General

Latest in Mortgage News: Economic Slowdown Hitting Alternative Lenders Hard

General Beata Wojtalik 29 Jul

Latest in Mortgage News: Economic Slowdown Hitting Alternative Lenders Hard

The COVID pandemic has taken a toll on many aspects of Canada’s mortgage industry, but none more so than private lenders, which have seen a 26% decline in Ontario mortgage registrations.

According to Teranet, the province’s electronic land registry system, that decline follows a 45% drop in May and a 29% decline in April.

“The tide is going out right now” Dustin Van Der Hout, investment adviser with Richardson GMP Ltd., told the Globe and Mail. “We’ll see very quickly who was naked this whole time in the private mortgage world.”

Less severe declines were reported for other sectors, such as banks, credit unions, trusts and insurance companies.

For the country’s banks, mortgage registrations were down 3% in June compared to a year earlier.

Alternative lenders include mortgage investment corporations (MICs), which pool investor funds to fund mortgages. When home prices were soaring years ago and the government began introducing stricter mortgage qualifying rules, alternative lenders saw unprecedented growth as those who could no longer apply turned to alternative sources.

Other findings from the Teranet-National Bank Home Price Index (which tracks movement in resale homes) include:

  • The index reported its smallest decline in 17 years (and was negative when seasonally adjusted)
  • Toronto recorded an increase of 9.1% (year-over-year)
  • Vancouver saw an increase of 1.1%
  • Montreal saw an increase of 10.3%
  • Winnipeg saw a rise of 5.1%

AMF New Regulatory Body for Quebec Brokers

Court decisionQuebec’s mortgage brokers are now officially regulated by the province’s Autorité des marchés financiers (AMF), which took over the role in May.

The province’s mortgage brokers were previously under the jurisdiction of the Organisme d’autoréglementation du courtage immobilier du Québec (OACIQ), which also regulates real estate agents.

“The AMF welcomes this new mandate from the government,” AMF president and CEO Louis Morisset said in a statement. “…we have been in constant contact with the various stakeholders in the mortgage brokerage sector and have developed a robust and effective framework aligned with the one previously established for other sectors involved in the distribution of financial products and services.”

The Quebec chapter of Mortgage Professionals Canada made a proposal to the provincial Finance Minister requesting separate laws and a separate regulator for mortgage brokers back in 2015.

“MPC was supportive of the transition to the AMF for several reasons,” noted Mortgage Professionals Canada President and CEO Paul Taylor. “The transition followed the implementation of Bill 141, and the changes provide a clear delineation between the regulation of mortgage brokers and realtors. This delineation provides a much easier structure to ensure consumer protections are enforced, enabling better consumer outcomes and financing practices in the province.”

As Claude Girard, Quebec Director for MPC told CMT, the association expects to see benefits from the change.

“We expect regulation to be different and stronger than with the OACIQ, and this, of course, is for the well-being of mortgage consumers and our profession,” he said.

More Cases of Mortgage Fraud

Two Ontario mortgage brokers are now facing fraud charges, with one being accused of collecting more than $8 million in investments.

In the first case, a Guelph, ON, broker was arrested and charged with four counts of fraud over $5,000, four counts of using forged documents, 22 counts of uttering a forged document and one count of mischief to data.

The accused allegedly ran mortgage brokerages under various names and collected the $8 million in investments between 1995 and 2014. He is said to have repaid just $1 million in interest to the investors over that time.

In another case, a Brampton mortgage broker was arrested defrauding clients of $35,000 in investments between 2017 and 2019. It is alleged the broker promised to process mortgage applications for the victims, who were encouraged to pay in cash.

Steve Huebl

Bank of Canada Hints at No Interest Rate Hikes Until 2023

General Beata Wojtalik 16 Jul

Bank of Canada Hints at No Interest Rate Hikes Until 2023

Prospective homebuyers were reassured today that interest rates will remain near historic lows “for a long time,” according to Bank of Canada Governor Tiff Macklem.

The BoC chief made the comments during a conference call following the Bank’s interest rate meeting, where it left the overnight lending rate unchanged at 0.25%, at its “effective lower bound.”

“Interest rates are very low and they are going to be there for a long time,” Macklem said. “Canadians and Canadian businesses are facing an unusual amount of uncertainty, so we have been unusually clear about the future path for interest rates.”

In the Governing Council’s official statement, it said it would “hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.”

Observers say that implies the Bank has no plans to start raising rates until at least 2023.

“Based on the Bank’s new forecasts, this implies it has no intention of raising policy rates for several years,” wrote Capital Economics economist Stephen Brown.

“While the Bank may eventually raise its central scenario forecasts for growth and inflation, our forecasts are still consistent with the broad message in today’s policy statement,” he added. “That is, despite the huge stimulus, there is little chance that a surge in inflation will justify raising interest rates within the next few years.”

The BoC also confirm that its bond purchases, which have helped to inject liquidity into the lending market and help keep mortgage rates lower than where they otherwise may be, will continue until the economic recovery is “well underway.”

“We continue to think asset purchases will continue at least through the first quarter of 2021, and likely well into next year,” wrote Josh Nye of RBC Economics.

Some of the BoC’s updated forecasts include:

  • GDP growth of -7.8% in 2020, +5.1% in 2021 and +3.7% in 2022
  • Inflation to remain below 2%, at 0.6% in 2020, 1.2% in 2021 and 1.7% in 2022
  • The worst impacts of the COVID-19 pandemic should subside by mid-2022

What does that mean for homebuyers?

It’s rare to have such a clear roadmap for future interest rates confirmed by the Bank of Canada itself. So, what would another couple of years of rock-bottom interest rates mean for homebuyers and how might that affect mortgage decisions today?

Rates have already been falling significantly over the last couple of months, with many mortgage ratesincluding insured 5-year fixedsnow available for under 2.00%. Remember that those shopping for insured 5-year fixed rates in January were looking at rates at around 2.50% (or close to 3.00% for uninsured 5-year fixeds).

The biggest question is whether you choose to lock in these low rates at a longer term, say 5 or 7 years, or opt for a shorter fixed term or variable rate.

While existing variable-rate mortgage holders have enjoyed significant savings thanks to the drop in prime rate from 2.95% in January to 2.45% today (numerous mortgage holders at the time were able to snatch rates of prime – 1.00%), new variable-rate discounts aren’t quite as competitive.

“Unless you’re able to find a variable rate at least a half-point under the best 5-year fixed rates from fair-penalty lenders, the risk-reward of floating your rate isn’t overly attractive,” wrote Rob McLister, founder of RateSpy.com.

“Barring that sort of discount, if the BoC were to hike rates 100 bps in 2023, for example, you’d pay less in a 5-year fixed—assuming you didn’t break the mortgage early.”

Fixed rates have been trending downward largely thanks to falling bond yields and the Bank of Canada’s quantitative easing programs, which have injected billions of dollars in liquidity into the market, which in turn has reduced much of the risk for mortgage lenders.

“If the BoC’s forecast pans out, the next few years entail little risk of significant increases to bond yields (relevant for fixed mortgage rates) and the overnight rate (relevant for variable mortgage rates),” McLister added.

Canadian Real Estate Defies COVID, Sales up 63% in June

General Beata Wojtalik 15 Jul

Canadian Real Estate Defies COVID, Sales up 63% in June

National home sales shot up in June, with prices also climbing steadily, according to June data released today by the Canadian Real Estate Association (CREA).

Transactions were up about 15.2%, while the average property price was up 6.5% from June 2019 to $539,000. Excluding the country’s most expensive markets, Toronto and Vancouver, the average price falls to $432,000.

“While June’s housing numbers were mostly back at normal levels, we are obviously not back to normal at this point,” said Shaun Cathcart, CREA’s senior economist. “I guess the bigger picture is one of cautious optimism. The market has recovered much faster than many would have thought, but what happens later this year remains a big question mark. That said, daily tracking suggests that July, at least, will be even stronger.”

But it’s the month-over-month data that is truly staggering: property sales are not only 150% above where they were in April, but sales rose 83.8% in the Greater Toronto Area , 75.1% in Montreal and 60.3% in Greater Vancouver.

Source: CREA

“Pent-up demand (supported by the fact that would-be house hunters have likely suffered lesser job declines) fuelled a surge in home sales during June. The gain brought sales levels nearly back to where they were in February,” noted TD economist Rishi Sondhi. He added that average prices have almost entirely erased pandemic-related losses, with prices down only 0.5% compared to February.

And with such a frenzy of homebuying activity, it’s no wonder that national inventory levels are at a 16-year low with just 3.6 months of housing supply left, should sales continue at the current rate. With such limited housing stock, buyers are forced to compete fiercely for properties.

Another metric that shows sellers with the upper hand in most markets is the sales-to-new listing ratio, which is at 63.7%. A balanced ratio is between 40-60% and anything below 40% is considered a buyers market.

Homebuyers Growing More Confident

As the demand for homeownership is clearly still strong, with or without COVID, prices are likely to continue moving upward for the time being barring something drastic that would force homeowners to start listing their properties en masse. Some speculate the forthcoming end of the government’s income-assistance programs and mortgage payment deferrals that were offered by most lenders may be that “drastic” something.

“While third-quarter sales growth is likely to be very strong, what takes place in the few quarters thereafter is a major risk point, as mortgage deferral programs and the CERB are set to conclude in the fourth quarter,” Sondhi noted. “In our view, as long as unemployment is elevated, population growth slows, and CMHC measures remain in place, growth in home sales and prices is likely to be subdued after this initial burst.

On the other hand, homebuyers may be assured by the prospect of lower interest rates for potentially years to come, as was confirmed today by Bank of Canada Governor Tiff Macklem.

“The message to Canadians is that interest rates are very low and they’re going to be there for a long time,” Macklem said during a press conference following the Bank’s interest rate decision, in which it left the overnight lending rate at 0.25%. “We recognize that Canadians and Canadian businesses are facing an unusual amount of uncertainty, so we have been unusually clear about the future path for interest rates.”

Danielle Tenenbaum

CANADIAN HOME SALES UP AGAIN IN JUNE

General Beata Wojtalik 15 Jul

CANADIAN HOME SALES UP AGAIN IN JUNE

Housing Market Continued Its Rebound in June and Early July

There was more good news today on the housing front. Home sales rebounded by a further 63% in June, returning them to normal levels for the month–150% above where they were in April when the pandemic-induced lockdown paralyzed the economy (see chart below). Data released this morning from the Canadian Real Estate Association (CREA) showed that for Canada’s largest housing markets, activity was strong. Sales rose 83.8% (month-over-month) in the Greater Toronto Area (GTA), 75.1% in Montreal, 60.3% in Greater Vancouver, 99.7% in the Fraser Valley, 54.9% in Calgary, 59% in Edmonton, 22.5% in Winnipeg, 34.8% in Hamilton-Burlington, 67.9% in London and St. Thomas, 55.6% in Ottawa and 43.6% in Quebec City. These m-o-m gains reflect the pent-up demand from what would have been a stellar spring housing season.

On a year-over-year basis, national home sales were up 15.2% in June.

Anecdotal evidence suggests that home sales continued to be robust in the first weeks of July. Daily tracking thus far this month indicates that activity has strengthened further in July.  According to Costa Poulopoulos, Chair of CREA, “realtors across Canada are increasingly seeing business pick back up”.

New Listings

The number of newly listed homes shot up by another 49.5% in June compared to the prior month with gains recorded across the country.

The national sales-to-new listings ratio tightened to 63.7% in June compared to 58.5% posted in May. There were only 3.6 months of inventory on a national basis at the end of June 2020 – a 16-year low for this measure.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) climbed 0.5% in June 2020 compared to May (see Table below). Of the 20 markets currently tracked by the index, 17 posted m-o-m gains.

Generally speaking, prices are re-accelerating east of Manitoba, except Toronto for now. B.C. prices are also picking up except for Vancouver. Home prices are declining in Calgary, while elsewhere on the Prairies, prices are either flat or rising.

As usual, the price movements announced by the local real estate associations (for example, TREB in Toronto) were misleading because they are greatly affected by the types and sizes of housing sold during any month. The MLS® HPI provides a more accurate way to gauge price trends because it corrects for the changes in the mix of sales activity from one month to the next.

The actual (not seasonally adjusted) national average price for homes sold in June 2020 was almost $539,000, up 6.5% from the same month the previous year.

The national average price is heavily influenced by sales in the Greater Vancouver and the GTA, two of Canada’s most active and expensive housing markets. Excluding these two markets from calculations cuts more than $107,000 from the national average price. In the months ahead, the extent to which sales fluctuate in these two markets relative to others could have significant compositional effects on the national average price, both up and down.

Bottom Line

CMHC has recently forecast that national average sales prices will fall 9%-to-18% in 2020 and not return to yearend-2019 levels until as late as 2022. I continue to believe that this forecast is overly pessimistic. Here we are in the second half of 2020, and the national average sales price has risen 6.5% year-over-year.

The good news is that the housing market is contributing to the recovery in economic activity. While the course of the virus is uncertain, Canada’s government has handled the COVID-19 situation very well from both a public health and a fiscal and monetary perspective. You only need to look at the debacle south of the border to see how well we have done. The future course of the economy here will depend on the virus. While no one knows what that will be, suffice it to say that Canada’s economy is en route to a full recovery, but it may well be a long and bumpy one.

The Bank of Canada had its first meeting today with Tiff Macklem at the helm. The Bank of Canada said full recovery from the virus would take two years (more on that in the next email).

DR. SHERRY COOPER

BANK OF CANADA HOLDS RATES STEADY AND CONTINUES QE PROGRAM

General Beata Wojtalik 15 Jul

BANK OF CANADA HOLDS RATES STEADY AND CONTINUES QE PROGRAM

Bank of Canada Holds Target Rate Steady
Until Inflation Sustainably Hits 2%

The Bank of Canada under the new governor, Tiff Macklem, wants to be “unusually clear” that interest rates will remain low for a very long time. To do that, they are using “forward guidance”–indicating that they will not raise rates until capacity is absorbed and inflation hits its 2% target on a sustainable basis, which they estimate will take at least two years. As well, they indicate that the risks to their “central” outlook are to the downside, which would extend the period over which interest rates will remain extremely low. The Bank also made it clear that they are not considering negative interest rates. The benchmark interest rate remains at 0.25%, which is deemed to be its the lower bound.

The Bank is also continuing its quantitative easing (QE) program, with large-scale asset purchases of at least $5 billion per week of Government of Canada bonds. The provincial and corporate bond purchase programs will continue as announced. The Bank stands ready to adjust its programs if market conditions warrant.

With the benchmark rate at its effective lower bound, the Bank’s quantitative easing is the way it is lowering mid- to longer-term interest rates, reducing the borrowing costs for Canadian households and businesses. The Bank assumes that the virus will be with us for the entire forecast range, which is two years.

The Bank released its new economic forecast in today’s July Monetary Policy Report (MPR). The MPR presents a central scenario for global and Canadian growth rather than the usual economic projections. The central scenario is based on assumptions outlined in the MPR, including that there is no widespread second wave of the virus in Canada or globally.

The Canadian economy is starting to recover as it re-opens from the shutdowns needed to limit the virus spread. With economic activity in the second quarter estimated to have been 15 percent below its level at the end of 2019, this is the most profound decline in economic activity since the Great Depression, but considerably less severe than the worst scenarios presented in the April MPR. Decisive and necessary fiscal and monetary policy actions have supported incomes and kept credit flowing, cushioning the fall and laying the foundation for recovery.

Mincing no words, the MPR acknowledged that the COVID-19 pandemic has caused a “worldwide health-care emergency as well as an economic calamity.” The course of the pandemic is inherently unknowable, and its evolution over time and across regions remains highly uncertain.

In Canada, the number of new COVID-19 cases has fallen sharply from its April high, and the economic recovery has begun in all provinces and territories and across many sectors. Consequently, economic activity is picking up notably as measures to contain the virus are relaxed. The Bank of Canada expects a sharp rebound in economic activity in the reopening phase of the recovery, followed by a more prolonged recuperation phase, which will be uneven across regions and sectors (Figure 1 below). As a result, Canada’s economic output will likely take some time to return to its pre-COVID-19 level. Many workers and businesses can expect to face an extended period of difficulty.

There are early signs that the reopening of businesses and pent-up demand are leading to an initial bounce-back in employment and output. In the central scenario, roughly 40 percent of the collapse in the first half of the year is made up in the third quarter. Subsequently, the Bank expects the economy’s recuperation to slow as the pandemic continues to affect confidence and consumer behaviour and as the economy works through structural challenges. As a result, in the central scenario, real GDP declines by 7.8 percent in 2020 and resumes with growth of 5.1 percent in 2021 and 3.7 percent in 2022. The Bank expects economic slack to persist as the recovery in demand lags that of supply, creating significant disinflationary pressures.

Bottom Line

Governor Macklem said in the press conference that what he wants Canadians to take away from today’s Bank of Canada’s actions is “Canadian interest rates are very low and will remain very low for a very long period”. The reopening of the Canadian economy is well underway. Economic activity hit bottom in April and began expanding in May and accelerated in June. About 1.25 million of the 3.0 million jobs that were lost in March-April, were added in May and June.

Some activities, including motor vehicle sales, have already seen a strong pickup since April. Likewise, housing activity fell sharply during the lockdown but is beginning to recover quickly. In contrast, some of the hardest-hit businesses, such as restaurants, travel and personal care services, have only just started to see improvements in recent weeks and are expected to continue to face significant challenges.

The chart below, from July’s MPR, shows that household spending patterns have shifted since the onset of the pandemic. Some of these shifts might last. In the central scenario, the effects of the downturn and lower immigration hold down housing activity over the next few years. After a near-term boost from pent-up demand, residential investment slowly increases as income and confidence recover.

DR. SHERRY COOPER

STRONG JUNE JOBS REPORT IN CANADA

General Beata Wojtalik 13 Jul

STRONG JUNE JOBS REPORT IN CANADA

Robust Jobs Report in June, Much Better Than Expected

The June Labour Force Survey, released this morning by Statistics Canada, reflects labour market conditions as of the week of June 14 to June 20. By that time, public health restrictions had been eased in most parts of the country. Tighter restrictions remained, however, in much of southwestern Ontario, including Toronto. Even though businesses reopened, physical distancing and other requirements reduced the employment impact of the easing lockdown provisions.

From February to April, 5.5 million Canadian workers–30% of the workforce– either lost their jobs or saw their hours significantly scaled back. Yet, nearly 8.2 million Canadians receive the $2,000 per month Canadian Emergency Response Benefit (CERB) payments. Is this a disincentive for some workers to return to work?

The benefits have been recently extended by eight weeks to roughly the end of August, and the NDP is urging Ottawa to continue them until early October. If you earn more than $1,000 per month, you lose the full $2,000 monthly payment, so clearly, this might preclude some from seeking new work or returning to their original employers.

CERB has cushioned the blow of the pandemic on households and helped to boost consumer confidence. Nevertheless, keep it in mind in assessing the speed at which the jobless are returning to work.

Blowout Jobs Report in June

By the week of June 14 to June 20, the number of workers affected by the COVID-19 economic shutdown was 3.1 million, down 43% since April.

Building on an initial recovery of 290,000 in May, employment rose by nearly one million in June (+953,000; +5.8%), with gains split between full-time work (+488,000 or +3.5%) and part-time work (+465,000 or +17.9%). With these two consecutive monthly increases, the total level of employment in June was 1.8 million (-9.2%) lower than in February.

The speed of job recovery has been much faster than in previous recessions, just as the pandemic-induced decline in jobs was more sudden. Men are closer to pre-shutdown employment levels than women in all age groups. The hardest-hit sectors, accommodation, food services, retail trade and personal services are heavily dominated by female employees. The burden of daycare with schools closed likely fell more heavily on women as evidenced by the higher unemployment rate for women with young children.

UNEMPLOYMENT RATE DROPS IN JUNE AFTER REACHING A RECORD HIGH IN MAY

The unemployment rate was 12.3% in June, a drop of 1.4 percentage points from a record-high of 13.7% in May. While this was the most significant monthly decline on record, the unemployment rate remains much higher than in February, when it was 5.6%.

Employment Increases in All Provinces

In Ontario, where the easing of COVID-19 restrictions began in late May and expanded on June 12, employment rose by 378,000 (+5.9%) in June, the first increase since the COVID-19 economic shutdown. The proportion of employed people who worked less than half of their usual hours declined by 6.5 percentage points to 14.1% in Ontario. The unemployment rate declined 1.4 percentage points to 12.2% as the number of people on temporary layoff declined (see table below).

In Toronto, where the easing of some COVID-19 restrictions was delayed until June 24, the recovery rate was slightly below that of Ontario in June. The employment level in Toronto was 89.6% of the February level, compared with 94.5% for the rest of the province (not adjusted for seasonality).

Quebec recorded employment gains of 248,000 (+6.5%) in June, adding to similar gains (+231,000) in May and bringing employment to 92.2% of its February level. At the same time, the number of unemployed people in the province declined for the second consecutive month in June (-119,000), pushing the unemployment rate down 3.0 percentage points to 10.7%. The decline in unemployment in Quebec was entirely driven by fewer people on temporary layoff.

The number of people employed in British Columbia rose by 118,000 (+5.4%) in June, following an increase of 43,000 in May. The proportion of employed people who worked less than half of their usual hours declined by 2.9 percentage points to 14.6%. The number of unemployed in the province was little changed in June, and the unemployment rate edged down 0.4 percentage points to 13.0%.

In the Western provinces, employment increased in Saskatchewan (+30,000) for the first time since the COVID-19 economic shutdown and rose for the second consecutive month in both Alberta (+92,000) and Manitoba (+29,000).

In New Brunswick, the first province to begin easing COVID-19 restrictions, employment increased by 22,000 in June. Combined with May gains, this brought employment in the province to 97.1% of its pre-COVID February level, the most complete employment recovery of all provinces to date.

Employment increased for the second consecutive month in Nova Scotia (+29,000), Newfoundland and Labrador (+6,000) and Prince Edward Island (+1,700).

Sectoral Variation in Job Growth

Those sectors that require proximity of workers to customers (accommodation and food services and retail trade other than online) remained hardest hit by the medically-induced job losses. As well, a high proportion of jobs in both the health care and social assistance and educational services industries involve proximity to others. Employment increased in all of these sectors, but remain well below pre-COVID levels.

Also hard hit was employment in businesses that rely on the gathering of large groups (information, culture and recreation industry). This sector was subject to some of the earliest public health restrictions in the form of the size of gatherings as all provinces continue to limit the number of people allowed to gather in public.

In several services-producing industries—such as wholesale trade, public administration, and finance, insurance, real estate and rental and leasing—fewer than 40% of jobs involve proximity with others. In many of these industries, employment in June was at or near pre-COVID-shutdown levels.

Monthly employment gains were recorded in wholesale trade (+38,000) and finance, insurance, real estate and rental and leasing (+17,000). Employment returned to pre-COVID-19 levels in wholesale trade, while it was 1.0% lower than pre-COVID-19 levels in finance, insurance, real estate and rental and leasing.

In most industries where few jobs require close physical proximity with others, workers have shifted to working from home on a large scale. In finance, insurance, real estate and rental and leasing, 6 in 10 (61.2%) were working from home during the week of June 14, more than double the proportion (28.5%) who usually do so. A larger-than-usual percentage of workers also continued to work from home in professional, scientific and technical services (73.2%) and public administration (53.8%).

After avoiding significant job losses in the first month of the COVID-19 economic shutdown, both the construction and manufacturing industries experienced heavy losses in April, followed by an initial recovery in May.

In June, employment in construction was 157,000 higher than in April, reaching 89.3% of its February level. In the manufacturing sector, employment gains in May and June totalled 160,000, bringing employment to 91.9% of its February level.

In each of the construction and manufacturing industries, both the proportion of people working less than 50% of their usual work hours and the number of people on temporary layoff fell markedly in June. Construction recorded a 53.8% decrease in the number of people on temporary layoff (not adjusted for seasonality).

Bottom Line 

This was an unambiguously strong jobs report, and we will likely see a continued rebound in employment as long as the economy can open further. Undoubtedly, however, Canada’s economy is still digging itself out of a deep hole, and some jobs are gone for good. But new sectors are growing rapidly as the pandemic accelerated the technological forces that were already in train. I expect to see strong job growth in the following new and burgeoning areas: telemedicine, big data, artificial intelligence, cloud services, cybersecurity, 5G, driverless transportation and clean energy. Online shopping will also continue to proliferate as Canadians have learned to use delivery services and online retail.

These new jobs require training and a high degree of expertise. Those who have suffered permanent job losses will need to adapt. What we do not want to see is government programs that slow the rate of adaptation or support businesses that are no longer viable. Support for those most in need with little likelihood of adaptation will remain necessary.

DR. SHERRY COOPER

FISCAL SNAPSHOT: MUCH LARGER DEFICIT AND DEBT THAN EXPECTED

General Beata Wojtalik 8 Jul

FISCAL SNAPSHOT: MUCH LARGER DEFICIT AND DEBT THAN EXPECTED

Astonishing Fiscal Red Ink Announced Today

Finance Minister Bill Morneau presented his fiscal snapshot this afternoon. Most economists were expecting a budget deficit of roughly $260 billion. Instead, the government announced a deficit for the fiscal year 2020-21 of $343.2 billion–close to 16% of GDP. That compares to the $34.4 billion deficit projected before the pandemic.
A big chunk of that additional deficit can be attributed to the $212 billion in direct support measures the federal government is providing to individuals and businesses. The deficit was initially estimated at C$256.2 billion by the Parliamentary Budget Officer, the country’s budget watchdog. The discrepancy reflects lower tax revenue, an eight-week extension of CERB and the wage subsidy increase.

Aside from the pandemic program spending, the economic slowdown is estimated to have added another $81.3 billion to the deficit in 2020-21, driving spending levels to their highest since 1945. The recession has also taken a toll on revenue, which will drop as a share of the economy to the lowest since 1929.

The prime minister argued the economy would be in much worse shape were it not for the government’s response, in part to thwart the need for households to take on more debt. “We made a very specific and deliberate choice throughout this pandemic to help Canadians, to recognize that overnight people had lost their jobs,” Trudeau told reporters in Ottawa. “We decided to take on that debt to prevent Canadians from having to do it.”

To be sure, the government can finance the debt at a much lower cost than households. Long-term interest rates for the government of Canada are at record lows–below the rate of inflation. The ten-year GOC yield is 0.56% and the 30-year bond yield is just a tad over 1.0%. In consequence, the interest cost to the government of the rising debt burden is very modest.

In addition, the vast majority of the temporary surge in Ottawa’s new debt is being absorbed by the Bank of Canada in its bond purchases. While the BoC’s holdings of federal government debt as a share of its total securities holdings has risen abruptly from less than 14% at the start of the year to around 27% now, that’s still below the share of domestic government debt held by central banks in Japan, Germany and Sweden, for example. Canada’s overall public sector net debt remains moderate among major economies, and especially when compared to the U.S., Britain, or the Euro Area.

GDP DECLINE

The Canadian economy is projected in the report to shrink by 6.8% this year before bouncing back by 5.5% next year, making this crisis the worst economic contraction since the Great Depression. The economy is expected to decline in FY2020-21 more than twice as much as it did in FY2009-10 in response to the global financial crisis.

Between February and April, 5.5 million Canadians either lost their jobs or saw their work hours significantly reduced. Those losses pushed the unemployment rate to 13.7% in May — the highest rise on record — from a pre-crisis low of 5.5% in January.

Finance Minister Bill Morneau said that without government pandemic programs, the GDP would have contracted by more than 10% and unemployment would have risen by another 2 percentage points.

DEBT STRATEGY

The government now projects debt will rise to 49.1% of GDP in the fiscal year that started April 1, up from 31.1% last year. In his speech, Morneau didn’t provide any forecasts beyond 2020 or provide any indication of future fiscal plans other than to say Canada will continue to hold its low-debt advantage relative to other major economies. That status is facilitated by historically low interest rates, with public debt charges actually declining as borrowing costs fell.

“We, the collective we, will have to face up to our borrowing and ensure it is sustainable for future generations. Canada’s debt structure is prudent, it’s spread out over the long term, and it compares well to our G-7 peers,” the finance minister said. “And we will continue to make sure this is the case in the months and years to come.”

Federal government spending, along with the deficit, is poised to hit all-time highs as a share of GDP outside of World War II. Program expenses will surge 69% to C$592.6 billion, or 27.5% of GDP. That figure has averaged about 15% in the past half-century.

That includes a cost of C$80 billion for the main income support program — the Canada Emergency Response Benefit, or CERB. One change in Wednesday’s documents is a top-up of almost C$40 billion in the government’s wage subsidy program to C$82.3 billion. The numbers suggest the government anticipates transition Canadians from the C$2,000-per-month cash support beginning in September.

BOTTOM LINE

The government has asserted bragging rights as having the most comprehensive fiscal response to the pandemic in the G20 (see chart below).

The fiscal snapshot states, “Canada’s strong fiscal position going into the pandemic has allowed the government to implement an ambitious economic response plan by international standards. Direct fiscal support measures alone represented over 10% of Canada’s GDP, relative to 6.7% on average for G7 countries, with the bulk of support directed at individuals and households. In comparison, the U.S. plan also devotes a large share of direct support to individuals and households but to a lesser extent than Canada. Beyond its total size, which is among the most significant in the G7 and the G20, Canada’s plan is also among the most comprehensive, covering a broader range of measures than most plans announced in peer countries. Canada is notably one of the few countries that has announced both a national program to provide commercial rent assistance for small businesses and forgivable credit to SMEs.”

Let us hope that the government does not consider restraint measures until it is certain that the pandemic has been contained and the economic recovery is on firm ground. The last thing we need right now is tax increases, which many people fear will be the outcome of all of this red ink. Much of the one-time fiscal costs will roll off as the economy recovers. it is essential, however, that we avoid supporting businesses that are no longer viable in a post-pandemic world. We also want to assure that the CERB and other income supports do not discourage people from returning to work that is available.

The government did not forecast beyond the current fiscal year. Given the uncertainty surrounding a possible second wave of the virus and the timing of a vaccine, that forecast would be highly unreliable. Morneau will get back to us with an update in the fall.

DR. SHERRY COOPER

9 Ways to Keep Your Credit Score as High as Possible (Part II)

General Beata Wojtalik 8 Jul

9 Ways to Keep Your Credit Score as High as Possible (Part II)

In our previous post, we spoke about the fact that there are so many credit score providers out there, all providing different results, and chances are none of those results are the credit score lenders see when you apply for a loan product such as a mortgage, credit card or car loan.

How are you supposed to optimize your credit score when you don’t even know what it is? The answer is by focusing more on your overall “credit hygiene” rather than on any one particular score.

Dental hygiene is preventative maintenance to ensure your teeth and gums are the best they can be at all times. Having a similar routine for your personal credit history can be equally important to avoid problems when you least need themlike when buying or refinancing a home.

If you are always employing best practices, then you are optimizing your credit score and your overall credit profile, regardless of who is checking, when they are checking and what is being counted and reported.

Unfortunately, more credit in the wrong hands can lead to abuse. Some people rely on credit to supplement their income and end up in an untenable situation. These credit hygiene tips are intended for people who are responsible with credit.

Never Go Over Limits – Leave Some Room

When you have a credit card or line of credit hovering around its limit, you are at risk of going over, which is not a good thing for your credit score. And it might happen innocentlyyou started out under the limit, but with interest charges and possible over-limit penalties, you are now in the Badlands.

Even when you deploy a balance transfer promotion or some form of interest-free period, you should leave room at the top.

It’s like when ordering a coffee, leave room at the top for the milkeven if you take it black, avoid spillages.

Accept All Offers of Increased Limits

You should usually welcome credit limit increases. You look healthier and stronger to the casual reader, because your limits have some heft to them. And perforce, you instantly reduce your percentage utilization of credit with an increased limit. This often results in a higher credit score.

Equifax Canada states percentage utilization has a 30% weighting on your personal credit score.

Spread Around Your Balances

When maximizing your personal credit score, you should look at your utilization of available credit for each individual credit facility. If your goal is to maximize your score at all times, but you do carry credit balances, try to spread it around, rather than cluster it all on one card. One way this can arise is when you use balance transfer promotions to reduce interest expenses. You’ll have to evaluate the trade-offs of each approach.

Exercise All Cards and Lines of Credit

tips to improve your credit scoreWe tend to favour one particular credit card (maybe we like their rewards program) and we might neglect our other cards. If you are trying to maximize your credit score, it is good to use all available credit fairly regularly, even if it’s just for a brief moment every few months.

These trade lines can get stale and they are not pulling their full weight. Update the DLA (date of last activity) with a modest transaction and then pay it online immediately.

Coincidentally, only yesterday I received a message from my bank telling me my personal line of credit was now dormant and no longer accessible. I had not used it in eighteen monthsnot following my own guideline!

If in Doubt, Do NOT Close a Credit Card

It will rarely be correct to close older, unused credit facilities since they are contributing “score juice.” If you want to close the card to avoid an annual fee, just ask the card issuer to downgrade your card to a free card. You will retain your valuable history, but avoid annual fees (and the spectre of forgetting to pay the fee).

Equifax Canada states your history can have a 15% weighting on your personal credit score.

Use It or Lose It

If you never borrow money, or you have a solitary credit card in your wallet and you never actually use it, eventually you will have nothing generating a credit score for you. And you may end up with no score at all. And that can really cramp your style when you need a mortgage.

Pay Your Active Credit Cards At Least Twice Monthly – The Statement Date Strategy

I keep track of the statement cycle of my oft-used cards, and I pay the balance in full several days BEFORE the next statement is issued. The card issuer typically reports my statement date balance to the credit bureaus – so I always want that balance to be small, and that way my utilization ratios are really good.

And within a week or so of the statement being issued, I go back in and pay the statement balance in full. This ensures I never have interest charges on my core credit card usage, since the balance is always brought to zero before the due date.

The smaller the limits on your credit cards, the more dramatic the impact of the statement date strategy.

Pay Disputed Items – Then Argue Your Position

might a mortgage payment deferral affect your credit scoreYou may know someone who was offended by charges they were certain did not belong on their credit card statement. They refused to pay and preferred to wait out the investigation process. Unfortunately, by doing that they run the risk of interest charges and late payments.

My own experience has always been the card issuers do the right thing when fraud or outright billing errors are at hand. So, I pay and wait for the credit to come back to my account when the investigation is complete.

NOTE – if the fraudulent charges are very large and quite serious, this is a different matter altogether and you should strategize the best approach with the authorities and management at the card issuer.

Scour & Clean All Reporting Errors

There might be some incorrect information in your personal credit history that is needlessly dragging down your score. Those are easy and necessary fixes. And the impact on the personal credit score can be profound. There are many types of errors, but two examples are:

  • You have two or more personal profiles with the credit bureau, so your information is scattered and diffused. Combining it all into one credit report could well increase your score and strengthen your look. (This often happens to people whose name is hard to spell, or who have legally changed their name.)
  • You completed a consumer proposal and all the debts included in the proposal should be reporting zero balances and should NOT be “R9s.”

Each agency provides a mechanism on its website for reporting errors. Mortgage brokers can fast-track an investigation with Equifax Canada for their clients. What might take a consumer two months we can often get done in a few days.

The Takeaway

The credit reporting agencies may generate a different score for credit card issuers, car dealerships or mortgage lenders, and the score they provide the consumer upon request is typically none of these. Therefore, you should be more concerned with ensuring you are always using best practices that will score well, regardless of who is doing the measuring.

The credit hygiene strategy ensures your credit history is a weapon you can wield with confidence, and that whatever method is generating your credit score, it will always be optimized and at its maximum potential.

Ross Taylor

Latest in Mortgage News: Home Price Recovery Not Expected Until 2022

General Beata Wojtalik 6 Jul

Latest in Mortgage News: Home Price Recovery Not Expected Until 2022

On the heels of new data showing that home prices tumbled in April across many of Canada’s largest cities, CMHC is forecasting it will take at least until 2022 for a return to pre-recession levels.

The federal housing agency modelled out a pandemic scenario that was “not as severe as this,” CEO Evan Siddall said in a teleconference following the release of CMHC’s annual report. “And I’m sure that you’d understand that the realm of plausibility has expanded significantly as a result of all the experience we’ve had…Tens of thousands of Canadians are having trouble meeting their mortgage commitments.”

Siddall noted that early figures suggest about 10% of CMHC’s insured mortgages are now in deferral.

covid-19 mortgage lender updateCIBC economists say the housing market faces challenges in the coming 12 to 18 months, particularly once the mortgage deferral periods run out.

“Forced sales will add to supply, and probably outweigh the offsetting impact of reduced supply of new units,” they wrote.”In the coming few quarters, housing activity will dance to the volatile tune of economic activity. During that period, we expect continued reduced levels of activity, and an unreliable and volatile price mechanism.”

Prices are already down in April, according to recent data from a number of local real estate boards, including:

  • The Greater Toronto Area: Home sales down 67% year-over-year; average price down 11.8% month-over-month to $821,392
  • Greater Vancouver Area: Home sales down 39.4% year-over-year; benchmark price flat month-over-month to $1,036,000
  • Montreal Census Metro Area: Home sales down 68% year-over-year, median price for single-detached homes down 1.4% month-over-month to $360,000
  • City of Calgary: Home sales down 63% year-over-year; detached benchmark price down 0.35% from March to $479,100

Most of the above home prices are still up compared to April 2019, although forecasts peg eventual year-over-year price declines anywhere from 5% (Capital Economics and RBC) to 10% (Moody’s).

CMHC chief economist Bob Dugan says that reliable forecasts are difficult to make given the many unknown variables, but made this prediction: “For Canada and for Ontario, I think, the best case we’re looking at … house prices getting back to their pre-recession levels, at the earliest, by the end of 2022.”

CMHC Declares $2B in Dividends in 2019

The Canada Mortgage and Housing Corporation returned more than $2 billion back to taxpayers in the form of dividends to the Canadian government, according to its 2019 annual report.

The federal housing agency also reported its insurance in force stands at $429 billion, down 4% from $448 billion in 2018, and down from $526 billion in 2015.

CMHC declares dividendCMHC attributed this to “run-off of existing policies-in-force, primarily in portfolio insurance due to reduced volumes since the introduction of pricing increases commensurate with revised regulatory capital requirements in 2017.”

In an update on the First-Time Home Buyer Incentive, CMHC reported 2,950 applications for the shared-equity program as of December 31, 2019, representing financial commitments of $56 million. The program has a $1.25-billion budget with a goal of assisting up to 100,000 first-time homebuyers.

In his parting Message from the President, outgoing CEO Evan Siddall noted one of the agency’s accomplishments during the year being to “speak out against homeownership policies that stimulate demand via increased borrowing.” He added: “Containing housing demand and limiting indebtedness are also reinforced by the mortgage insurance stress test, notwithstanding opposition from mortgage brokers, realtors and homebuilders. Our role is to promote housing affordability, not to stay silent when the real estate industry seeks to preserve its income at the expense of housing affordability.”

New Bank of Canada Governor

We learned earlier this month that Tiff Macklem will become the next Bank of Canada Governor on June 3, replacing outgoing head of the Bank Stephen Poloz.

Macklem, a former deputy governor, was passed over for the job seven years ago to Poloz. Since then he has spent the past six years as dean of the University of Toronto’s Rotman School of Management.

In a press conference following his appointment, Macklem indicated support for current policy measures and confirmed he sees supporting market stability and providing liquidity as the bank’s top priorities. He also noted that he sees negative interest rates as “disruptive” at the present time, and that the bank isn’t justified in making firm economic forecasts given the current market instability.

Steve Huebl

Why Is My Credit Score Different From What Lenders See? (Part I)

General Beata Wojtalik 3 Jul

Why Is My Credit Score Different From What Lenders See? (Part I)

It’s pretty easy to track your credit score these days⁠—perhaps through a paid subscription to Equifax Canada or Trans Union Canada, or through free offerings from your bank, or other entities such as Borrowell, Credit Karma, Mopolo or Mogo.

But there is no consistency among these various sources. In fact, there can be dramatic differences. Therefore, you should focus more on your overall “credit hygiene” rather than any one particular score. Meaning, focus on best practices at all times. More on that later.

tips to improve your credit scoreCBC News ran a solid investigative piece last fall called “Why 4 websites give you 4 different credit scores and none is the number most lenders actually see.” One Canadian encountered a 200-point difference between his highest and lowest scores from several score providers!

Scott Terrio, manager of consumer insolvency at Hoyes, Michalos & Associates Inc., thinks Canadians are obsessed with their credit scores. He is perhaps jaded by having met thousands of insolvents, many of whom had high credit scores.

Terrio notes, “It’s also important to remember that the credit score you see might not be the one the bank sees. That’s right. Lenders can (and do) order credit reports that are designed to meet their specific needs.”

What is their merit then? What exactly are people tracking? What does it even mean when someone tells you what their credit score is?

How Useful Are Free Credit Scores When Applying for a Mortgage?

To bring the conversation around to mortgage borrowing, the only credit score that matters is the one your lender sees when your application is submitted. And it’s almost certainly NOT a score you have seen for yourself from all the score providers out there.

These days, prospective mortgage clients are often excited to tell me what their credit score is. I bite my tongue, and instead applaud them for caring and for monitoring their credit, while explaining that, no, a screenshot of their Borrowell credit score is not sufficient for our mortgage lenders.

We actually need their signed consent to access a comprehensive (and completely different-looking) credit report.

FICO Score 8 is the Gold Standard

tips to improve your credit scoreFor the most part, mortgage brokers submit their mortgage applications with an Equifax Canada credit report attached. This report will display a few different measures to the lenders, but the one we pay the most attention to is called FICO Score 8. It’s the number we cite when a lender wants to know our mortgage applicants’ credit scores.

FICO says 90% of Canadian lenders use it, including major banks. But Canadian consumers cannot access their FICO score on their own.

Some banks and other mortgage lenders rely solely on the TransUnion credit report, which may use the Credit Vision Risk Score, and others use both reporting agencies. But they can all generate a FICO score.

Rob McLister, founder of RateSpy.com, picked up the cause last week with a short piece on the need to standardize the credit score that various providers of free credit scores offer. He wrote, “It’s time for companies hawking partly useful free scores (the Mogos, Borrowells and Credit Karmas of the world) to offer a more practical score. For mortgage purposes, FICO 8 is best of breed.”

Why You Should Worry About Your Credit Hygiene, Not Your Credit Score

I am delighted Canadians care about their credit historyit is so essential to many aspects of life, not just for major events like financing a home or an automobile. For example, some employers check candidates’ credit history, and so do most landlords when considering tenancies.

We are not here extolling the need for standardized credit score reporting. Because that is not going to happen anytime soon, as desirable as it may seem. Instead, we will talk about best practices of maintaining great credit hygiene.

In Part II, we will look at various ways you can proactively manage your personal credit history and keep your score (whatever score that may be) optimized at all times.