Current Risks to the Canadian Mortgage Market? May 15th, 2024
Summary:
May 21, 2024 is when the inflation a report comes out and it should be the determining factor if the Canadian PRIME RATE of INTEREST is reduced from 7.2% in June or not. Maybe July. Maybe later.
Nobody is buying anything big right now, which is the idea … to reduce inflation.
Which means now is the best time to buy a home before everyone waiting for rates to drop jumps in on the 1st Prime rate reduction.
Says Mortgage Mark Herman, Calgary Alberta best/ top/ mortgage broker for first time home buyers
DATA:
Mortgage holders have been anxiously waiting for the Bank of Canada to cut interest rates. The increase of 90,400 jobs in April – 5 times what analysts expected – has heightened concerns that the Bank will continue to wait before lowering rates. 🙁
While the economy has not slowed as much as expected, there’s growing economic slack, with the jobless rate up 1 percentage point over the past year and a 24% year-over-year increase in the number of unemployed individuals, which is slowing down wage growth. The crucial factor in determining whether a rate cut will occur in June or be postponed to later this year hinges on the April CPI release scheduled for May 21st.
In the background of these deliberations, the Bank of Canada also assesses various potential risks to the economy. Last week, the Bank released its Financial Stability Report, highlighting two key risks: debt serviceability and asset valuations.
The report notes that the share of mortgage holders who are behind on their credit cards and auto loan payments, which had hit historic lows during the pandemic, has now returned to more normal levels. It also notes that smaller mortgage lenders are seeing an uptick in credit arrears. This increase isn’t surprising, given the run up in rates and the market segment that these lenders cater to. While the arrears rate is up, it remains relatively low compared to historical levels.
This overall positive portfolio performance is due to two key factors: 1) financial flexibility and 2) employment.
Canadian mortgage defaults tend to spike up during periods of rising unemployment. While the unemployment rate has risen, it remains relatively low. Additionally, mortgagors are holding higher levels of liquid assets. Before the pandemic, homeowners with a mortgage held 1.2 months of liquid reserves, which increased to 2.2 months during the pandemic and has since fallen to 1.8 months. These increased reserves provide a solid buffer for mortgagors to meet unexpected increases in expenses.
The Bank remains concerned that nearly half of all outstanding mortgages have yet to be renewed, leaving these borrowers at risk of payment shock due to the increase in interest rates. Scotiabank is an interesting case because, unlike other banks, it offers adjustable-rate mortgages (ARM) with variable payments instead of variable rate mortgages with fixed payments. Scotia has seen its 90+ days past due rate increase from 0.09% to 0.16%. During their fourth-quarter earnings call, Scotia noted that ARM borrowers have been cutting back on discretionary spending by 11% year-over-year, compared to a 5% reduction among fixed-rate clients.
The mortgage maturity profile in the Financial Stability Report suggests that we could see significant slowing in consumer discretionary spending over the next two years. While the rise in debt-servicing costs will be partially offset by income growth, we should expect to see belt tightening by mortgage holders. This poses less of a risk to the banking sector mortgage market than to the overall outlook for the economy.
Divorce & Mortgage Buy-Out Details, Canada, May 2024
Important data for separating / divorcing partners, this may help with “Buying the ex-spouse out” of a divorce, when some debts need to be rolled in.
The way most lawyers and Big-6 banks do it:
as a refinance, max loan is 80% of the appraised value of the home,
and you get refi rates – the highest – today:
- 3 year fixed 5.76%, 5 year fixed 5.59%
and usually NO debts can be rolled into the mortgage past that 80% of the home value.
with OUR WAY/ Broker way…
we do it as “a purchase after marital breakdown” which allows
max loan of 95% LTV (of the home value) – which usually makes ALL THE DIFFERENCE in a buyout situation.
- BEST RATES again: 3 year fixed 5.39%, 5 year fixed 4.99%
and usually Most/ All/ some debts can be rolled into the mortgage – at no extra cost, depending on your lending ratios.
Data from a similar file –
As long as the deal IS insurable (meaning it conforms to CMHC rules and guidelines) to get that lower rate – actually 0.6% LOWER as of today – then we need an offer to purchase too. Most lawyers do not want also write an “offer to purchase,”
If the Big-6 bank is doing it as a conventional refinance then an offer to purchase is not needed.
Banks don’t have substantially different rates for insurable and conventional like we do. (o.4 to o.9% rate difference makes a huge difference.)
So yes, we can get a separation done without an Offer to Purchase as long as at least 20% of the value stays in the home and we use refinance rates at 0.6% higher than broker best rates today.
Considering customers will leave us for 0.05% and this is 0.6% – that is >10x multiple of what customers consider “worth leaving us for” this is an important way to get divorce deals to work better for everyone.
Mortgage Mark Herman, top/ best Calgary Alberta Mortgage Broker
Bank of Canada Leaves Prime the Same, April 2024
As Expected, No change in Bank of Canada benchmark interest rate for April 2024.
As noted in August 2023, the 1st Prime Rate reduction is expected in July and then Prime should come down at o.25% every 90 days so … 1 quarter percent reduction, every calandar quarter, for the next 2 years.
Mortgage Mark Herman, best top Calgary Alberta mortgage broker.
Today, the Bank of Canada announced it is keeping its benchmark interest rate at 5.0%, unchanged from July of 2023. However, much has changed in the economy and in the world since then. For evidence, we parsed today’s announcement and present a summary of the Bank’s key observations below.
Canadian Inflation
- CPI inflation slowed to 2.8% in February, with easing in price pressures becoming more broad-based across goods and services. However, shelter price inflation is still very elevated, driven by growth in rent and mortgage interest costs
- Core measures of inflation, which had been running around 3.5%, slowed to just over 3% in February, and 3-month annualized rates are suggesting downward momentum
- The Bank expects CPI inflation to be close to 3% during the first half of 2024, move below 2.5% in the second half, and reach the 2% inflation target in 2025
Canadian Economic Performance and Housing
- Economic growth stalled in the second half of last year and the economy moved into excess supply
- A broad range of indicators suggest that labour market conditions continue to ease. Employment has been growing more slowly than the working-age population and the unemployment rate has risen gradually, reaching 6.1% in March. There are some recent signs that wage pressures are moderating
- Economic growth is forecast to pick up in 2024. This largely reflects both strong population growth and a recovery in spending by households
- Residential investment is strengthening, responding to continued robust demand for housing
- The contribution to growth from spending by governments has also increased. Business investment is projected to recover gradually after considerable weakness in the second half of last year. The Bank expects exports to continue to grow solidly through 2024
- Overall, the Bank forecasts GDP growth of 1.5% in 2024, 2.2% in 2025, and 1.9% in 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026
Global Economic Performance and Bond Yields
- The Bank expects the global economy to continue growing at a rate of about 3%, with inflation in most advanced economies easing gradually
- The US economy has “again proven stronger than anticipated, buoyed by resilient consumption and robust business and government spending.” US GDP growth is expected to slow in the second half of this year, but remain stronger than forecast in January
- The euro area is projected to gradually recover from current weak growth. Global oil prices have moved up, averaging about $5 higher than the Bank assumed in its January Monetary Policy Report
- Since January, bond yields have increased but, with narrower corporate credit spreads and sharply higher equity markets, overall financial conditions have eased
- The Bank has revised up its forecast for global GDP growth to 2.75% in 2024 and about 3% in 2025 and 2026
- Inflation continues to slow across most advanced economies, although progress will likely be bumpy. Inflation rates are projected to reach central bank targets in 2025
Outlook
Based on the outlook, Governing Council said it decided to hold the Bank’s policy rate at 5% and to continue to “normalize” the Bank’s balance sheet. It also noted that while inflation is still too high and risks remain, CPI and core inflation have eased further in recent months.
The Council said it will be looking for evidence that this downward momentum is sustained. Governing Council is particularly watching the “evolution of core inflation,” and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.
As it has said consistently over the past year, the Bank will remain “resolute in its commitment to restoring price stability for Canadians.”
Next Touchpoint
On June 5th, 2024, the Bank returns with another monetary policy announcement and economists are already lining up with predictions of a rate cut either then or in July.
Net Migration to Alberta – #’s here.
the CORE reason home prices in Calgary will be going up for the next 4 years, and are 100% supported and will not be coming down is summed up in this article right here.
https://www.cbc.ca/news/canada/calgary/alberta-population-records-2023-to-2024-data-1.7157110
Summary of the Main Reasons Home Prices are Supported:
- BC and Ontario home prices are DOUBLE Calgary home prices
- 4 million New Canadians on the way here in the next 5 years.
- We hatched the largest 20 – 29 year old population Canada has EVER had, and they are moving out of their parent’s basements and buying their own homes.
- Alberta does NOT have PST
- Alberta does not have a 1% “welcome to the neighborhood tax” when buying property.
After researching the above data points we can confidently say all 5 of these stacked factors will cause home prices to increase is all price ranges for the next few years.
Mortgage Mark Herman, licensed as a top Alberta Mortgage Broker for 21 years and 1 year in BC
Why to Buy Your Home Now; Vancouver Island, Winter, 2024
Summary
We expect to see multiple & competing offers, with NO Financing Conditions for all home types, priced from $400k to $1.1M, starting now, and growing to “full-scale crazy- town” by May.
Use this time before May 2024 to take advantage of slight & short term softening of the market before:
- News of lower mortgage interest rates ignites a powder keg of sidelined, eager, competitive buyers.
- Prices continue to climb due to continued competition from 4 million New Canadian immigrants for the few homes on the market; for the next 4 years!
- Housing will remain in super-tight supply with inventory pre-sold before it gets to market.
Shameless Advertisement … then the data
Your #1 concern should be: how does my offer win among 5, 10 or 20 others?
Will you have the confidence in your broker or bank to write a No Condition or Lo Condition Offer?
We support NO CONDITION & LOW CONDITION OFFERS!
-
- with 100% pre-underwritten approvals and
- 9am to 11 pm live phone support – with me & your realtor – when writing your offer to ensure it works.
To take your 1st step to a FULLY Pre-Undewritten, Pre-Approval; that could go NO Conditions, if needed – click here.
DETAILS
1. Mortgage Rates
Have Decreased Already – but on the down low.
Without media attention, About 20 tiny reductions have already happened for FIXED RATES.
- Fixed rates have been slowly and quietly decreasing from Post-COVID 20 year highs; they were ~7% and are now ~5%
- Most people are only aware of the 10x Prime rate increases in a row post-COVID in 2023/23
- Prime has held steady at 7.2% since then,
- 1st Prime reduction expected in July and it has already been “100% priced-in” by the stock market.
- Inflation and the Consumer Price Index came in at 2.9% and is now back inside the target range of 1.0% to 3.0%.
Why the Rush?
1A. Joe Public is now correctly thinking;
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the slight extra interest cost of buying now with marginally higher mortgage rates and some actual inventory selection to choose from; far, far, far out weighs …
- the small increase in buying power from lower rates that is sure to come with
- massive price increases when buying in the frenzy starts after the BoC rate cuts hit the news.
1B. 50% of “Exhausted Buyers” plan to re-enter the market when rates drop
A recent survey, half (51%) of those who put their home purchase plans on hold, now say they will re-enter the market when they hear that rates have dropped.
- A rate decline of just o.25% would be enough to bring 10% of those Exhausted Buyers back,
- A rate decline of 1.00% would bring back 23% of those sidelined.
- the Prime rate (for variable rates) is expected to go down 2%, and fixed rates could easily sneak down another 1.5% yet too.)
1C. AUTO_RATE_FLOAT_DOWN helps
In a decreasing rate environment, if the rates goes down AFTER you sign, you still AUTOMATICALLY get the lower rate right up until 5 business days before you move in.
See the GRITTY details of WHY THE VARIABLE RATE IS THE WAY TO GO HERE
- The Variable lets you take advantage the rates going down over the next 28 months, right now. It goes you an option to not take a fixed rate at near 10-year highs.
2. Home Pricing
Home prices on Vancouver Island are FULLY SUPPORTED, and will NOT be dropping at all, due to continuous demand from record setting immigration for the next 5 years.
- Remember in 2022, during COVID when “buyers were acting irrationally” and then home prices went up $500k over 1 year?
- That is about to happen again!
Consider this is the reason why Vancouver Island is in such demand …
- Every day, somewhere in Canada, say about 100 people retire and “sell all their things” and plan to move West, to the Island, and retire in Canada’s only temperate rain-forest. The #1 location choice for retirees.
- Right now the high interest rates are slowing the asset sales for these retirees to “move their high value assets” and move West including: primary and rental homes, cabins, businesses, vehicles and boats.
- When interest rates come down, buyers will better afford loans on these assets, and the above items will sell. The “tidal wave” of backlog retirees will all “move West to the Island” for the weather and retirement in a rush.
- With plentiful CASH reserves to haphazardly throw down on their last home purchase, completing their dream; and frustrating yours.
Prices are expected to further INCREASE for the next 5 years due to these data points below:
3. Current homes prices well below national average:
For 2023: Calgary; up 4%, Halifax; up 3%, Victoria; up 1%
- All other cities in Canada are down 18% to 21%‘; which really means Victoria is really up about 22-ish%.
- [data point here]
4. Peek New-to-Canada Immigration
Overall Canada’s population growth is 3.1% – 6x higher than the USA at o.5%.
- 1.2 million new Canadians arrived in 2022 – highest growth of all the G20.
- 4 million new Canadians are on the way before 2027; where will they live?
- That’s 2x Canada’s already hefty overall population increase, which also broke records.
- “We have never seen the young adult population growing anywhere nearly this fast before,” an analyst wrote. “Putting additional pressure on rents now, and in the medium term, it will put pressure on home prices.”
- See the red-blue graph below
5. Renting in the Wild West
37% of Canadian households are renters.
- New renters are on the scene from an unprecedented rise in working age population – up 874,000 in 2023
- Rent inflation was 8.2% in October 2023 – highest in over 40 years.
- The difference between rent inflation and “standard inflation” is the highest in 60+ years.
Costs to build a home are up 51% since 2020.
- High costs for all inputs, scarcity of skilled construction workers, higher mortgage interest rates for builder’s financing, supply-chain bottlenecks from COVID. (See the graphics below.)
- Forest fires from 2020 to 2023 have reduced the supply of lumber.
- 100,000 new construction workers are needed in Canada.
- Most will be “temporary foreign workers” also hoping to become citizens and buy the same home supply they are producing.
- Construction wages were up 11.5% in 2023.
{Lots of fantastic graphs go here.
For a copy of the actual report in PDF, please request from me in email.}
What about COMPETING / Multiple Offers?
- We do Lo/No CONDITION OFFERS with Pre-underwritten, Pre-approvals that actually work.
- And I answer my phone from 9-9 x 360 so you can win your competing deals at the last second.
- Banks don’t offer this service. We have been doing this since “the Rush of 2007” when home prices were going up $1000/ day. This will be similar.
Why Buy Your Home Today: Data Points, Alberta, Winter, 2024
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Acceptable Sources of Down Payment for a home Canada, 2024
This seems to be the topic of this week … what can I use for down payment on my home?
All banks DO ACCEPT these approved methods to gather down payment for a home.
Acceptable Sources of Down Payment:
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Ineligible Sources of Down Payment
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The new Tax-Free First Home Savings Account (FHSA) and the
FTHBI – First Time Home Buyer Incentive were the government matches your down payment up to 5% ARE both great ideas!
Mortgage Mark Herman, top Calgary Alberta Mortgage Broker since 2004!
Underlying Economic data on BoC holding Prime rate the same, December 5, 2023
Bank of Canada holds its policy interest rate steady, updates its outlook
Against the backdrop of a decelerating economy and growing calls for less restrictive monetary policy, the Bank of Canada made its final scheduled interest rate decision of the year today.
That decision – to keep its overnight policy interest rate at 5.00% – was broadly expected. What was not entirely expected (or welcome) was the Bank’s statement that it is “still concerned” about risks to the outlook for inflation and “remains prepared to raise” its policy rate “further” if needed.
The Bank’s observations are captured in the summary below.
Since August, we have been saying the VARIABLE RATE mortgage is the way to go, and this proves we were right on the money.
Mortgage Mark Herman, top Calgary Alberta and Victoria BC mortgage broker
Inflation facts and housing market commentary
- A slowdown in the Canadian economy is reducing inflationary pressures in a “broadening range” of goods and services prices
- Combined with a drop in gasoline prices, this contributed to easing of CPI inflation to 3.1% in October
- However, “shelter price inflation” picked up, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs
- In recent months, the Bank’s preferred measures of core inflation have been around 3.5-4%, with the October data coming in towards the lower end of this range
- Wages are still rising by 4-5%
Canadian economic performance
- Economic growth “stalled through the middle quarters of 2023 with real GDP contracting at a rate of 1.1% in the third quarter, following growth of 1.4% in the second quarter
- Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year
- Exports and inventory adjustment “subtracted” from GDP growth in the third quarter, while government spending and new home construction provided a boost
- The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly
- Overall, these data and indicators for the fourth quarter suggest the economy is “no longer in excess demand”
Global economic performance and outlook
- The global economy continues to slow and inflation has eased further
- In the United States, growth has been stronger than expected, led by robust consumer spending, but is “likely to weaken in the months ahead” as past policy rate increases work their way through the economy
- Growth in the euro area has weakened and, combined with lower energy prices, has reduced inflationary pressures
- Oil prices are about $10-per-barrel lower than was assumed in the Bank’s October Monetary Policy Report
- Financial conditions have also eased, with long-term interest rates “unwinding” some of the sharp increases seen earlier in the autumn. The US dollar has weakened against most currencies, including Canada’s
Summary and Outlook
Despite (or in the Bank’s view because of) further signs that monetary policy is moderating spending and relieving price pressures, it decided to hold its policy rate at 5% and to continue to normalize its balance sheet.
The Bank also noted that it remains “concerned” about risks to the outlook for inflation and remains prepared to raise its policy rate further if needed. The Bank’s Governing Council also indicated it wants to see further and sustained easing in core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and “corporate pricing behaviour.”
Once again, the Bank repeated its mantra that it “remains resolute in its commitment to restoring price stability for Canadians.” As a result, we will have to wait until next year for any sign of rate relief.
What’s next?
The Bank’s next interest rate announcement lands on January 24, 2024.
In the meantime, please feel free to call me and discuss financing options that will empower you in this economic cycle, and the ones ahead.
Canadian Mortgage Data – Nov 14
There has been a little relief for mortgage shoppers in recent days.
- Fixed-rates have come down slightly, led by declining yields for government bonds.
- Variable-rate mortgages appear to be maintaining their discounts and most market watchers believe the Bank of Canada has reached the top of this rate-hiking cycle.
The Bank, however, continues to warn that Canadians should be preparing for interest rates to remain higher for longer. Senior Deputy Governor Carolyn Rogers made that point again during a recent speech in Vancouver, saying it is important to adjust proactively to that possibility. Rogers cited a number of global considerations for higher rates including: China and other developing nations joining the worldwide economy; a decline in attractive investment opportunities for businesses; and an overall, international, adjustment to higher rates.
It is also useful to remember that central banks around the world have been working to normalize interest rates that have been at historic lows since the 2008 financial crisis.
Rogers offered some reassurance that Canadians are adjusting to higher rates. Household credit growth has dropped to its slowest pace since the early ’90s. Delinquency rates on credit cards and other consumer loans are only slightly above pre-pandemic levels. Mortgage delinquencies are below pre-pandemic levels, and that is despite about 40% of all mortgage holders having already renewed at higher rates, with bigger payments.
As to when interest rates might actually start falling? The BoC’s Q3 survey of “Market Participants” suggests they are adjusting to the higher-for-longer scenario. Based on the median response they are expecting a quarter point drop in April, 2024. That is a month later than expectations expressed in the Bank’s Q2 survey.
Finally some good news for buyers.
Buy soon before everyone that did not buy sees this data and tries to by tool
Mortgage Mark Herman – top, best Calgary mortgage broker
Data on those negative amortization mortgages
Queston 1: What about all these (negative amortizing) mortgages that will now take 71 years to pay off?
Answer:
Yes, they are called VRMs – Variable rate Mortgages – and we don’t really offer/sell /even talk about them for that exact reason – what if the rates rates jump? And they did.
We do offer ARMs – Adjustable Rate Mortgage – and we do recommend as of August 2023 because:
- Rates have topped and are slowly on the way down right now so the rate will go down
- The current rate starts lower than the 1, 2, 3, and 4 year fixed right now; and ARM rates should be below the 5-year fixed by Fall of 2024.
Question 2: What is the difference between VRM and ARM?
- With an ARM – adjustable rate mortgage – the amount of your payment will go up and down based on the changes of the prime lending rate
- The VRM – Variable rate mortgage – your mortgage payment amount always remains the same. It does not go up and down with changes in the prime lending rate. And when rates jump to 4x what they were when your loan started, then you are not even paying interest any more, and end up at 70 years left to pay it off.
As the article below states, VRMs are mostly from BMO, CIBC, Royal Bank and TD.
ARMs – Adjustable rate mortgages – are what we offer, they can’t have a negative amortiztion and we don’t have any customers that were affected with negative loans.
Mortgage Mark Herman, best top Calgary mortgage broker
Concern over rise in negative amortization mortgages
On October 30th, the Bank also highlighted concern over negatively amortizing mortgages. Negative amortization occurs when a borrower’s monthly mortgage payment is less than the interest due on the loan and the outstanding mortgage balance grows over time rather than declining. This phenomenon is mostly associated with variable rate mortgages.
Those who bought or refinanced homes during the pandemic, when interest rates were at their lowest, heavily opted for variable rate mortgages (VRMs). In Canada, most VRMs come with fixed payments, where the interest portion is determined by the prevailing prime lending rate, while the rest is used to repay the principal. As a result, the Bank of Canada’s series of rate hikes – from 0.25% to 5% – has propelled growth in negative amortization mortgages with terms exceeding 30 years.
As of July 31, negative amortization mortgages were 24% of total mortgage portfolios (insured and uninsured) for BMO, CIBC, Royal and TD. This is equivalent to $277 billion in mortgages – up from virtually nil a year ago. National and Scotia mainly offer adjustable-rate mortgages – as rates change the mortgage payment changes to keep the amortization period fixed – so both banks have negligible exposure to negative amortization within their mortgage portfolios.
Variable Rate Exposure (as of July 31, 2023)
Source: Fitch Ratings
Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OFSI), has announced regulatory changes to address risks related to mortgages in negative amortization. Effective early next year, banks will be required to maintain a higher amount of capital, reflecting the elevated risk associated with mortgages in negative amortization when the loan-to-value ratio (LTV) surpasses 65% (i.e. when the outstanding mortgage balance is 65% or more of the value of the underlying property). The proposed changes are designed to incentivize banks to reduce the volume of mortgages that could potentially go into negative amortization.
Mortgage repayment trends
To assess how borrowers are reacting to the increase in rates, the prepayment report for floating rate 5-year mortgage-backed securities (MBS) pools, published by CMHC, serves as a valuable tool. Although it doesn’t pinpoint individual issuers, the report offers a comprehensive look at trends within the banks’ variable-rate mortgage (VRM) portfolio.
Report data indicates that borrowers with VRMs have been effectively managing impacts of rising rates by making partial principal payments or transitioning to fixed-rate mortgages. Enforcement activity, which is undertaken when a borrower is unable to make mortgage payments, has been minimal, which suggests that despite the rise in rates, defaults have remained low.
Also, the majority of non-amortizing mortgages, where payments are covering interest only, were recorded between November 2022 and February 2023. This is a positive sign that banks have taken measures to limit the growth of these mortgages.
One caution is around borrowers whose mortgage rates have exceeded the trigger point – that is, the rate at which the regular payment is no longer enough to cover the full amount of interest accrued since the last payment. These borrowers might encounter payment shock when their loans mature and are re-underwritten based on the original amortization but at higher rates and with larger principal amounts.
Those who were first-time homebuyers with high loan-to-value ratios, purchasing at or close to peak prices in 2020 or 2021, could face significant challenges during renewal, particularly if their equity position has been significantly eroded. Similar to Fitch, we anticipate that delinquency rates will not rise in 2024, remaining within the expected range of 0.2-0.25%.