no additional debt, were making a 20% down payment, and were amortizing their mortgage over 30 years.
Borrowers would see the largest dollar amount slashed from their qualification in Greater Vancouver, where the average home price was $1,211,223 in April; they’d receive $47,170 less on their mortgage, and would need to supplement their income by $9,000 to qualify for the same sized mortgage post stress test.
Next was Greater Toronto, where qualification would be reduced by $42,475 on the average home price of $1,090,992, resulting in a requirement of $8,000 in additional income.
The buyers least impacted by the stress test were found in Saskatoon and Winnipeg, where average home prices are $347,616 and $353,377, respectively. Qualification amounts in each would be reduced by $13,661 and $13,875, requiring an income increase of $2,000 to qualify for the same size mortgage.
Check out the infographic below to see how the stress test impacts average home buyers across Canada:
Why Is the Stress Test Being Increased?
The tougher stress test is part of efforts by both the federal banking regulator (OSFI) and Department of Finance to reduce the amount of risky mortgage debt currently held by Canadians as a result of the pandemic home buying boom. Part of the issue is the aforementioned historically low mortgage rates; interest rates have been kept at record lows over the past year by the Bank of Canada to protect the economy and keep liquidity in the market. However that’s made it cheaper to get a mortgage than ever before; combined with lockdown buyer psychology and pent-up savings, buyers have been motivated to get into the housing market at an unprecedented rate.
That has pushed home prices to stratospheric new heights in markets across Canada, as buyers working and schooling from home have sought properties with more space. The ability to work from home has also decoupled them from big city centres and shifted demand to smaller suburban and rural markets, known for their comparable affordability. However, supply has struggled to keep up with demand. Bidding wars and homes selling for far over their listing price has become the norm, even in secondary markets where these dynamics were previously rare. The Canadian Real Estate Association reports the average home price soared by 41.9% in April to $696,000, with average home prices easily topping the million-mark in the most in-demand markets.
As a result, more home buyers have had to bid higher than they otherwise would have to win their homes, and have taken on larger mortgages. The concern is that when interest rates do inevitably rise, these newly-minted homeowners will struggle to keep up with their mortgage debt. In fact, overly-leveraged households pose one of the largest risks to the economy, according to the Bank of Canada. In their most recent Financial Systems Review, the central bank states, “The biggest domestic vulnerabilities are those linked to imbalances in the housing market and high household indebtedness. These are not new, but they have intensified because of the unusual circumstances caused by the pandemic.”
The BoC adds that buyer expectations have become “extrapolative”, meaning they believe prices will keep rising, fueling their fear of missing out, and hedging on rapidly growing equity in order to afford homes outside of their budgets. This has led to higher levels of mortgage debt, with more borrowers taking on a higher loan-to-income ratio, leaving them potentially financially exposed. The fear is that should an unexpected financial event shock the economy, it could cause a chain reaction of homeowners defaulting on their mortgages.
“It is important to understand that the recent rapid increases in home prices are not normal. Even without a shock, some of the factors that caused prices to rise fast could reverse later, and that could leave some households with less equity in their homes,” states the BoC.
It remains to be seen whether additional methods to cool the housing market will be rolled out by policy makers as the economy recovers from the pandemic. In the meantime, buyers will need to absorb this new affordability requirement when budgeting for their home purchase.
METHODOLOGY:
Average, not seasonally adjusted home prices for April 2021 were sourced from the Canadian Real Estate Association. (CREA) Calculations assumed a home purchase down payment of 20%, 30-year amortization, and no additional debt, no condo fees, $125 heating costs, and $331 property tax. Calculations were made using ratehub.ca/affordability-calculator.
Another Weak Canadian Jobs Report For May
General Robyn McLean 7 Jun
Stay in-the-know on things that affect our economy and the rebound from Covid 19. Valuable information from Dr. Sherry Cooper, Chief Economist at Dominion Lending.
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Housing is Driving The Canadian Economy
General Robyn McLean 2 Jun
Great insight on our current economic rebound from Dr. Sherry Cooper, Chief Economist at Dominion Lending.
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